893.00 P.R./40

The Minister in China (Johnson) to the Secretary of State

No. 680

Sir: In compliance with the Department’s standing instructions, and in continuation of the Legation’s despatch No. 600 of November 17, 1930, I have the honor to transmit herewith a Report on the Political and Military Situation in China for the month of November, 1930.

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The foreign relations of China will form the subject of a separate report.

Respectfully yours,

For the Minister:
Mahlon F. Perkins

Counselor of Legation

Monthly Report for November 1930

1. The Political Situation

(a) Chang Hsueh-liang at Nanking.

During the month under review the “Sick Man of the Far East” may be said to have entered upon a period of convalescence. Although civil wars in China usually begin in the spring, the Chinese have always shown remarkable powers of recuperation between their periodic upheavals, and without entertaining any inordinately sanguine hopes, it may be reported—as a local paper cautiously phrases it—“that something almost like peace has temporarily descended upon China”.

The two outstanding events of the month which warrant a certain degree of optimism have been the visit of Marshal Chang Hsueh-liang to Nanking and the resolutions of the Fourth Plenary Session. Of the two the former has undoubtedly been the most significant, for by his decision to accord personal and public recognition to the National Government the Young Marshal has given proof of exceptional courage and patriotism.

Chang Hsueh-liang arrived in Nanking on November 12th, almost unexpectedly, for the greatest secrecy had been preserved regarding his movements and nobody knew even a few days before his arrival whether he would meet President Chiang Kai-shek at Tsingtao or at Nanking. He was accompanied by his wife and his younger brother, Chang Hsueh-ming, the Chief of the Bureau of Public Safety in Tientsin, and was received by the Executive with ceremonies and honors due an equal rather than a subordinate. Although he brought with him a bodyguard of 1000 men he moved about freely and fearlessly and created an excellent impression by his innate modesty and disarming smile. November 12th being the 65th anniversary of the birth of Sun Yat-sen he attended a commemorative celebration at the Central Kuomintang Headquarters, but declined to make a speech. To the newspapermen he stated briefly:

“I have come to get a glimpse of the new National Capital and make the closer acquaintance of the Party and Government leaders, many of whom I have not yet had the pleasure of meeting, and to [Page 60] place myself entirely at the disposal of the Central authorities. I hope to have many conversations with President Chiang Kai-shek and other leaders of the Government, so as to enable me the better to do my part in the work of peace and national reconstruction for the country and the people.”

He did not attend the opening of the Fourth Plenary Session as he is not a member of the Central Executive Committee. Nevertheless, he repeatedly expressed a desire to work earnestly in collaboration with the National Government and agreed to serve on the Commission for the consolidation of foreign and domestic debts.

However, his principal work was done at numerous informal conferences with Chiang Kai-shek and other party leaders, and although no statement was ever issued as to the nature of the understanding reached, it was soon evident that Chang had wholeheartedly aligned himself with the central authorities. Together they made some kind of working agreement which must have covered such fundamental questions as the division of revenue, railways, and military establishments between the North and the South. The Young Marshal is understood to have agreed to permit Nanking to collect the salt and tobacco revenues in Manchuria, and to limit his army to 150,000 men, to be called the “Frontier Defense Force”. The management of railways was also satisfactorily settled by giving Nanking the control of the Peking-Hankow Railway (with its head office at Hankow), and of the Tientsin-Pukow Railway as far as Tsinan. Chang will control the Tsinan-Tientsin section, the Tsingtao-Tsinan Railway, and all other lines north of the Yellow River. The train service, both to Hankow and to Pukow, which had been interrupted since February 1930, was resumed early in November, and it was decided to facilitate contacts by through trains between Mukden and Nanking and by an air service.

But by far the most important single problem discussed by the two leaders at Nanking was the rehabilitation of Shansi and Shensi, the two provinces recently in revolt. It will be recalled that Marshal Yen Hsi-shan, the head of the Shansi faction, had been “Tuchun” of Shansi since 1911 and by his excellent administration had won for himself a great following among the people. He had been successful in saving the province from the ravages of the civil wars for nearly twenty years, and it was not until Nanking bombing planes attacked Taiyuan and other cities last October and November that the people themselves suffered any casualties. It will also be recalled that Yen in turn relied in the last civil war upon the support of the Kuominchun forces from Shensi under Marshal Feng Yu-hsiang.

