893.51/1–2347
The Ambassador in China (Stuart) to the
Secretary of State
No. 443
Nanking, January 23,
1947.
[Received February 5.]
Sir: I have the honor to refer to the Department’s
telegram no. 1098, November 29, 3 p.m. (1946),18 giving the
reactions of the Export-Import Bank of Washington to a Chinese approach for
a new line of credit to finance rehabilitation of the Canton–Kowloon–Hankow
Railroad and for certain Yellow River bridge projects, discussed in detail
in the enclosures to the memorandum of November 26, 1946,19 addressed
to General Marshall by Colonel M. S. Carter, General Marshall’s
representative in the Department. These enclosures include a copy of a
letter dated October 29, 1946, sent to the Chairman of the Eximbank20 by Mr.
Clayton, Under Secretary for Economic Affairs; a copy of a letter dated
November 9 [8], 1946, addressed to Mr. Clayton by the
Acting Chairman of the Eximbank;21 and a copy of an inter-office memorandum from Mr.
Vincent22 dated November 25,
1946.
[Page 1034]
In connection with the Chinese approach for a line of credit to finance the
rehabilitation of the Canton–Hankow Railroad there is now enclosed a copy of
a memorandum on that subject dated January 4, 1947, addressed to General
Marshall by the Embassy. This memorandum contains an appraisal of the
financial, economic, and general policy considerations involved in the
granting of a loan for this purpose.
There is also enclosed a copy of a letter dated October 21, 1946,23 addressed to the
Ambassador by Dr. T. V. Soong, President of the Executive Yuan, conveying
the request of the Chinese Government for a new cotton loan. The Embassy’s
comments on this Chinese request are contained in the enclosed copy of a
memorandum of December 31, 1946.
The relative merits of the Chinese requests for the railroad and cotton loans
are discussed in the enclosed copy of a memorandum of January 6, 1947,
prepared by the Embassy on that subject.
No comments were made by the Embassy in regard to the Chinese approach for a
line of credit to finance reconstruction of certain Yellow River bridges,
owing to the continued threat of hostilities in the area where the bridges
would be built and their possible early destruction by Chinese Communist
and/or Chinese National Government forces.
The Embassy has no additional comments to make at this time in regard to the
Chinese requests for the railroad and cotton loans, since the means of
implementation of our policy in China will be discussed by General Marshall
on his arrival in Washington.
Respectfully yours,
For the Ambassador:
W. Walton Butterworth
Minister-Counselor of Embassy
[Enclosure 1]
Memorandum by the Minister-Counselor of Embassy in
China (Butterworth) to General George C. Marshall
[Nanking,] January 4, 1947.
The Export-Import Bank’s response in its letter of November 824 to the State Department to the
proposal for a loan vital to the rehabilitation of an area in which
there is little or no likelihood of disruption of communications by
hostilities raises the whole question of our future policy, political as
well as economic, towards China.
[Page 1035]
I. Financial and Economic
Considerations.
- 1.
- From a financial point of view China’s long-term balance of
payments position is so unfavorable as to raise serious and
justifiable doubts as to her ability to meet any long-term
commitments she incurs except most intermittently and partially. If
the Export-Import Bank were to place a pedantically strict
construction on the policy quoted in its letter of November 8 to the
Department to the effect that “the loans of the Bank should, in the
judgment of the Board of Directors, offer reasonable assurance of
repayment”, there would be little chance that long-term
rehabilitation loans to China would satisfy this criterion. But the
fact that the Bank authorized a credit for railway and bridge repair
materials and equipment to China last February, not to mention a
number of substantial credits to other countries which would not
meet this criterion, if rigorously interpreted, provides clear
indication that the Bank need not act in this wise.
- It should be noted with reference to paragraph 1, page 2, of the
Export-Import Bank’s letter25 that China
submitted a detailed statement of its foreign exchange assets and a
forecast of its balance of payments to the Embassy on December 20 in
connection with the question of relief allocations in 1947.*
- 2.
