Foreign Relations of the United States: Diplomatic Papers, 1945, The Far East, China, Volume VII

Marshall Mission Files, Lot 54–D270

Memorandum by the Treasury Department Representative in China (Adler) and the Assistant Commercial Attaché in China (Walker) to the Chargé in China (Robertson)

Chungking, December 19, 1945.

Mr. Robertson: In response to your request, there are briefly summarized below the principal matters now pending in the work of the Economic Section of the Embassy:

Surplus Property

There are three categories of surplus property involved, Army property in West China, Army surplus property in East China, and Navy surplus property in the Pacific. The Army was very anxious to evacuate West China and, basing its decision on military necessity, it sold its property to the Chinese Government on November 29 at a price of US $25 million, with a cash down payment of US $5 million, payment for the rest to be made over 30 years at 2⅜ percent interest. The landed cost of Army property in West China was approximately US $130 million and after allowance for depreciation, etc., the write-down value was approximately US $70 million.

The landed cost of Army property in East China has been estimated at US $250 million. It will be disposed of by the Foreign Liquidation Commission which is under instructions not to sell property to the Chinese Government unless the Chinese Government agrees to pay for the surplus property it acquires with the U. S. dollars it receives from the settlement of obligations for CN dollar advances (see below). This provision was unfortunately not obtained in the agreement on Army property in West China.

The Navy has very large amounts of surplus property in the Pacific, more probably than China could absorb even if she did not have to pay for it. Arrangements have been made to fit disposal of Navy surplus property into the overall program for China. It is hoped that the Navy can sell UNRRA⁴¹ some of its requirements for its China program, which would of course constitute a saving to the American taxpayer, who pays 70 percent of the cost of UNRRA.

CN Dollar Advances to the U. S. Army in China

The Army’s activities in China are financed through the receipt of ON dollar advances from the Chinese Government, settlement for which is made by negotiations between the Treasury and the Ministry of Finance. The Chinese have already received US $255 million for their CN $ advances to the U. S. Army in China for February-December 1944, a settlement which was undoubtedly extremely generous to the Chinese. Negotiations have not yet commenced for our obligations for 1945. It is estimated by the Army Fiscal Officer that CN $ advances for 1945 will total between CN $125–150 billion. The higher figure includes approximately CN $25 billion for food, board and lodging which in 1944 was provided by the Chinese Government as reciprocal aid, but on which it has reserved its position as far as 1945 is concerned. It is difficult to estimate what the final basis of settlement for this obligation will be. But it will probably involve a sum in the range of US $150 million. State, Treasury and FLC are all interested in seeing that after we have sold China surplus property and after we have met our obligations for CN dollar advances to us, we are still not in debt to the Chinese Government. Hence their desire to obtain an offsetting arrangement on the disposal of surplus property.

Exchange Rate

The official exchange rate established by the Chinese Government in 1942 and not yet altered is 20 CN $ to US $1. This rate is utterly fantastic and bears no relation to the real value of the CN $. The Chinese Government has implicitly admitted this by giving overseas Chinese remitting to their families in China CN $499 for US $1 and by allowing American philanthropic, relief and educational associations to sell U. S. dollar drafts in the open market. American civilian Government agencies and American Army and civilian personnel finance their expenditures in China by the sale of U. S. currency on the open market without opposition from the Chinese authorities. The open market rate fluctuates very considerably, having been as high as CN dollars 3,000 in July and as low as 800 in September. It is now around 1350 in Chungking and around 1250 in Shanghai. While admittedly it is not a satisfactory measure of the value of the CN dollar, it is the best we have at the moment. It undoubtedly overvalues CN” and undervalues the U. S. dollar.

As long as China was isolated and had little or no foreign trade, the unrealistic level of the official rate of exchange was a heavy burden on foreign governments and foreigners operating in China and in the nature of a general nuisance. But now its maintenance even nominally is seriously retarding recovery of the Chinese economy by making impossible the resumption of foreign trade on normal lines. The Chinese Government will eventually have to adjust the exchange rate if it wishes export trade to resume. The position the Treasury is taking is that it should not take the initiative in suggesting to the Chinese Government a specific rate, because in the nature of the situation it is impossible to peg the rate at any fixed value until political and economic conditions in China become much more stable.