Both were outstanding figures, and although both announced their retirement in the first week of November, considerable mystery surrounds their plans. They have doubtless been playing a waiting game, [Page 61] hoping perhaps that the Young Marshal’s pilgrimage to Nanking would fail, in which case they would have offered to join him against the government. On the other hand, the fact that Chang Hsueh-liang had never been willing to fight or disarm them lent color to the suspicion that he was shielding them in case he should have any trouble with Nanking in the future. A considerable portion of Feng’s army is still intact and what is left of Yen’s forces has been kept on a war footing. The National Government therefore realizes that so long as Feng and Yen remain in the country they will always have to be reckoned with as disturbing elements, and it hopes that, as a result of its understanding with the Young Marshal, it will now be able to force them to go abroad. It is said that Chang has agreed to undertake the rehabilitation of Shansi with the assistance of Generals Shang Chen and Hsu Yung-chang, and that the Shansi and Kuominchun armies will be reorganized as a “Northwest Frontier Defense Force”.

In a circular, dated November 4th, Marshal Yen announced his retirement with the following interesting declaration:

“In order to strengthen the party and the state as well as in order to return the country’s politics to its normal road, I have tried to induce Generalissimo Chiang Kai-shek, General Feng Yu-hsiang and Mr. Wang Ching-wei to resign from their respective posts, thereby creating democratic party politics. But, this attempt was frustrated owing to stubborn opposition on the part of the Nanking Kuomintang leaders and I was forced to meet them in the battlefield.

“Once the war was started, I was shocked to see the miserable plight of the people suffering from the inevitable development of warfare and I have now realized that it is practically impossible to hope for the improvement of politics through civil war.

“Furthermore, continuation of war was made unnecessary owing to the fact that the opposition faction has practically recognized our propositions. I have lost nearly all of my military strength. Consequently, I have decided to transfer the administrative powers in Shansi, Chahar, Suiyuan, Shensi, Kansu and Chinghai to the competent authorities.”

Chang’s visit to Nanking has undoubtedly done much to eliminate possible sources of dissension and has opened the way towards genuine cooperation between the North and the South. The danger of a fresh civil war has greatly diminished, not only because of the solution of problems which concerned more particularly the Marshal and the Generalissimo, but principally because Chang’s presence in the capital during the meeting of the Fourth Plenary Session strengthened the hands of the reform elements. It constitutes one of the few instances since the Revolution when a powerful Northern leader has succeeded in making his influence felt in the councils of the Kuomintang.

On November 16th Chang Hsueh-liang made an eloquent appeal for peace and unification when he addressed a meeting of the Central [Page 62] Kuomintang Headquarters. He concluded his remarks with the following solemn declaration which he delivered with great earnestness:

“As a result of my conversations with General Chiang Kai-shek we have come to an understanding that hereafter peace must be preserved in China at all cost. Warlike measures are only adopted by the lowest of animals and the most uncivilized nations. If we can preserve peace in China for five or ten years great progress can be made. I have come to the decision that I shall make every effort to support the Central Government and preserve peace in the country, even if I have to make the supreme sacrifice, that of my life.”

The wisdom of Chang’s moral intervention at Nanking is as clear as was the wisdom of his physical intervention south of the Great Wall last September. Both actions have been decisive. He has given the Nanking Government the sense of security it required to enable it to plan the constructive program which will be referred to under the next heading.

(b) The Fourth Plenary Session and Reforms of the Kuomintang.