- Economically the case for loans for restoration of communications
is stronger than for most other loans. The rehabilitation of the
Canton–Hankow Railroad is a long-term project not connected with
current hostilities. Presumably such hostilities will cease some
day, and the economic recovery from years of war and civil war would
be greatly facilitated if a start had already been made in the
restoration of previously existing communication facilities. China
cannot be expected to make rapid progress in its recuperation even
after the final termination of internal hostilities, if it has to
begin from scratch. In fact, it would have to begin from worse than
scratch if no rehabilitation projects are initiated in the near
future, as there will be all the destruction of the civil war to
make good.
- The present state of communications is one of the major obstacles
to internal economic recovery, and the restoration of the
Canton-Hankow Railroad would undoubtedly make a significant
contribution to the economic rehabilitation of South China. In the
past this area made considerable exports of wood oil, tungsten,
antimony, tin and agricultural
[Page 1036]
products. The restoration of the railroad
alone would of course not suffice by itself to bring about the
revival of these exports. In present conditions, and probably even
with the railroad in efficient operation, many potential exports
could not compete on the world market without subsidies or their
equivalent. In any case, the prospects for substantially increasing
China’s exports and for improving her exchange position without
drastic action in the fiscal sphere cannot be considered bright.
- 3.
- The case for the Canton-Hankow Railroad is strengthened by the
following considerations:
-
a)
- It runs through an area in which there are no hostilities
at present.
-
b)
- Its rehabilitation is a long-term project which will make
little if any contribution to the National Government in its
conduct of current military operations, and adequate
provisions could be made in a loan agreement to prevent
abuses of the loan such as diversion of railroad equipment
to railroads running through disturbed areas.
-
c)
- As American air bombing, particularly in 1944, wrought
great havoc to the Canton-Hankow Railroad, it would be
fitting if the first specific railroad rehabilitation
project should be carried out on this line with the aid of
American funds.
None of the above considerations, except (c),
apply to the Yellow River bridge project. It would appear to be
expedient, therefore, if you decide to recommend the Canton–Hankow
Railroad loan, to allow the question of Yellow River bridge project to
be shelved for the time being.
II. General Policy
Considerations.
Since any long-term U. S. Government loan to China would appear to be
excluded on strictly financial and economic considerations, the question
arises as to whether we should discriminate between limited loans for
specific long-term projects, which would undoubtedly contribute to the
improvement of China’s internal and external position, and loans which
would serve primarily to relieve the immediate pressure on her foreign
exchange resources. The case for the latter would appear to be more
questionable than the case for the former. As for the former,
-
a)
- The decision to make no such loans would have major political
implications and consequences and would not appear to be in line
with the President’s statement of December 15 [18], 1946.26 The Embassy sees no reason for
recommending any such drastic reversal in the President’s
statement of policy as would be involved in a decision to make
no loans of any kind to China.
-
b)
- The decision to preserve an open mind on limited loans for
specific projects and to make such loans from time to time would
both give us greater freedom of maneuver in our China policy and
be consistent with the President’s statement.
-
c)
- It would not impose long-term political commitments on us and
would leave policy open for revision if and when desirable.
Moreover, timing of such assistance could be of some value in
implementing general policy.
-
d)
- As the proposed loan for the rehabilitation of the
Canton–Hankow Railroad would appear to belong to the category of
limited loans for specific projects, therefore the main question
to be decided is whether now is the right time for this
loan.
[Enclosure 2]
Memorandum by the Minister-Counselor of Embassy in
China (Butterworth) to General George C. Marshall
[Nanking,] December 31, 1946.
