Foreign Relations of the United States, 1946, The Far East: China, Volume X

893.5151/10–446: Telegram

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

Nanking, October 4, 1946—4 p.m.
[Received October 5—11:50 a.m.]

1595. From Adler to Secretary of the Treasury. Eyes alone Vincent and at Butterworth’s⁵⁴ request Clayton.

1. Had three conversations with T. V. Soong on October 3 in which he reviewed China’s foreign exchange situation. (See also Embtels 1588 and 1589 of October 4)

In first conversation he emphasized gravity of China’s unfavorable balance of payments position, saying China could not afford to have a deficit of more than US dollars 100 million per year. He said “the last few months have been hell” for him, as he had been under pressure not on one but on all economic fronts. The real chances for economic improvement were tied up with the political situation, and he was still desperately hoping against hope for a peaceful settlement of China’s internal problems.

2. In second conversation 2 hours later, at which his top financial advisers were present, he reviewed a scheme they had prepared for a drastic import licensing system with quotas for main items of import, the division of the quotas to be decided upon by importers acting as a group. He admitted that introduction of this plan would have grave impact on prices, and yet he felt that if the pressure on China’s foreign exchange assets continued there might be no alternative. He asked me for my informal reaction, upon which I pointed out that the plan was drastic and that while there was no doubt as to the urgency and acuteness of China’s foreign exchange problem it was desirable not to compromise China’s position with respect to forthcoming international trade conference. Soong admitted scheme if introduced would come at most inopportune time. He discussed with his advisers possibility of coupling scheme with further adjustment of exchange rates as they felt that doing so would still further push up prices and they seemed to favor as a preferable alternative coupling it with imposition of new import duties—possibly in guise of an emergency excess profit tax—which however would also operate as a stimulus to rising prices. Pei also mentioned that it might be necessary to prohibit circulation of US currency and its entry into and withdrawal from China. Soong concluded that he and Pei were going to see the Generalissimo in the afternoon, and he would let me know the result of the interview later.

3. At 5 p.m. Soong informed me that they had decided not to introduce the scheme at this stage. Pei felt that the immediate pressure on the Central Bank had slackened off somewhat. Nevertheless the situation was such that they had to be prepared to adopt stringent measures at short notice, and if there were further runs on Central Bank’s foreign exchange position in near future they might have to go through with plan for import licensing system. Soong therefore asked me to inform you most confidentially that he is “contemplating the introduction of a strict import licensing system as a temporary emergency measure.” [Adler.]

Stuart

54. W. Walton Butterworth, Jr., Minister-Counselor of Embassy in China.