In accordance with the wishes of President Chiang Kai-shek the Fourth Plenary Session of the Central Executive Committee of the Kuomintang met at Nanking on November 12th and sat until November 18th. As pointed out in the Legation’s Report for October (see pp. 3638), Chiang was obviously anxious to remedy as many defects in the Party as possible, but the frank avowal of guilt and almost pitiless self-accusation which followed went further than such declarations usually do in China. The presence of the Young Marshal, who is known to be bitterly opposed to the deadening obstructionism of party pride and privilege, has of course had much to do with it. But he evidently found a strong ally in the person of the Generalissimo, as will be seen from the following extracts from Chiang’s statement issued on the occasion of the opening of the Plenary Session:

“It is my firm conviction that, with the successful conclusion of the recent punitive expedition, permanent unification of the country is assured.…

“It is in the lethargy and incompetence of the lower Party headquarters that the main shortcoming of the Party lies. The reason why Party members not only cannot inspire respect and confidence among the people, but have instead become the object of general dislike and hatred, is to be found in the fact that most of the Party members have not learned to be good and righteous men.…

“The fact that—in spite of the state of corruption into which Party affairs have degenerated, and notwithstanding the existence of such supervisory and directive organs as the supervisory committees, and the various judicial organs—not a single case of impeachment and prosecution of corrupt officials (with the exception of the ringleaders [Page 63] of rebellions) has so far taken place fully bears out my contention.…

“Suffering, as I have been, from many shortcomings as well as the fact that I did not have the privilege of joining the Party at an early stage, I have myself in the past not infrequently asserted my own views and opinions to the detriment of the public. No one realizes more than I do my own shortcomings and blunders. What I mention above is the result of a self-examination of my own past conduct and may, therefore, be looked upon as an act of self-confession.…

“In so far as it is not in conflict with the principles of the Party, every man in the country should be given the opportunity to serve the State.… It should be realized that our only implacable and irreconcilable enemies are the Communists, the militarists, and Imperialists, and that the youths who have blindly lent themselves to the support of such enemies should still be given a chance to render service in tiding the country and the Party over the troublous times.…”

And on November 25th, as President of the Executive Yuan—in succession of the late Tan Yen-kai—he was even more outspoken in his exhortations:

“Government officials must no longer find any excuse for shirking their responsibilities. If the state of confusion and inactivity obtaining in the Administration remain unrectified, the Government’s efforts for military rehabilitation, bandit-suppression, and enforcement of district autonomy would be doomed to failure.

“The shortcomings in the present Government administration may be recapitulated as follows: (1) lack of clear demarcation of the duties of various government organs; (2) prevalence of nepotism in the employment of public servants; (3) ignoring the orders of the superior government organs; (4) indolence and irresponsibility; (5) prevalence of corruption; (6) encroachment upon the rights of the people and (7) reluctance to do anything likely to incur the enmity of colleagues.

“Party members should refrain absolutely from encroaching upon the sphere of other government organs … they should be above corruption … and strict economy of public funds should be practiced.

“Government officials should not lavish favors on their own personal relatives to the detriment of the country nor should they shield the rapacious and the corrupt on account of personal friendship.…

“Should any one be found guilty of negligence of duty, encroachment upon the jurisdiction of other government organs, fraudulent misrepresentation in budgets, violation and disregard of laws and discipline; or corruption and nepotism; I will, in fulfillment of the responsibility entrusted to me by the Revolutionary Government and in order to uphold discipline, deal sternly with such delinquent officials regardless of personal considerations.”

In the meantime a Manifesto to the Nation had been adopted and published at the final meeting of the Plenary Session on November 18th, and it was immediately followed by a Circular from the Central Executive Committee to all branch headquarters and members of the Kuomintang. Both reveal the evils from which the Party has [Page 64] been suffering and show that Chiang and the Young Marshal had succeeded in imposing their will upon the Plenary Session.

The Manifesto is a very lengthy document, but its main points may be briefly summarized as follows:

A National People’s Convention is to be called for May 5, 1931, the anniversary of the inauguration of Sun Yat-sen as President of the Chinese Republic. This People’s Convention will be virtually a Constituent Assembly which may promulgate a Constitution to take the place of direct dictatorship by the Kuomintang, although it may well be a long time before the political power will revert to the people.
General Amnesty for all political offenders, except Communists. This is based on the ground that “the services of all men of real talent and ability must be enlisted”, because of the “dearth and paucity of competent men, due to the absence of proper education and training”. The country “cannot afford to let the limited number of talented men hold aloof from public service”.
Measures to remedy the “political stagnation and lack of administrative efficiency”, by improving the morale of the officialdom and eliminating “the present state of lethargy and inactivity.”
Eradication of Communism and banditry, “the main cause of the sufferings of the people”.
Local self-government for the purpose of training the people to participate in local (village) autonomy.
Re-demarcation of provinces with smaller jurisdictional areas than at present. It is suggested that some 70 new districts be created in which the powers of the governors would be greatly reduced and the authority of the Central Government correspondingly increased. This would tend to discourage semi-independent regions under feudal warlords whose sole idea is military aggrandizement.
Abolition of likin in all provinces as from January 1, 1931, for the purpose of fostering commerce and industry in the interior.

The Circular of the Central Executive Committee is particularly severe in its indictment of Kuomintang abuses. It speaks of “three principal blunders” the members of the Party have been guilty of, viz. (1) the use of the Party as a “source of personal livelihood” by “insatiable” persons; (2) the use of district headquarters (Tangpu) as rival organs of the local government; and (3) improper speech and conduct towards the people, or “utilizing the masses as tools”.

Similar in scope, only more explicit in its denunciation of acts of injustice and oppression, are the proposals formulated by General Chen Ming-chu, the Chairman of Kwangtung Province, and a number of other prominent Party leaders. They recommend, among other things, that (1) the authorities be strictly enjoined not to arrest persons or appropriate property without due process of law; (2) the officials or party members guilty of misconduct be not permitted to escape the jurisdiction of the courts; (3) that Labor Unions and Chambers of Commerce be prohibited from arresting or punishing their own members, or agents of employers against whom they have a [Page 65] grievance; (4) arbitrary arrests by militarists to be forbidden, except where martial law is in force; (5) judges to be paid regularly and the courts to function without external interference; and (6) private individuals who have suffered injustice at the hands of officials to be able to obtain redress against the government through administrative courts.

Among the more important changes in the governmental machinery adopted by the Fourth Plenary Session may be mentioned:

the decision that the Chairman of the Executive Yuan shall ex officio become President of the National Government;
that all Cabinet Ministers shall ex officio become members of the Council of State;
the creation of a Ministry of Industry, which is to include the former Ministry of Industry, Commerce and Labor, as well as the former Ministry of Mining and Agriculture;
the abolition of the Ministry of Public Health and the creation of a Bureau of that name to be attached to the Ministry of the Interior;
the installation of the Control Yuan, a department of the government which has existed on paper ever since Sun Yat-sen provided for it, but which has never been properly organized. It is to be independent of the executive, legislative, and judiciary branches of the government, among its principal functions will be the supervision of government accounts and the impeachment of corrupt officials.

Most of the Cabinet Ministers have been confirmed in their posts, despite frequent rumors that Marshal Chang Hsueh-liang had demanded the resignation of Dr. C. T. Wang, the Minister for Foreign Affairs. On the contrary, Dr. Wang has now also been made a full-fledged member of the Central Executive Committee, of which he had heretofore only been a substitute member.

The Ministry of the Interior, which had been vacant for some time, is now headed by Liu Shan-ching, a former Governor of Fengtien, while a new Minister of Education has been appointed in the person of Dr. Kao Lu, who is at present Minister to France. The former Minister of Education, Dr. Monlin Chiang, has been made Chancellor of the Peking National University.

As stated above, the Ministry of Agriculture and Mines has been amalgamated with the Ministry of Industry, Commerce, and Labor, but Dr. H. H. Kung remains as the head of the new Ministry of Industry. The Ministry of Public Health has been abolished and the former Minister, Dr. J. Heng Liu, becomes Director of Public Health instead.

The complete list of the Cabinet, as of November 30, 1930, therefore reads as follows:

Interior: Liu Shan-ching
Foreign Affairs: C. T. Wang (Wang Cheng-t’ing)
Finance: T. V. Soong (Sung Tze-wen)
War (Military Administration): General Ho Ying-ch’in
Navy: Admiral Yang Shu-chang
Industry: H. H. Kung (K’ung Hsiang-hsi)
Education: Kao Lu
Communications: Wang Po-ch’un
Railways: Sun Fo (Sun K’o)

(c) The Opposition.

