Office of the Historian

893.5151/9–1046: Telegram

The Ambassador in China (Stuart) to the Secretary of State

Nanking, September 10, 1946—9 a.m.
[Received September 11—4:10 p.m.]

1445. For Secretary [of the] Treasury from Adler. In addition Central Bank provided United States dollars 25 million for Government [Page 1006] purchases abroad and made net sales of United States dollars 20 million of gold (i. e. New York price). Thus Central Bank’s losses of foreign exchange and gold in 5½ months between exchange adjustments totalled $155,000,000.

2.
It should be noted that:
a.
Central Bank’s net sales of foreign exchange do not of course represent China’s total unfavorable balance of payments for this period, [and?] do not include use of Chinese private free and blocked assets abroad for purchase of imports unauthorized by Central Bank or flight of capital.
b.
Rate at which gold and foreign exchange assets were depleted increased from about $15,000,000 in March to $40,000,000 [apparent omission] in July–August.
c.
While Chinese private holdings of gold do not represent a net long-term loss of foreign exchange to China, they do constitute a short-term loss, as Central Bank recovery of gold from private holders is liable to be a laborious and tedious process.
3.
Government’s foreign exchange policy is open to criticisms that:
a.
Central Bank should not have waited till March to announce a United States dollar rate.
b.
2020 rate instituted in March grossly overvalued China National dollars.
c.
It should never have been pegged or maintained for so long.
d.
Readjustment when made was too small.
e.
Authorities slow in prohibiting imports of non-essentials and luxuries.
At same time administrative machinery of exchange control has worked much better than anticipated even though there are inevitable leaks through absence of effective control over Chinese private funds abroad, over-valuation of imports and under-valuation of exports, etc.
4.
Sale of Pacific surplus property to China and increase in UNRRA shipments will of course provide some relief to China’s balance of payments position. At same time:
a.
Government wishes to spend over United States dollars 50 million abroad in second half of 1946 for its military program.
b.
Exchange adjustment of August 19 obviously insufficient by itself to bring about desired curtailment of commercial imports and expansion of exports. Moreover disruption of internal communications hampers flow of exports from interior and increases dependence on foreign raw materials such as cotton and tobacco.
c.
Evasion and flight of capital through smuggling, diversion of overseas remittances to Hong Kong, etc., will continue.
5.
Central Bank loss of foreign exchange and gold for period under review is at annual rate of $330,000,000. Seriousness of China’s balance payments position needs no emphasis. For the earlier China [Page 1007] depletes its official foreign exchange assets the earlier it is likely to appeal to the United States Treasury and International Monetary Fund, or both, to bail it out. China’s depletion of its foreign exchange assets typical of its whole financial and economic policy. She is using up non-recurring items such as large foreign exchange balances, enemy property and surplus property acquisitions and decumulating [sic] capital largely to support threadbare war economy and only partly to cushion transition to peace and to prepare for overall fiscal and monetary stabilization. Result is to defer essential economic readjustments, which will be all the more painful and drastic when they are eventually made. This policy is to be explained in terms of exigencies of war and, no doubt, of expectations on part of China of further substantial financial aid from abroad—i. e. the United States—when necessary. Review of exchange operations for period from March 4 to August 17 during which Central Bank maintained 2020 rate for United States dollars reveals on basis of data supplied by Government that Central Bank had a deficit of exchange sales of United States dollars 103.9 million and of sterling 1,350,000 in sterling area currencies. [Adler.]
Stuart