I. With reference to your memorandum to me of November 5, 1946,27 regarding Dr.
Soong’s letter of October 21, 1946, to the Ambassador,28 the Embassy
has received the following estimates and information:
| 1. |
Chinese Cotton Supply—August 1, 1946 to
December 31, 1947
|
|
a. |
Cotton carryover on August 1, 1946 (Including cotton on
order but undelivered) |
750,000 bales |
|
b. |
Anticipated UNRRA arrivals |
200,000 “ |
|
c. |
Expected receipts from 1946 domestic crop |
550,000 “ |
|
d. |
“ “ “ 1947 “ “ |
550,000 “ |
|
Total supply 1946–47 |
2,050,000 “ |
| 2. |
Chinese Mill Consumption Requirements
1946–47
|
|
|
a. |
August 1, 1946 to December 31, 1946 |
500,000 bales |
|
b. |
January 1, 1947 to December 31, 1947 |
1,537,000 “ |
|
Total August 1, 1946 to December 31, 1947 |
2,037,000 “ |
The above figures are based on the assumptions of:
-
a.
- An estimated equivalent of full-time operation (20 hours per
day, 6 days per week) of 2.4 million spindles in the last five
months of 1946 and of 3,075,000 spindles in the calendar year
1947; this estimate is lower than Dr. Soong’s, even though it
allows for the arrival of new machinery.
-
b.
- An estimated consumption of 250 pounds, or ½ a bale, of cotton
per spindle per month. Dr. Soong’s
estimate of cotton consumption per spindle per
month is 312 pounds, which in the opinion of our
Commercial
[Page 1038]
and
Agricultural Attachés29 is much too
high, given the current and expected levels of efficiency of
operation.
3. Carry over on January 1, 1948
It will be noted that estimated mill consumption requirements for the
period from August 1, 1946 to December 31, 1947 are approximately equal
to the estimated cotton supply for the same period. However, the
industry needs a carryover equivalent to 3 or 4 months’ supply for its
normal operations. Moreover, the expected receipts from the 1947
domestic cotton crop, which certainly should not be lower than those
from the 1946 crop, will only begin to become available from October
1947 on. Even so, according to our estimates, there will be
approximately 350,000 bales available at the end of the third quarter of
1947 apart from the domestic cotton crop. Our Commercial and
Agricultural Attaches nevertheless estimate a safe carryover for January
1, 1948 to be a little over 500,000 bales, or the equivalent of mill
requirements for 4 months.
4. It follows that Chinese import requirements for the
period ending December 31, 1947 total 500,000 bales, which should
have a landed cost of between US$80 and US$85 million. This
estimate is about half Dr. Soong’s, even though Dr. Soong’s estimate
refers to requirements for the period ending July 31, 1947.
II. Policy Considerations
- 1.
- From a financial point of view China’s
long-term foreign exchange and balance of payments position is so
unfavorable as to raise serious and justifiable doubts as to her
ability to meet commitments beyond 1947 except most intermittently
and partially. According to estimates submitted by Dr. Soong to the
Embassy on December 20, Chinese official foreign exchange resources
will probably be exhausted by the end of 1947; at the same time it
must be remembered that there are still very substantial foreign
exchange assets in the hands of Chinese private citizens and
corporations but in view of the inadequacy of Government controls
and of the disturbed internal situation it is doubtful to what
extent the Chinese Government can succeed in mobilizing them.
- 2.
-
Economically the case for a loan to
facilitate the maintenance of China’s major industry, an industry
moreover which is functioning relatively well, would appear to be
stronger than for any other loan for which application has recently
been made. While domestic cotton needs are still acute, in spite of
the unrealistic exchange rate and high labor costs, China could
export some of her cotton production to Southeast Asia because of
the sustained heavy demand in former
[Page 1039]
Japanese markets. In fact, it would be
advisable to suggest to the Chinese that they should allocate part
of their cotton production to sales abroad and use the proceeds to
contribute to servicing and repaying such loan as we may see fit to
make. At the same time, it is most unlikely that such proceeds would
suffice to repay either a 5-year or a 2-year loan.
- 3.
-
Politically the issue of a substantial cotton
loan raises the whole question of our future policy, political as
well as economically, towards China. It is not easy to justify such
a loan on strictly financial and economic grounds, even though
probably a better case can be made on these grounds than for almost
any other loan. A decision to make no such loans would have major
political implications and consequences which it would appear
premature to provoke. On the other hand, a decision to preserve an
open mind on limited loans for specific projects and to make such
loans from time to time would give us greater freedom of maneuver in
our China policy. It would not impose long-term political
commitments on us and would leave our policy open for revision if
and when desirable. Moreover, the timing of such assistance would be
of great value in implementing general policy.