Exchange Control

The Chinese Government has developed a system of exchange control in cooperation with the U. S. and U. K. which again was relevant to an isolated country with little or no foreign trade. With the resumption of foreign trade, exchange control will become much more complicated and more difficult. The United States particularly is moving toward the relaxing of its own wartime controls. The latest U. S. measure of relaxation involving China was the issuance of U. S. Treasury General License 94 whereby all current transactions between the U. S. and a number of blocked countries, including China, are freed. The U. S. is interested first in insuring that the operations of Chinese exchange control will not interfere with the legitimate activities of American corporations and individuals in China excessively or in a discriminatory manner, and second in seeing that the Chinese exchange control is in accordance with the spirit of the Bretton Woods Agreement⁴² and is adopted as a transitory and not as a permanent arrangement.

Commercial Treaty

The Treaty of January 11, 1943 between China and the United States in which the United States relinquished its rights of extraterritoriality⁴³ provided that within six months after the end of the war there would be negotiated a new Treaty of Friendship, Commerce and Navigation. Such a treaty is essential to provide the legal basis for the rights which all American nationals are to enjoy in China, and its ratification is urgently desired to establish the legal framework for developing the whole range of economic relationships between the two countries. On April 2, 1945 the Embassy transmitted to the Chinese Government a proposed draft⁴⁴ of this treaty which has since been under study in the various Ministries. On November 29 the Embassy was informed that the Chinese would be willing to commence negotiations on this treaty in mid-January.⁴⁵

The provisions of the commercial treaty and the whole range of Chinese legislation (see below) assume new importance following abolition of extraterritoriality. Prior to the war, American business firms operating in China were under the jurisdiction of American law and of the United States Court of China. Henceforth, they will operate under Chinese law.

Protection of U. S. Property Rights

Since the end of the war the Embassy has received an increasing number of requests from American missionary organizations for assistance in securing the evacuation from their property of Chinese troops who have occupied it. The Embassy has promptly communicated each specific case of this kind to the Foreign Office which has taken the necessary action to bring about the evacuation of the property. Because of the number of these incidents it will probably be necessary to work out with the Chinese Government some means of ensuring American mission property against occupation by the military to replace the use of consular proclamations which the Chinese do not wish to continue now that extraterritoriality has been abolished.

A problem of temporary nature arose in Tientsin where Chinese officials claimed as war booty stocks and equipment in American-owned premises which had been occupied by the Japanese.⁴⁶ The Foreign Office has agreed that in cases where such stocks and equipment are similar to those used in the ordinary business of the firm at the time of occupation by the Japanese, they should not be regarded as war booty but be turned over to the American firm along with the premises. Differences of opinion concerning the local implementation of this understanding remain to be worked out.

In Shanghai the question of land titles has been raised by the promulgation of municipal regulations which, in certain respects, do not appear consistent with the treaty of January 11, 1943 between the United States and China abolishing extraterritoriality. The problem is a technical one which will require further study and discussion with the Chinese Government.

Company Law

In June of this year the Chinese Government undertook revision of its Company Law and of the previously existing regulations governing registrations, i. e. authorization to do business in China, of foreign companies. On July 13, Dr. Sun Fo, President of the Legislative Yuan, forwarded a draft copy of the revised Company Law for comment from the American Government and business groups. This draft was forwarded to the Department of State for study there and by the Department of Commerce and representative business groups. Views of these Departments and business groups in turn have been transmitted to Dr. Sun Fo, and from this cooperation a number of mutually beneficial revisions in the provisions of the law have been accomplished.

Although approved by the Legislative Yuan on September 29 and then forwarded to the Executive Yuan for promulgation, the law is now being returned for further consideration by the Legislative Yuan, particularly because of representations made by the Embassy, under instructions, regarding certain of its provisions which the Department of State and American business groups regard as undesirable from the standpoint of Sino-American trade and investment relationships.

Other Pending Legislation

The Legislative Yuan is now undertaking revision of the banking, insurance and mining laws, each of which will affect participation in its respective field by foreign enterprises. The Embassy has been requested by a number of the Committee drafting this legislation to make available texts of relevant American legislation.

Status of American Banks

Prior to 1941 American banks in China were all located in international settlements and were therefore not subject to Chinese Government law or regulations. With the abolition of extraterritoriality they are now subject to Chinese banking law. Under the last law affecting foreign banks, foreign banks are not allowed to receive savings deposits, such loans as they make are tightly supervised, and the whole spirit of the regulations is such as to make the normal functioning of hanks extremely difficult. The Chinese Government has agreed to revise these regulations and to allow foreign banks to reopen without prejudice to the final position they take when the revised Chinese banking regulations are published. Accordingly, the National City and the Chase Banks reopened in Shanghai on December 10, but the business they are doing in the present situation is largely nominal. Pending the clarification of the exchange rate and of Chinese exchange control policy (with reference to foreign exchange accounts in banks, percentage of profits to be remitted home, etc.) and publication of China’s banking regulations, the banks can obviously not undertake any new commitments. It is to the interest both of the United States and of China that American banks resume normal functioning as soon as possible.

