Marshall Mission Files, Lot 54–D270
Memorandum by General Marshall to Colonel Marshall S.
Carter
OSE 610
Nanking, 30 November
1946.
Attached memorandum prepared at the Embassy’s request by Mr. Boiling
Powell81 outlines in general various considerations
connected with the loan CNAC has been attempting to obtain through the
Eximbank. It is suggested that you hand this to appropriate Eximbank
official for their use in considering the CNAC project.
Any loan of this nature, General Marshall thinks, should be based by the
Eximbank on the commercial and technical aspects.
The restoration or expansion and improvement of communications in
China—water, rail and air—is of fundamental importance to the economic
recovery of the country. The problem is just how much of any loan should be
granted in the light of the present political and military attitude of the
government. General Marshall previously stated that he thought preliminary
loans might well be granted for the restoration of the Canton–Hankow
railroad and the first year preparations for the Yellow River bridge
project. For the same reason a preliminary loan of about 10 million might be
granted to initiate the development of CNAC, providing the commercial and
technical (CAB82
problems) appeared to justify such action.
For General Marshall:
J. Hart Caughey
Colonel, G. S. C.
[Annex]
Memorandum by the Adviser of the Office of Transport
and Communications (Powell) to the
Minister-Counselor of Embassy in China (Butterworth)
Prior to my departure for China on August 6, 1946, I interviewed an
official of the Export-Import Bank in Washington concerning the
possibility of loan to China for the improvement of its commercial air
transport system. He stated, that the Export–Import Bank had been
informally approached on the subject by officials of the CNAC, and that
the matter had been discussed in an informal way. He stated that he had
advised the CNAC people that no loan could be made for this purpose
except out of the $500,000,000 fund that had been earmarked for
reconstruction in China, which fund was under General Marshall’s control
thus making his approval necessary. This probably explains why CNAC has
now approached General Marshall on this matter.
The Export–Import Bank official stated that there had only been one
meeting with CNAC officials on the matter and that the substantive
merits of the proposed loan had not been discussed. In view of the fact
that this matter has been presented to General Marshall at this time
when the proposed Air Transport Agreement between the United States and
China is being concluded by Chinese authorities,83 the following
observations would seem to be pertinent, particularly since at the
commencement of these negotiations the Minister for Communications
proposed that the Air Transport Agreement be informally linked with an
agreement by the United States to finance the improvement of Chinese
commercial air transport facilities. The Minister was advised that no
such commitment could be made in connection with the Air Transport
Agreement, and that if China insisted on such a commitment as a
prerequisite to the Air Transport Agreement our Government would
terminate the negotiations for this Agreement.
1. Relation of Proposed Loan to
International Air Transport.
- (a)
- The proposed loan would not improve overall international
commercial air transport operations or services to or through China,
but, aside from improvement of internal air transport, would merely
enable CNAC to participate more extensively in the utilization of
international air transport facilities of other countries. The funds
received from this loan would not be used to improve the airports or
other navigation facilities, including radio and meteorological
services,
[Page 1029]
of China for
the general use of those interests rendering international air
transport services to China. No part of the loan is proposed to be
used in improving airport runways, an improvement which is badly
needed in China particularly at Chinese international commercial
airports. The only airport improvements envisaged are the
construction of hangars and navigation facilities for CNAC’s
exclusive use within China, the majority of which would apparently
be located at points not designated by Chinese authorities as
international airports.
- In the negotiations for the Air Transport Agreement the principal
reason offered by the Chinese authorities for their hesitancy in
executing the agreement has been the fact that the airports
designated, or to be designated, as international commercial
airports are not adequate for the purpose. It is evident that the
proposed loan to CNAC would not in any way remedy this
situation.
- (b)
- The greater part of the fund obtained through the loan is proposed
to be used to enable CNAC to purchase new aircraft and spare parts.
This would give CNAC the equipment necessary for extensive
participation in international commercial air transport operations,
giving rise to the following situations:
- (1)
- The United States Government would be financing additional
competition for American international airlines, not only in
the handling of traffic between the United States and China
(third and fourth freedom traffic) but also in the handling
of fifth freedom traffic, i. e., passengers, mail and cargo
destined for or originating in the territory of any other
country. The United States Government has certificated three
American airlines to fly international routes to and through
China. The Civil Aeronautics Board certificated these three
American carriers and no more on the basis of the potential
traffic available for these three competing carriers. In
view of this fact it would seem that the Government would
not be justified in now financing additional competition for
the American carriers in this field of operations.
- (2)
- Pan-American Airways is said to own a 20 percent stock
interest in CNAC, and exercises further control over the
operation by virtue of a management contract. If this loan
were made, the United States would be indirectly financing
additional international air transport operations for the
benefit of Pan-American Airways without extending similar
assistance to the other American airlines it has
certificated to do business in this field. It would seem
that the other American airlines concerned would have reason
to object to such action, particularly since this would give
Pan American indirect participation on international routes
for which other American carriers have been given exclusive
American rights by our Government through the CAB.
- (3)
- Under the Air Transport Agreement “substantial ownership
and effective control of airlines” of China must “be vested
in nationals” of China. Otherwise, an airline of Chinese
registration
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could be prohibited by CAB from flying a scheduled operation
to the United States under this Agreement. Whether or not,
in view of the Pan American’s relationship to CNAC,
“substantial ownership and effective control” of CNAC is
vested in nationals of China is a matter that would have to
be decided by the CAB on all the facts of the case. In any
event CAB might be consulted in the matter so that its
freedom of decision would not be impaired by the United
States making this loan to CNAC when part of the proceeds
would be used to finance CNAC’s international operations
under the proposed Air Transport Agreement. The importance
of this Pan-American participation is particularly
emphasized in Item VI of the prospectus issued by CNAC on
the loan.
2. Other Considerations in Connection
With Such a Loan.
Financial assistance to China for the improvement of airports or other
air navigation facilities, including radio and meteorological services,
would seem to be warranted under proper conditions. Also loans for the
improvement of its internal air transport services might be justified as
part of a general reconstruction and rehabilitation program. But it
would seem logical that these two steps should be taken before China is
assisted in establishing an international air transport service.
Surplus property sales by the United States to China have made available
to China a substantial though indeterminate amount of equipment and
materials for the accomplishment of these two steps if they are properly
utilized. In addition provision is made under the Convention on
International Civil Aviation84 for financial assistance to countries like China for
the improvement of airports and other air navigation facilities used in
international services. Furthermore, in time, loans for such purposes
may well be made by the International Bank.
There are certain features that bear special consideration with respect
to loans having to do with aviation:
- 1.
- The present conflict between the Ministry of Defense and the
Ministry of Communications over the use of airports and
navigation facilities in China for commercial purposes should be
settled. In this connection more of the better airports at
Chinese industrial and commercial centers should be designated
for commercial use instead of being retained for military
use.
- 2.
- Legislation should be enacted setting up a sound and efficient
civil aviation regulatory body with sufficient authority to act
promptly and finally in civil aviation matters without having to
channel everything through higher levels of government. This
regulatory body should be adequately staffed and efficiently
organized.
- 3.
- The status of the CATC85 and CNAC should be
clarified, and policy with respect to competition between them
established. The authority of the regulatory body over those
companies should be established, and sound policies with respect
to rates, mail subsidies and safety regulations set up.
- 4.
- Effective program for improvement of airports and navigation
aids should be established and put in operation.
B[olling] R. P[owell]
[Nanking,] November 29, 1946.
