Foreign Relations of the United States Diplomatic Papers, 1936, The Far East, Volume IV

893.00/13636

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

No. 552

Peiping, July 3, 1936.
[Received July 28.]

Sir: I have the honor to refer to the Embassy’s despatch No. 147 of January 3, 1936,⁵³ reviewing the political, military, economic, and financial developments in China during the last six months of 1935, and to submit a similar review of the first six months of the present year.

The significant developments during the period under review, most of which augmented the precariousness of China’s situation, were as follows: (1) intensification of the resolve of Japanese military to extend Japanese economic, military, and perhaps political control in China; (2) elevation of the status and increase in the strength of the Japanese North China Garrison; (3) appointment of new personnel to the principal Japanese military and civilian posts in China; (4) the apparent elimination of the Kwantung Army from participation in affairs of North China; (5) growth of smuggling into North China by Japanese, which weakened China financially; (6) increasing autonomy of General Sung Che-yuan’s regime in North China; (7) increasing divergence of views between General Sung’s military and civilian subordinates; (8) preparation of Japanese-directed Mongols in Chahar to extend their control over Mongol areas in Suiyuan; (9) anti-Japanese demonstrations by students; (10) tendency of communist forces to assemble in west and northwest China; (11) the death of Mr. Hu Han-min, Southwestern political leader, on May 12; (12) the northward advance of troops of Kwangtung and Kwangsi; (13) partially effective efforts of the National Government to improve economic and financial conditions, including the reorganization of the Central Bank of China; (14) continuing efforts of General Chiang Kai-shek to become dictator over larger areas of China; (15) the extension of his authority into Shansi; (16) the Sino-American monetary understanding, announced May 18;⁵⁴ and (17) the departure of Sir Frederick Leith-Ross, British financial expert.

A. The position of General Chiang Kai-shek:

Although General Chiang Kai-shek gave up control of no province over which he had extended control, although he brought additionally the Province of Shansi within his sphere of power, and although his powers as dictator within his sphere increased, his position was more perilous at the end of the period under review than it had been at the beginning. In fact, practically all major developments of the six months were factors working for the disintegration of China, chief among which were those developments promoted by Japanese military and subversive movements of Chinese factional leaders.

B. Policy of the Japanese:

The Japanese military in China were comparatively inactive during the early months of 1936, apparently awaiting (1) clarification of the situation created in Tokyo by the assassinations of February 26; (2) the increase of the numerical strength of the North China Garrison, (3) the arrival (March 28) of Major General Takayoshi Matsumuro, successor to Lieutenant General Kenji Doihara as chief Japanese negotiator in North China, and (4) the arrival (May 19) of Lieutenant General Kanichiro Tashiro, the first Commander of the North China Garrison to be appointed by the Emperor. The effect of Lieutenant General Tashiro’s appointment appeared to be the removal of the Kwantung Army from participation in affairs of North China and an increase of unity in policy and of determination on the part of Japanese military officers dealing with affairs in North China.

It was evident that the Japanese military were resolved (1) to extend their economic, military, and perhaps political control in China, (2) to cause General Chiang Kai-shek either to come to terms or to fall, and (3) to promote the break-up of China through separatist movements.

There was also evidence of increasing cooperation with the Japanese military on the part of Japanese civilian officials concerned with affairs in China, although there was some reason to believe that the civilians would emphasize particularly during the near future the question of Sino-Japanese economic cooperation.

C. Smuggling: anew Japanese instrument of coercion:

The probability of Japanese success in obtaining agreements desired by them was enhanced by the development and fostering of a new instrument of coercion; namely, the excessive smuggling of foreign products, for the most part Japanese, principally through Yin Ju-keng’s autonomous area in northern Hopei (established through Japanese aid on November 25, 1935) and thence into other parts of China. As a result of Chinese inability to cope with the situation without Japanese cooperation, which the Japanese authorities obviously had no intention of giving, the revenues of China were seriously impaired. It was evident that Japanese military and civilian officers regarded this smuggling as a policy by means of which agreements could be accelerated with North China and, especially, with the National Government, the latter having come no closer to an understanding with the Japanese by the end of the period under review than it had been at the beginning.

D. Chinese military preparedness:

Meanwhile, the purpose of General Chiang Kai-shek’s efforts to reach a state of military preparedness was undefined and observers were uncertain whether he intended to resist Japanese aggression at some time or whether he was preparing for action against disaffected Chinese factions.

E. Separatism in North China:

General Sung Che-yuan’s regime in Hopei and Chahar, established December 18, 1935, progressed toward greater autonomy through such methods as gradually taking over control of financial, communication, construction, and cultural organs previously under the direction of the National Government. These acts were apparently in part the result of General Sung’s desire to improve his own position and in part the result of Japanese urging. Meanwhile he was pressed by the Japanese military and by his own self-seeking civilian subordinates to enter into agreements with the Japanese which would further separate his area from the National Government, which would give to the Japanese greater political, military, and economic control of that area and render more probable the establishment of a North China regime of five provinces, and which would probably bring about the merging of Yin Ju-keng’s autonomous area with that of General Sung. Concrete accomplishments by the Japanese during the period under review were apparently few. Submission to Japanese pressure by General Sung involved the possibility of military disorders on the part of at least some of his military subordinates opposed to the program of the Japanese and of some of General Sung’s civilian subordinates. Retreat from Hopei seemed difficult as there was no suitable place in the rest of China for General Sung and his allegedly more than 80,000 troops. Armed resistance to the Japanese was regarded as likely to fail.