The political alignments in Nanking since the cessation of hostilities have not been very clear. Little is known of what passed behind the scenes during the Fourth Plenary Session, beyond the fact that men like Hu Han-min (Chairman of the Legislative Yuan) and Li Shitseng protested vigorously against the immediate convocation of the People’s Convention, on the ground that it had not been the intention of Sun Yat-sen that the people should be given the right to frame their own constitution until after the five-year period of political tutelage under the Kuomintang. Hu Han-min was on the special committee, with Chiang Kai-shek, Tai Chi-tao, and Wang Ch’ung-hui (Chairman of the Judicial Yuan), appointed to draw up a comprehensive political program, and it is understood that sharp differences developed as to the degree of constitutional representation which should be granted.

While an open split in the Kuomintang was avoided by the weight of Chang Hsueh-liang’s influence, it has become increasingly evident that certain rights will have to be given to the Opposition if serious trouble is to be avoided in the future. It is not enough for the Party to cry “mea culpa” and “peccavi”, unless it is willing to turn over a new leaf, improve the lot of the common people, and listen to opinions based on different interpretations of party principles.

So far not only have no changes been made in the central government personnel to meet any wishes of the Opposition, but three more prominent men, viz. Chao Pei-lien, Chao Tai-wen, and Chen Chia-yu, have been expelled from the Kuomintang for life. Nor have any overtures been made to Wang Ching-wei (see the Legation’s report for September, despatch No. 521, October 12, 1930, page 639) who is said to be in hiding in Tientsin and is planning to go abroad. In an interview which he recently gave to the press he made the following significant declarations:

“General Chiang accepted the three main objects on the attainment of which we have concentrated recently—namely, the People’s participation in the Government, the calling of the People’s Convention, and the convening of the Party Congress. These proposals were accepted in General Chiang’s manifesto of October 3. Although Mukden did not put forward any concrete proposals when it issued the peace circular of September 18, it was generally understood that it fully agreed with these three objects.

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“But now it is reported that the Nanking Government is divided on the very issues referred to in General Chiang’s telegram. One group considers the telegram to be an ignominious surrender to the enemies of the Government; being in fact merely another edition of the opposition’s political programme. The group holds that by adopting it, the war waged by the Government ever since the Spring of last year has resulted in nothing except in the moral victory of the Opposition.

“The other group holds that there is no harm in calling the People’s Convention and the Kuomintang National Congress, provided that the slogan shall be: ‘No Party except the Party and no groups within the Party’.

“This implies the manipulation of both the People’s Convention and the National Party Congress, thus serving the dual purpose of giving added power to the Nanking Government and of really defeating the enemies of the Government.

“If the Opposition to the Government is persistently ignored and persecuted, it will have no alternative but to resort to armed resistance. Government by persecution or government by persuasion is all the difference between despotism and democracy, and on the realisation of the democratic ideal depends the issue between war and peace in China. I sincerely hope that these observations will be seriously considered by all who have the welfare of the Chinese at heart.”

Nor has the new Press Law, passed by the Legislative Yuan on November 29th, been calculated to inspire confidence in the desire of the government to be fair to anybody differing from it. For apart from prohibiting the publication of articles or news items “endangering public safety” or prejudicial to “good morals”, it also prohibits the printing of anything that may be construed as an attack on the Kuomintang or Sun Yat-sen’s “Three People’s Principles”, or that may be contrary to the interests of the Chinese Government and people. The authorities are empowered to confiscate any newspaper violating these provisions, to impose fines and imprisonment, and even to seize foreign newspapers and magazines upon their arrival in China if found to contain such objectionable matter. Officially, however, the National Government denies that there is any press censorship, but merely requires the “registration” of all newspapers in order—as Liu Lu-ying, the Director of the Propaganda Bureau, naively put it—“to prevent the press from being utilized by counter-revolutionaries and enemies of the government, and to facilitate government control of all press reports”!

While, therefore, the immediate prospects are distinctly encouraging and the unification of the country appears possible, if not probable, much remains to be done. It would be a pity if Nanking threw away an unprecedented opportunity by taking the attitude that the victory over the Feng-Yen coalition was a victory exclusively for the Kuomintang.

