Foreign Relations of the United States, 1955–1957, China, Volume III

96. Letter From the Ambassador in the Republic of China (Rankin) to the Republic of China Finance Minister (Hsu)¹

Taipei, November 8, 1955.

Dear Mr. Minister: I thank you for your thoughtful letter of October 27,² in which you detailed various observations on the economic situation, following our talk of October 20.

The difficulties in question obviously are not easy to solve. In fact, many of them simply illustrate continuing problems which we must follow and deal with as best we can for an indefinite future period of time. In view of this and of the complexities of the situation, as noted in numbered paragraph 4 of your letter, it seems to me particularly important that we should give special attention to factors of major importance which involve large sums of money and affect the economy accordingly. I cite the following as examples:

1. Increased Tax Revenues. There appears to be general agreement that tax revenues have increased less rapidly than national income in recent years. Obviously, steps should be taken to tap this source, both to provide your Government with much needed additional revenue and also to combat inflation.

2. Financial Position of Power and Sugar Corporations. These two companies are among your Government’s most important economic assets. Both have monopoly positions and both appear to be well managed as far as their general operations are concerned. At the very least, they should provide from current earnings enough to cover normal depreciation charges and to contribute to the Government no less than similar private enterprises would pay in taxes. Yet both companies have been operating at a loss of running ever further into debt. Thus very important and legitimate sources of revenue have been wasted. I am glad to learn from you that steps recently have been taken to put the Sugar Corporation on a sound financial basis; I hope that this will provide for a substantial and legitimate return to the Government. It is essential that the Power Company be placed on a similar foundation; otherwise I do not feel that the United States is warranted in making further capital investments in this Company, which already has absorbed some US$70 million in aid funds.

3. The Food Bureau. As far as I can learn, no one seems to understand the financial operations of the Food Bureau except to note its steadily mounting indebtedness, which now approximates one billion NT$. While the Food Bureau cannot be expected to make a large profit, it could be permitted to make a modest return, which would eliminate the need for incurring further debt and would permit it to begin the liquidation of its large obligations.

4. Dispersal Plans. What I heard of dispersal plans, particularly for the Provincial Government, suggests the expenditure of extravagant sums for which no compensating revenue is in sight. I believe that this subject should be restudied with a view to reducing it to very modest proportions. Only a minimum of persons and facilities should be dispersed, and existing buildings, etc, at dispersal points should be used in most cases. There should be no serious thought of moving schools, etc.

5. Budget Balancing. I note your statement that the national budget is within 3 percent of balance. I fear, however, that this figure has been reached after assuming a substantial United States contribution in counterpart funds to budget balancing, and that it also is dependent on contributions by such agencies as those mentioned above (numbered paragraphs 2 and 3) out of non-existent earnings. And, of course, the 3 percent deficit takes no account of direct United States military and economic aid, which at present represents at least two-thirds of the total cost of maintaining the various branches of the Government of the Republic of China. All of this is well known to you, but I mention it because I fear that the use of a figure such as 3 percent to measure your budgetary deficit is misleading to most people. Even after our current program of reequipping your Armed Forces has been completed (say, in 1958), your current resources promise to cover scarcely half of your prospective requirements in local currency revenues and foreign exchange. This situation emphasizes the importance of early and effective attention to increasing revenues, putting Government enterprises on a sound basis and restricting expenditures and imports to genuine, practical needs.

6. Unforeseen Government Expenditure and Borrowing. In a situation such as exists at present it is inevitable that expenditures to meet emergency needs cannot always be foreseen when an annual budget is prepared. However, a budget becomes almost meaningless unless such unforeseen expenditures are covered immediately by (1) increased current revenues, (2) United States aid, or (3) postponing equivalent outlays already provided for but which events have shown should be given a lower priority. Government borrowing to meet emergency needs, under existing conditions, is in most cases equivalent to direct monetary inflation. I am hopeful, therefore, that in the future we can avoid all unforeseen outlays and new borrowing until each case has been fully discussed and agreement reached between the appropriate Chinese and American officials. Unless this can be done, not only your budgetary controls but also our counterpart program might almost as well be forgotten entirely. The assurance given in numbered paragraph 3 of your letter is therefore particularly encouraging to me.

Sincerely yours,

K. L. Rankin

1. Source: Department of State, Central Files, 893.00/11–1755. Confidential. The source text, a carbon copy bearing a typed signature, was sent to the Department as an enclosure to Rankin’s letter of November 17 to McConaughy; see footnote 1, Document 91.
2. Not found in Department of State files.