Office of the Historian

893.5151/5–1147: Telegram

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

Nanking, May 11, 1947—3 p.m.
[Received May 11—5:56 a.m.]

1022. For Secretary of Treasury from Adler.

1.
Saw Minister of Finance May 3 and after general review of financial situation I raised the problem of United States Government expenditures in China. (Reference Embassy’s telegram 947, May 2.) Minister of Finance was sympathetic but non-committal and said the problem would have to be discussed with Premier and Governor of Central Bank. After I intimated that I had already discussed it with Central Bank Governor he said he would arrange an interview for me with Premier Chang Chun. Saw Premier on May 6 and again he reviewed general economic and financial situation. I then raised the problem of United States Government expenditures, adding that a precedent for reasonable solution had been set by the arrangement worked out in January with T. V. Soong and Tsuyee Pei. He replied that he would have to discuss the matter with Governor of Central Bank who would be in Nanking in next 2 or 3 days. Saw Governor of Central Bank on evening of May 10 informing him that I had already discussed the problem with the Premier and the Minister of Finance, and emphasizing that it had become more urgent and pressing in the 10 days since I had last seen him and that a solution was [Page 1118] essential. He rejected any settlement based on the use of the Shanghai black market rate for United States currency or drafts, stating the obvious objections from Chinese Government point of view. However, he was willing to accept the Hong Kong cross-rate as the basis for settlement of United States Government expenditures in China. He indicated that he was returning to Shanghai on May 11 when he would discuss the details with his business department and asked me to come up on May 12 to finalize the arrangement by an exchange of letters. He also agreed that the use of the Hong Kong cross-rate as a conversion factor should be subject to review from time to time in the light of changing conditions and that the arrangement should go into effect as from Monday, May 12.
2.
I strongly recommend that we accept the Hong Kong cross-rate arrangement for the following reasons:
a)
The Shanghai black market rate is unacceptable to the Chinese authorities and the Hong Kong cross-rate is the best settlement we can obtain from them. In any case the Shanghai black market is still subterranean and fairly thin.
b)
The Hong Kong cross-rate which had been lagging behind Shanghai black market rate for United States currency is now catching up and on May 9 was 80 percent of the Shanghai black market rate.
c)
The Government’s agreement to review the situation from time to time in the light of changing circumstances enables us to shift from the Hong Kong cross-rate should it later turn out to be disadvantageous.
3.
Embassy approves of arrangement on basis of Hong Kong cross-rate. Am proceeding to Shanghai tomorrow morning, and propose unless I receive instructions from you to the contrary by Niact59 telegram to consummate the arrangement in the next couple of days. Also propose to settle on basis of Hong Kong cross-rate as of date of purchase of CN dollars and not as of 2 or 3 days prior to date of purchase of CN dollars, as with intensification of inflation such a time-lag works out to our disadvantage. [Adler.]
Stuart
  1. Night action.↩