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2. Army Reorganization and Bandit Suppression

Some intensive air raids (November 21–24) against Taiyuan, the capital of Shansi, in order to force Yen Hsi-shan to leave the province, and some desultory fighting against the rebels in Kwangsi constituted the last operations of the civil war. The remnants of the Shansi forces are to be reorganized as the “National Border Defence Force”, a task which has been entrusted principally to General Hsu Yung-chang. And the Fourth Plenary Session, in one of its numerous resolutions, abolished the “National Disbandment and Reorganization Committee”, leaving all matters pertaining to the reorganization of the national army to be attended to by the “highest military organs”, i. e. presumably the Commander-in-Chief.

The Nanking Government would therefore at last appear to be free to devote more attention to the problem which, now that the civil war is over, is by far the most serious and urgent it has to face, viz. the suppression of banditry and “communism”.

The problem of brigandage has, of course, been an age-long scourge in China, but the admixture of communism in recent years has had a far more demoralizing effect on the people than is commonly realized. The general discontent of the peasants and the fact that the vast majority of the population have little or nothing to lose makes them a fertile field for subversive propaganda. Fortunately for the government the harvests this year have, in most provinces, been exceptionally good and plentiful. For if the people, exasperated by many years of oppression and savage depredations on the part of outlaws, had also to face a series of crop failures, it is not impossible that a social upheaval in the shape of an agrarian rebellion might take the place of the present apathy and indifference.

Until recently the Government has shown a surprising lack of determination in fighting the “Reds”. Neither the various military units nor the provincial authorities seem to cooperate; the troop movements are slow and ineffectual; the leaders are jealous of each other; and the local officials are afraid to denounce communists in hiding for fear of reprisals when the government forces depart. Although the movement is no longer sporadic, the “Reds” are relatively few in number and are scattered over wide areas. It is of course too much to expect an effective policing of the whole country, but a little more energy in bringing guerilla marauders to book would have gone a long way toward more stable conditions.

President Chiang Kai-shek appears to be fully alive to the dangers of the situation and has decided to deal drastically with all forms of outlawry. He has placed himself at the head of the “Bandit Suppression Campaign” and will personally direct operations, with headquarters at Hankow. It will, of course, require time before his elaborate [Page 69] preparations and carefully laid plans can bear fruit, and the estimate of three, or even six, months is probably too optimistic.

In the meantime, however, General Chiang has already struck at many of the roots of the evil when he published (November 29th) an order to the various army units engaged in the drive against the “Communists”, of which the following is a summary:

There shall be no delay in carrying out orders or wilful withdrawal contrary to instructions;
Troops shall not buy off outlaws with money or munitions, and secret sales of equipment by individual soldiers must stop;
Soldiers must not molest the inhabitants, extort money from them, or interfere with the local administration;
Troops must not incorporate bandits into their units, or even new recruits from the locality where they are stationed;
Negligence or treason resulting in failure to protect a locality against outlaws will be severely punished;
The higher officers will be directly responsible to the Generalissimo for their conduct, and meritorious work on the part of officers and men will be liberally rewarded.

And as the communist-bandits operate preferably along the borders of neighboring provinces—presumably because the divided responsibility on the part of the authorities facilitates their escape—the Generalissimo has appointed three “Pacification Commissioners”: one for the Honan-Shensi-Shansi borders, one for the Honan-Hupeh-Anhwei borders, and one for the Hunan-Kiangsi border. These officials—all of them generals of experience—are to be in charge of the anti-Red campaigns in their respective regions and are to report directly to the Commander-in-Chief.

The news of outrages perpetrated by bandits have become so commonplace that they no longer arouse much attention unless accompanied by some particularly foul act of savagery. The month of November continued to witness the usual looting of villages and small towns, and the kidnapping and murder of innocent people. And although the greatest publicity is naturally given to crimes committed against foreigners, it is only fair to say that for every foreigner persecuted in the interior thousands of natives are suffering at the hands of the same malefactors. It is estimated, for example, that in the province of Kiangsi alone some 150,000 people have been killed within the last year or two, and that over 100,000 houses have been burnt to the ground.

