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

893.515/1141

The British Embassy to the Department of State⁴³

undated

Statement Issued by Sir F. Leith-Ross to the Press on Leaving China

His Majesty’s Government in the United Kingdom sent me out to examine the financial and economic difficulties of China and the possibilities of our assisting her, in conjunction with the other Powers interested, to overcome these difficulties. I have spent nearly nine months here and have done my best to investigate conditions as I found them, without prejudice or preconceptions. A large part of my time has necessarily been spent in Shanghai, but I have visited Nanking, Tientsin, Peking, Hankow, Chungking, Amoy and Canton, and have met representatives of the Government authorities and local banking and trading communities in all these centres. It had been the hope of my Government that the United States of America, Japan and France would appoint experts to collaborate with me, but this did not prove possible. However, an important Economic Mission from the United States recently visited China and I have found their Report⁴⁴ of great interest. I have maintained contact with Japanese Government representatives and bankers here and have paid two visits to Tokyo so as to obtain first-hand information on the views of the Japanese Government.

2. The considered report on my mission will have to be presented in due course to my Government, but it may be useful, before I leave China, to give some outline of my impressions.

3. The first question to which my attention was directed was naturally the position of the currency. Silver has for many centuries been the currency of China, and the sudden and sharp rise in the value of silver during 1934 caused a similar rise in the exchange value of Chinese currency. Chinese produce became too dear in relation to world prices, exports fell off and silver had to be exported to meet the adverse balance of trade. This, in turn, caused a contraction of credit and an acute deflationary crisis: prices began to fall, debts could not be met and the banks became more and more “frozen”, particularly in Shanghai where the collapse of the real estate boom created a special problem. By October 1934 the situation had become so serious that the Chinese Government imposed a variable export tax on the export of silver, thereby divorcing the Shanghai dollar from the free silver standard. But this measure, while it mitigated the extreme effects of the rise in silver, did nothing to remedy the difficulties which that rise had already caused: and when I reached Shanghai last September, it was evident that further positive measures had to be evolved. China had abandoned silver, without adopting any alternative currency basis. I did not bring any cut and dried scheme out with me to “put over” the Chinese Government. There were several possible alternatives, and the decision between them, depending as it did largely on Chinese psychology, could only be taken by the Chinese Government. I was examining the situation with a view to the preparation of a detailed programme with adequate safeguards and if possible with international support. But before any such scheme could be devised, the exchange market became dangerously weak and the Chinese Government decided to adopt an inconvertible managed currency on the basis of their own resources.

4. I had no responsibility for this bold step, but I have of course closely followed the situation, and I have no hesitation in saying that the action taken has been fully justified by the success which it has achieved. It was accepted throughout China without any serious difficulty. The notes of the Government Banks have been steadily replacing the silver dollars in circulation. Their exchange value has been firmly maintained and the resources at the disposal of the Government Banks for this purpose have substantially increased. The rate of exchange fixed has tended to encourage exports and the resulting increase of agricultural prices should, in due course, lead to improvement in the purchasing power of agricultural producers. The adverse balance of trade has been greatly reduced, and it seems probable, so far as can be judged from the statistics available, that the international receipts and expenditures of China on income tax are now evenly balanced. Thus the fundamental economic conditions for a stable currency are fulfilled.

5. I think the Chinese Government are to be congratulated on the progress which their policy has achieved. Already much has been done to re-establish sound financial and economic conditions. Confidence in the currency is growing. But much has still to be done before it can be solidly assured as a basis for long-term trading and investment plans. The currency reform had to be put into force at short notice, and the various measures necessary to make it watertight have had to be drafted piecemeal and fitted together gradually. The unification of the note issue and the reorganisation of the Central Bank as an independent Reserve Bank has not yet been carried through effectively. There have been unfortunate speculative movements of a non-commercial character which have disturbed sentiment. There is a large Budget deficit entailing constant recourse to Government borrowing. The domestic bond market is depressed and Government credit low. Though the market is now comparatively easy many of the commercial banks are far from liquid. Meanwhile, both in the Southern Provinces and in the North, there have been political difficulties in carrying through the currency reform, as it should be done, on a national basis. Lastly, the sharp fall in the price of silver, following the suspension by the United States Treasury of silver purchases on the world market, aroused temporary misgivings. But, all things considered, there would appear to be every reason, so far as economic factors are concerned, for confidence in the present currency system, provided that the Chinese Government complete and carry through efficiently the programme of internal reforms, including especially the re-organisation of the Central Bank and the reform of the Budget.

