Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.50/6–2649: Telegram

The Consul General at Shanghai (Cabot) to the Secretary of State

Shanghai, June 26, 1949—1 p. m.
[Received June 26—12:50 p. m.]

2496. Following tentative estimate economic consequences Kmt²¹ blockade Shanghai assuming 1 month’s effective enforecement:

1. Food: Shanghai probably has sufficient stocks and access interior supplies movable here by rail [or] canal meet essential food needs although food deliveries from rural areas discouraged by higher rural prices, depletion surplus stocks in producing areas due military requisitioning and farmers’ insistence on silver dollar. Lack foreign exchange and established program rice procurement make substantial foreign food imports Shanghai within next month unlikely even without blockade. Shanghai presumably ineligible IEFC²² rice allocations.

2. Fuels and power: Shanghai has about 40 days’ supply fuel oil at present power load 90,000 kw assuming all stocks physically here irrespective ownership available power purposes only with company bombing losses. Roughly 1,000 tons coal daily possibly obtainable Huainan mines by rail (1 train 30 cars of 30 tons each) and water, sufficient to operate power company’s other public utilities at 50,000 kw assuming flow continuous enough met essential needs other than basic industries which presumably would be faced with shutdowns due shortages other materials.

3. Cotton: Shanghai mills have about 6 weeks’ supply raw cotton all sources but need at least 200,000 bales foreign cotton carry mill operations present rate capacity through late October. SMCC²³ seeking step-up mill operations despite low raw cotton supply in line policy increase production which will accelerate exhaustion raw cotton. Due quality unbalance stocks mills presumably will be forced slow down suspend operations prior end 6 weeks’ period with very serious labor repercussions affecting over 200,000 workers or over 1 million directly dependent on cotton milling for livelihood Shanghai alone.

4. Shipping: Despite possible ineffectiveness Kmt blockade, high war risk rates or refusal Marine coverage may make operations foreign, Chinese ships impossible. Far East Shipping Company has suspended calls member lines on Europe run including APL but excluding Isbrandtsen.²⁴ APL has cancelled cargo bookings destined Shanghai up to August 15. Although Chinese shipping companies have few ships here, hence negligible income, must meet payments family allowances crew members ships moved out of Shanghai. SMCC helping companies meet payments by loans. During blockade heavy reduction stevedoring lighterage expected with slowing down other activities dependent on shipping with direct reactions on foreign exchange banking, marine insurance underwriting and business foreign trade houses. (Even now firms with warehouse stocks keep going by sales to meet payrolls only at expense capital resources.) Bombing attacks on river shipping far west as Nanking [and] Hankow have already occurred which if continued might seriously impede deliveries foods, coal, export goods from upriver ports. Principal bombing targets Shanghai, foreign oil storage tanks, Chinese and foreign shipping airfields. Interior transportation still disrupted and far below pre-1937 levels. Many essentials required keep Shanghai’s trade industry functioning either wholly unobtainable from interior or inadequate meet immediate essential needs.

5. Manufacturing: As factories shut down due material power shortages with replacement materials impossible, labor will almost certainly get unruly making large-scale repatriation excess population to rural areas imperative possibly already planned. Already East China Trade Bureau paying premium prices manufactured light bulbs, rubber goods, other products as means enabling companies continue operations despite slack demand and rising payrolls due labor agitation re wage problems. Effect directly inflationary comparable to Nationalist subsidies through Central Bank. Under blockade economic pressure may force general adoption this practice to hold together Shanghai’s modern economy leading to inflation as virulent as under Nationalists with similar effects despite apparent divergence intentions and policy objectives.

6. Finance: Banks now operating low income levels due trade inactivity which has facilitated currency price stabilization despite cumbersome foreign banking, foreign exchange and trade control machinery. Blockade would force marked reduction volume foreign bank business creating very difficult problem meeting payrolls overhead although staff already reduced.

7. Foreign trade: Shanghai’s status world’s fourth biggest city largely dependent on active ocean river shipping. Once cut off or seriously curtailed, city’s economy will be rapidly strangled due exhaustion remaining material assets. Working capital in terms valuta, fuel, industrial materials consumer goods, all now phenomenally low due broad economic dislocation across board since gold yuan conversion and Chiang Ching-kuo²⁵ regime last autumn accelerated by economic disintegration and meteoric inflation between Yangtze crossing April 21 to Shanghai takeover May 28 and worsened by extensive Kmt removals to Canton, Taiwan, Hong Kong, etc., large amounts hard cash and movable assets. Blockade would greatly magnify growing deficits in whole range industrial consumer essentials and increase unemployment, labor difficulties. Even after blockade lifted, substantial time lag needed refill empty pipelines. Quantity imports already paid for remaining unshipped abroad probably insufficient in quantity and poorly balanced as to essentiality meet needs. Labor agitation directed against large firms chiefly foreign; general anti-foreign propaganda and discouraging trade prospects under cumbersome, inept Communist trade foreign exchange regulations directed toward state trading; all factors likely discourage imports financed by foreign exchange held abroad, particularly by foreigners. Recent Communist abrogation GATT²⁶ evidently intention effort deprive imports USA and Britain from benefits may cause countermeasures making Shanghai exports already overpriced in world markets still less competitive. Any event, improbable export availabilities on termination blockade would be sufficient meet US dollars 50 million needed for raw cotton alone, not to mention fuel oil, other industrial materials urgently needed maintain manufacturing even at present low levels.

While blockade might intensify anti-foreign movement, might also eventually impress on Communists extent Shanghai’s dependence on foreign imports, facilities and personnel for survival as most important center modern economy in China especially if blockade prolonged much beyond month’s time limit assumed, when Shanghai might well approach economic chaos.

Sent Department, repeated Canton 804, Nanking 1355.

Cabot

21. Kuomintang (Nationalist Party).
22. International Emergency Food Council.
23. Shanghai Military Control Commission (Communist).
24. American shipping firm.
25. Son of President Chiang Kai-shek; from August until November, 1948, he was in charge of economic matters at Shanghai; for correspondence on this subject, see Foreign Relations, 1948, vol. vii, pp. 364 ff., passim.
26. General Agreement on Tariffs and Trade signed at Geneva, October 30, 1947; Department of State, Treaties and Other International Acts Series 1700, or 61 Stat. (pts. 5–6).