Altogether some 24 foreign missionaries were held captive towards the end of the month, and no serious steps appear to have been taken by the authorities to effect their liberation or to punish such outrages as the murder of Miss Nettleton and Miss Harrison. In southwest Shensi an Italian bishop, Monsignor Soggiu, of the Franciscan Order, was murdered at Hingan on or about November 12th, but the Italian [Page 70] Legation only heard of it on November 25th. Another Franciscan, Father Augustin de Gasperi, was captured at Sinchow (northern Hunan), while the Italian Lazarist mission at Hangchung (Shensi) was looted and the bishop with three fathers and six nuns are still in hiding in the hills. Father Thierney, the superior of Saint Columban’s Mission at Kienchang (Kiangsi), some 80 miles southeast of Nanchang, was captured by bandits about the middle of November. Further north, near Paot’owchen (Suiyüan), an American, Mrs. H. D. Hayward, and her British nurse, Miss E. Gomersal, fell into the hands of bandits, but were rescued—largely through the efforts of the American and British Legations. Not far from there, at Kuantsun, several hundred brigands had attacked a train of the Peiping-Suiyuan Railway on November 17th, looted all valuables and the mails, and took some 40 passengers (all natives) into captivity.

Northern Hunan continues to be terrorized by Ho Lung and his hordes, but now that government troops are advancing against them they are expected to move further south, and possibly into Kwangtung. Of the larger places the Reds took Siangyin, after defeating the government troops, and threatened Changteh, Lichow, on the Hunan-Hupeh border, and Kwangchow, in southeastern Honan. On the other hand, the government claims to have retaken from them Siangyin, Weilo, Yuhsien and Pingkiang. Kian was recaptured by government forces on November 18th, but the communist leaders in that region, viz. Chu Teh, Mao Tse-tung, and Peng Teh-huai are still at large.

In Manchuria some Russian and Korean communists have given trouble.

3. Financial Problems

The rehabilitation of China will be impossible unless prompt attention is paid to the chaotic state of the country’s finances. The cessation of civil war seems to have given rise to the belief in government circles that the State will from now on have unlimited means at its disposal with which to finance all kinds of costly projects (such as were proposed at the Industrial and Commercial Conference at Nanking, November 1–8) when, as a matter of fact, the government is practically insolvent.

It must be remembered that the burden of militarism has for many years been absorbing China’s energies and resources. It is estimated, for example, that the last civil war (April–October 1930) alone cost the South at least $(Mex.)200,000,000, while the North spent at least $(Mex.)80,000,000. These staggering sums wasted in waging war were far beyond the means of the government and had to be raised by abnormal and often illegal taxation, which in turn throttled trade and caused a decrease in revenue from that source. Add to this the sensational [Page 71] and quite unprecedented fall in silver, the world-wide business depression which has diminished the demand for Chinese products, the depredations of bandits who infest the roads in the interior and levy arbitrary toll on all merchandise, and it will be seen that the country is suffering from a number of serious economic and political evils which are sapping its life.

The deplorable state of the public exchequer will, of course, continue so long as military requirements are given preference over all others, and the authorities continue to make large purchases of bombing planes, armored trains, and other war material as they do at present.

Moreover, the burden of incorporating the Kuominchun troops in the national army and the contributions made towards the support of the Manchurian army are a heavy drain on the treasury. The disbandment of the hordes of soldiers now under arms, many of whom are unpaid, undoubtedly also constitutes one of the major problems the government will have to tackle in earnest in the immediate future.

When the Kemmerer Mission was in China in 1929 it estimated its total indebtedness at $(Mex.)3,028,477,000. Since then this sum has been greatly increased by extensive borrowing and the fall in exchange, so that today the total is possibly in the neighborhood of four billion dollars Mexican. The domestic, i. e. virtually forced loans, during the past few years have amounted to over $(Mex.)500,000,000, and hardly a month passes without a fresh internal loan. As these loans fail to attract investors their cost to the government is ruinous and the net proceeds are often only between 25% and 50% of the face value of the bonds I The bonds are distributed throughout the provinces, and the local authorities, native banks, et cetera, are compelled to take up blocks of them without any option of refusal. The provincial authorities in turn levy surtaxes, the receipts for which may on presentation be exchanged for bonds of like amounts. Another favorite dodge is to force the tenants in large cities to pay several months’ rent in advance to government agents, the receipts for which are then declared a legal discharge from the payment of rent and can likewise be exchanged for bonds. Instances are known where landlords have in this manner been deprived of rent for the next two years.