Meanwhile, preparations of Japanese-directed Mongols in nominal control of Chahar north of the Great Wall continued for the presumed purpose of gaining control of Mongol areas in Suiyuan and of creating a new Mongol puppet regime.

F. Disaffection in the Southwest:

The long-standing, mutual mistrust of General Chiang Kai-shek and the military leaders of the Southwest (Kwangsi and Kwangtung Provinces) entered a highly critical phase in the latter part of May. The death of Mr. Hu Han-min on May 12 substantially weakened the peace policy allegedly supported by the Southwestern civilian politicians; and his will, which, according to some evidence, may have been forged by the Southwestern military leaders, gave those leaders a useful political weapon as it expressed strong opposition to General Chiang’s policies. Motivated primarily by hatred of General Chiang and fear that General Chiang intended shortly to extend effective control over Kwangsi and Kwangtung and probably influenced in part by Japanese advisers and Japanese assistance, General Pai Ch’ung-hsi was chiefly responsible for the initiation of a northward movement of troops of the two provinces for the alleged purpose of fighting the Japanese but for the evident immediate purpose of overthrowing General Chiang Kai-shek. The forces of the Southwest and the forces of General Chiang had not yet begun at the end of June to fight. In case they were to fight, the question was not so much whether General Chiang could win as whether such a conflict would not result (1) in the breaking away of other parts of China where the leaders were dissatisfied with General Chiang and/or under Japanese pressure, (2) in the rallying of the forces of nationalism against General Chiang Kai-shek, (3) in the development of country-wide chaotic conditions, and (4) in the accelerating of the extension of Japanese control with the concomitant injury to Western interests in China. If a compromise were to be effected, it seemed probable that the general situation would not be materially altered.

G. Communist forces:

The principal communist forces in China were by the end of the period under review in the Provinces of Sikang, Ch’inghai, northern Shensi, southeastern Ningsia, and northeastern Kansu. Although communist forces did not form so immediate a threat to the National Government as at times in the past, it was evident that their activities in the west and northwest might, depending on political developments in the rest of China, hold considerable significance for Chinese domestic policy and for Sino-Japanese relations as well.

H. China’s periphery;

While Japanese encroachment continued in the north, there was no known alteration in the tenuous relationship of the National Government with the western areas of Sinkiang Province and Tibet. Nor did the Sino-British Commission for the delimitation of the disputed Burma-Yunnan border reach any conclusion.

I. Finance and Economics:

The stabilization of Chinese currency and the strengthening of Government finance, which were the immediate achievements of the monetary decree of November 3, 1935, were continued during the period under review. A loan of $1,460,000,000 (Chinese currency), secured on the Maritime Customs, was issued in February to convert most of the existing domestic loan bonds, thereby greatly reducing the carrying charges on the Chinese national debt and enabling the National Government to effect a considerable saving. Also, a loan of $340,000,000 (Chinese currency), secured on the Maritime Customs, was approved at the same time primarily for the purpose of strengthening Government finance. Chinese credit and public confidence were further strengthened as the result of efforts to readjust and to meet outstanding loan obligations, the announcement on May 18 that the United States would begin regular purchases of substantial amounts of Chinese silver, and the reorganization in February of the Central Bank of China, which was one of the reforms proposed by Sir Frederick Leith-Ross.

Notwithstanding these developments, however, it seemed probable that any lasting betterment of the situation would depend on (1) the maintenance of civil peace, (2) the satisfactory regularization of Sino-Japanese relations, and (3) a more direct and extensive approach by the National Government to the outstanding economic problems of China. Meanwhile, purchasing power and revenue continued to decline, the adverse trade balance (with smuggled imports taken into consideration) remained dangerously high; the new draft budget was larger than the preceding budget and achieved a technical balance only by the inclusion of certain sums to be obtained by borrowing and from “miscellaneous” revenues; the National Government and provincial governments continued to borrow to meet current expenses; excessive taxation and political corruption showed no significant abatement; the agricultural situation showed no outstanding signs of betterment or of further deterioration; and China’s import of food stuffs continued to account for an alarming proportion of total purchases made abroad. As usual, however, some progress continued to be made along lines of public health, development of communications, urban improvements, and education.

J. Sir Frederick Leith-Ross:

The significant visit of Sir Frederick Leith-Ross, British financial expert, who arrived in China September 21, 1935, ended with his departure June 23. Although the Chinese authorities were unable to carry out to the full extent his proposals for reforms, because of the political and financial organization of the country, and although he apparently failed to gain the approval of Japan of his proposals, his mission was successful insofar as it resulted in a partial rehabilitation of China’s finances. Whether his mission to the Far East will ultimately prove to have a lasting and important effect in respect to the rehabilitation of financial and economic conditions is as yet a question which cannot be answered.

K. Western nations:

The relations of China with western nations did not alter materially during the period under review. Neither the visit of Sir Frederick Leith-Ross nor the decision of the United States to purchase Chinese silver appeared to effect any important alteration in the relations of China with the countries concerned. The agreement, however, concluded on March 12 between Soviet Russia and Outer Mongolia for mutual assistance, brought forth statements of dissatisfaction; and the conclusion on April 30 of a commercial arrangement between Germany and “Manchukuo” caused Chinese officials to express apprehension at the implications of that arrangement. Changes in China’s relations with western nations appeared to depend upon future developments in China’s internal situation and in Sino-Japanese relations.

Respectfully yours,

For the Ambassador:

George R. Merrell, Jr.,

First Secretary of Embassy

53. Foreign Relations, 1935, vol. iii, p. 502.
54. See telegram No. 270, May 18, 4 p.m., from the Consul General at Shanghai, p. 481, and telegram No. 120, May 19, to the Ambassador in China, p. 482.