III. Recommendations
- 1.
- The cotton loan would appear to be in a category of loans for
limited and specific purposes for which a reasonably good case can
be made. At the same time the Chinese application (US$150 million)
is for an amount approximately double their requirements, and even a
loan to cover our estimate of China’s requirements (US$80–85
million) would appear to be too large to be made in one installment.
It is therefore suggested that you recommend an Export-Import Bank
Loan of US$33 million (i. e., the same amount as the previous
Eximbank cotton loans30). It would
be advisable to inform the Export-Import Bank that a loan of this
amount would not be sufficient to meet China’s requirements for 1947
and that it would be in order to give consideration to another loan
or loans to cover the deficiency in the light of relevant facts say
at the end of the first quarter of 1947.
- 2.
- Credits granted by the Export-Import Bank for the purchase of
cotton are invariably short-term. The existing 2-year US$33 million
Eximbank cotton loan to China is longer than any other cotton loan
it has made. As it is therefore hardly likely to agree to more than
a 2-year term for any further cotton loan, there would be little
point in recommending a 5-year term in accordance with the Chinese
request.
- 3.
- In accordance with II.2. above, the Export-Import Bank should be
advised that among other conditions it will stipulate—presumably
[Page 1040]
these would be more or
less identical with those of the existing cotton loan—it should
require the Chinese to earmark part of their cotton production for
export and to allocate the proceeds of such exports to contribute to
the servicing and repayment of the loan.
[Enclosure 3]
Memorandum by the Minister-Counselor of Embassy in
China (Butterworth) to General George C. Marshall
[Nanking,] January 6, 1947.
The two attached memoranda state the cases for the railroad and cotton
loans. The pros and cons of these loans are summarized below:
1. Arguments for Canton-Hankow
Railroad loan.
-
a)
- It is a long-term rehabilitation project vital for the restoration
of Chinese communications and for the revival of the Chinese economy
after the cessation of current hostilities.
-
b)
- Because it is a long-term project, it is not open to the objection
that it is a political loan of assistance to the National Government
in the civil war, and is therefore readily defensible in terms of
the President’s statement of December 15 [18], It should also be possible to impose conditions
preventing abuse or misuse of equipment purchased with the
loan.
-
c)
- The railroad runs through an area in which there are no
hostilities and little likelihood thereof. It is therefore unlikely
that the investment in equipment and installations will be
dissipated.
2. Arguments against Canton–Hankow
Railroad loan.
-
a)
- The railroad has already been abused by the Military, and it may
be difficult to prevent the recurrence of such abuses or the
diversion of equipment intended for its rehabilitation to other
railroads in areas of hostilities.
-
b)
- The record of Chinese utilization of UNRRA railroad equipment is
not impressive.
-
c)
- The prospects for the repayment of the loan cannot be considered
too bright.
3. Arguments for cotton loan.
-
a)
- The cotton textile industry is China’s major industry, which
moreover is functioning with relative efficiency. Its continued
large-scale operation is vital to the prevention of further economic
(and political) deterioration in Shanghai and in Nationalist China
generally.
-
b)
- The functioning of the cotton industry is not immediately related
to the civil war.
-
c)
- China can export some of her cotton manufactures and allocate the
proceeds to the servicing and partial repayment of the loan.
4. Arguments against cotton
loan.
-
a)
- While a cotton loan would provide immediate relief, it would not
contribute to any basic long-term improvement in the Chinese
economy.
-
b)
- Precisely because the cotton loan would provide immediate economic
relief and improve the Government’s immediate financial position
(the Government anticipates receiving CN$400 billion from the
profits of the China Textile Development Corporation), it would be
of assistance to the Government in waging civil war.
-
c)
- While the foreign exchange proceeds of cotton textile exports
could contribute to the servicing and partial repayment of the loan,
it is improbable that they would be on a scale sufficient to ensure
its full repayment.
