893.515/880
The Ambassador in China (Johnson) to the Secretary of State
[Received November 18.]
Sir: I have the honor to refer to the Embassy’s despatch No. 43 of October 22, 1935,38 regarding the Chinese note issue, and to enclose for the information of the Department copies of four memoranda39 by the Ambassador reporting conversations held recently in Shanghai with regard to the financial situation in China.
The general conclusions that may be drawn from those memoranda are: 1) the financial situation in China is badly deteriorated and, according to Sir Frederick Leith-Ross, there exists a grave doubt as to whether the National Government is administratively capable of controlling the situation; 2) Hong Kong is beginning to suffer as a result of China’s financial weakness; and 3) the Hong Kong & Shanghai Banking Corporation has apparently become heavily committed in the Chinese financial situation through its efforts in collaboration with the Central Bank of China to maintain control of the exchange market.
At the moment of writing, near-panic conditions prevail in the Shanghai financial market. This fact is probably not unconnected with the prevailing fear of inflation that received its latest impetus when it became known about October 15 that the Bank of China had been authorized by the Finance Ministry to issue Yuan $50,000,000 in new notes. T. V. Soong subsequently made a public statement to the effect that this issue was intended merely to replace old banknotes, but this statement failed to reassure the market in the face of the obviously deteriorated state of China’s finances.
Respectfully yours,
Counselor of Embassy