Loans and Investments

The Chinese Government is now applying for a loan from the Export-Import Bank to the amount of US $560,000,000. Our most recent information indicates, however, that this loan has not yet been consummated. In November it was announced that the Export-Import Bank had approved a loan of $16,000,000 to the Yung Li Chemical Works, a private Chinese enterprise. Approval and guarantee of this private loan had previously been withheld by the Chinese Government, T. V. Soong apparently favoring a policy of a single lump sum inter-governmental loan with the proceeds to be used in China as the Chinese Government sees fit.

Appointment of Mr. Clarence Gauss⁴⁷ to the Board of Directors of the Export-Import Bank is regarded as a significant development in view of the background of his experience in China and the pending China loan negotiations.

Representatives of the Standard Vacuum Oil Company, the Texas Company (China) Ltd., and the Shell Company of China, Ltd., have recently been carrying on negotiations with the Ministry of Economic Affairs with a view to collaboration in the development of China’s indigenous oil resources. Representatives of the Socony Vacuum Company recently returned to the United States with a proposal which gives some promise of success in these negotiations.

UNRRA

China has received an allocation of approximately US $550 million from UNRRA, the largest single allocation UNRRA has made to any country. Although this sum is small in relation to China’s absolute needs and on a per capita basis, China will experience great difficulty in making effective use of it in view of transportation and administrative difficulties. The Embassy observes and reports the functioning of UNRRA to the State Department so as to enable the Department to make recommendations to UNRRA in Washington which will contribute to the best possible utilization of the UNRRA allocation in existing circumstances.

Electrical Power Developments

Recently announced by Secretary Ickes was the agreement by which the United States Reclamation Bureau is to help the Chinese Government work out plans for flood control and a water power plant in the Yangtze river basin.⁴⁸ Cost of preparing designs and specifications amounting to $500,000 are to be paid by China, with John L. Savage, Reclamation Bureau, Denver Office, in charge of this work.

From the commercial standpoint, great importance attachés to China’s decision with respect to adoption of a 50-cycle or 60-cycle standard for its future electric power development. Because the United States is on the 60-cycle standard, its manufacturers would find it more advantageous in supplying the China market, especially for various types of electric motors and equipment, if China were also to adopt the 60-cycle standard for its future development. The British are understood to be active on this matter in support of the 50-cycle standard, the adoption of which would similarly benefit British manufacturers.

United Nations Conference on Trade and Employment

The United States has proposed that the United Nations organization convene a conference in the summer of 1946 to adopt measures for elimination of barriers to international trade, and has proposed that a preliminary meeting in preparation for such a conference be held in March or April 1946. The Embassy is now communicating the Department’s proposals on this matter to the Chinese Government.

Other Pending Matters

Other matters now pending with the Chinese Government involve (a) carrying out of the agreement by which in 1945 U. S. film distributing companies are to be granted dollar exchange at a 20 to 1 rate to remit 15 percent of net earnings in China; (b) China’s willingness to sign aircraft mortgage and property record conventions, as proposed by the Department of State following the International Civil Aviation Conference in Chicago in November–December 1944; (c) the sending by the Chinese Government of a representative of its Customs Service to the United States, especially to study operations of foreign trade zones or free ports.

41. United Nations Relief and Rehabilitation Administration.
42. Articles of agreement between the United States and other powers regarding the International Monetary Fund, formulated at the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, July 1 to July 22, 1944, and signed at Washington, December 27, 1954, Department of State, Treaties and Other International Acts Series No. 1501, or 60 Stat. (pt. 2) 1401.
43. Department of State Treaty Series No. 984, or 57 Stat. (pt. 2) 767.
44. See telegram No. 567, April 3, 2 p.m., from the Chargé in China, p. 1314.
45. See telegram No. 2085, December 3, 1 p.m., from the Counselor of Embassy in China, p. 1326.
46. For documentation on this subject, see pp. 1388 ff.
47. Formerly American Ambassador in China.
48. For documentation on this subject, see pp. 1425 ff.