The service of these short-term loans is an onerous one for the government. Thus one of the recent loans of fifty millions, issued under the name of “Rehabilitation Loan” on November 1st, bears interest at the rate of 8% payable monthly, which amounts to 9.6% per annum, and the final half-yearly amortization payment falls due in 1936. Incidentally, like several previous ones, this loan is in the form of customs treasury notes, but in this instance secured on customs revenue to be obtained from the new tariff which passed the Legislative Yuan on November 29th, and from which the government anticipates an annual [Page 72] increase of about one hundred million dollars Mexican in customs receipts.

The result of this reckless borrowing has been that not only are there no funds available for reconstruction purposes, but the government is hard put to it to defray current administrative expenses, and many government officials have received no salaries for several months. Owing chiefly to the depreciation of silver, the original 5% customs revenue is no longer sufficient for the service of the foreign loans and the old domestic loans charged upon it, and the deficiency has to be made up from the additional revenue which would otherwise be at the disposal of the government for current expenses. But even this additional revenue is no longer intact because the greater part of it has been pledged for the service of recent domestic bond issues of the Nanking Government, most of which are due for repayment within five years.

The temptation is consequently very great for the government to tamper with ear-marked reserves in order to strengthen its domestic credit. But as a number of foreign loans are secured upon revenues which are thus being misappropriated for other purposes—notably the earnings of certain railways—it is becoming increasingly difficult for the government to maintain its credit abroad. And without foreign financial assistance China’s recovery must needs be slow and uncertain.

The Chinese Minister of Finance, Dr. T. V. Soong, is an exceptionally able man and has been consistently advocating a policy of rigid economy in order to restore China’s credit abroad. He is opposed to further borrowing for the present and has several times resigned because he did not feel that his advice was being heeded. But each time his brother-in-law, Chiang Kai-shek, has prevailed upon him to remain in office with the promise that he would be given a freer hand. Considering the enormous difficulties which Soong has had to contend with he has had a considerable measure of success. Among other things, he points with pride to the fact that as regards the service of the loans secured on the Salt Gabelle all interest payments will have been brought up to date when the October coupon of the Crisp Loan is paid in December of this year. He has also promised to attend to the amortization of the salt loans in the near future.

As regards the funding of unsecured and inadequately secured loans, the Minister of Finance was instrumental in calling a meeting in Nanking (November 15th) of representatives of interested Powers, principally for the purpose of complying with the Annex to the Sino-Japanese Treaty of May 6, 1930, which has reference to the so-called Nishihara Loans.40 The Chinese Government expressed its readiness [Page 73] “to make a comprehensive settlement of its duly contracted obligations that are now in arrears”, chiefly from the customs and railway revenues, over a period of thirty years. This meeting was followed on November 28th by the appointment of a “Commission for the Reorganization of Foreign and Domestic Loans”, composed of the following members: Dr. Wang Chung-hui (Chairman), Dr. T. V. Soong, Dr. C. T. Wang, Dr. H. H. Kung, Mr. Sun Fo, Mr. Wang Peh-chun, and Marshal Chang Hsueh-liang.

We have already seen (page 23, above41) that the Chinese Government has decided to raise its import duties and to abolish likin (page 10, above42). It is understood that on the abolition of the latter (January 1, 1931) certain new taxes will go into effect, such as a factory and business tax, and taxes on special products (e. g. tobacco, liquors, etc.) to compensate for the loss of likin.

  1. Ante, pp. 5052.
  2. Ante, pp. 38, 40.
  3. See pp. 580 ff., especially p. 587.
  4. Ante, p. 71, last paragraph.
  5. Ante, p. 64, point (7).