6. The prospects of the currency, and indeed of the whole financial situation of China for the future will depend firstly on the maintenance of peace and order in the interior of China and secondly on a settlement of the special situation in North China. In particular the customs revenues are a vital factor in Chinese finance and every effort should be made to put an end to the difficulties in the way of their collection in east Hopei. These difficulties cannot be removed without a better political understanding between China and Japan. During my last visit to Japan I was assured that the Japanese Government desires such an understanding: that it favours the maintenance of the Chinese customs administration and will give no support to the creation of special tariffs by any local authority in China; and that it has no wish to interfere with internal administration of China. It is greatly to be hoped that a solution of the present difficulties will be reached which will restore general confidence and security for trade and investment.

7. I have dealt at length with the currency position because financial security is the basis of trade. Erratic exchanges and the contraction of credit strangle enterprise. The currency reform has laid the foundation for an increase of trade activities. Exports are expanding and the adverse balance of trade has been greatly reduced. But the export trade could be still further stimulated if the burden of local taxes, interport duties and export duties could be reduced and if the standards of production, manufacture and handling could be improved. It rests with the Chinese themselves to promote exports by such means. But I would sound a note of caution in regard to the tendency to create a control by monopoly or anything resembling a monopoly of national exports of China. As regards imports, the immediate prospects may not seem encouraging. But it is no use importing goods that cannot be paid for, and the export trade of China must improve before progress in imports can be looked for. If however present tendencies are maintained, there is every reason to expect a gradual and steady improvement in the import trade. I hope that British exporters will take advantage of the turn in the tide when it comes. They must expect to face keen competition and enterprise and expert salesmanship will be required, as well as readiness to take some risks. Needless to say, they must make a careful study of market requirements and establish the closest possible contact with their Chinese customers. Indeed, in every field of business, co-operation with Chinese interests should be aimed at. The establishment of Sino-British Trade Councils in Shanghai and Hankow will, I hope, help in this direction.

8. Imports, of course, are largely affected by the tariff, and I hope that the Chinese Government will consider whether the present tariff cannot be revised in a downward direction so far as this is possible without reducing revenue. During the depression a number of the tariff rates have been pushed up to a point at which they produce no revenue and merely prohibit legitimate trade. These rates require to be reconsidered in the light of the present exchange position. Industrial interests will no doubt press strongly for the maintenance of the highest possible protective tariff, but the advantages they obtain will be at the expense of the agricultural population. It is the duty of the Government to strike a fair balance between the interests of industry and agriculture, but I believe that in China the restoration of rural economy should have first consideration. In my opinion, therefore, a downward revision of the present tariff would be advantageous to China both in its financial and in its economic effects. The Maritime Customs is the basis of Chinese Government credit and it is in the first interests of China both to maintain that service in all its traditional efficiency and to adjust the tariff so as to secure the maximum revenue.

9. The development of China will require the importation of much capital goods and this is probably the most promising field for British exports. Such exports would be greatly facilitated by a flow of credit to China, where capital is scarce and the yield under proper management should be fully remunerative. In the past the United Kingdom has done much to develop the Railway system of China, but unfortunately many of the loan obligations thus incurred have not been fully met. These defaults have seriously prejudiced the credit of China, and her efforts to secure finance for new development purposes have been correspondingly hampered. The national Government appear genuinely anxious to settle outstanding obligations, within the limits of their financial possibilities, and also to remedy the serious defects in the administration and management of the Railways, with a view to enabling them to meet their charges. It must be borne in mind that the defaults are, in the main, a heritage of years of civil strife and social disorganisation. If a reasonable settlement could be reached in regard to these old debts, the way would be open for financing extensions to the present railway system and opening vast stretches of country to foreign trade. No other form of enterprise could be more beneficial both to China and to the United Kingdom, and every effort should be made to overcome the difficulties.

10. Apart from railway financing, which calls for long-term credit, the possibilities of arranging middle-term credits deserves exploration. Such credits would be of particular value for financing public utility schemes. I have been impressed by the energy and capacity with which the municipal authorities are developing local projects of this character and I think the British manufacturers and exporters should consult the Banks operating in China, as well as the Government Departments concerned, with a view to obtaining finance for soundly planned projects.

11. There are also many openings for the investment of private capital in properties or undertakings in China: but if investors are to be attracted to such ventures, confidence must be re-established by abrogating any measures that have the effect of discriminating against foreign capital, and as regards real estate, by securing that the legal rights of mortgagees are fully protected. Foreign capital cannot be expected to assist China unless it is assured of fair treatment.

12. I fully agree with the observations of the American Economic Mission, viz: “A vast change is coming over China: a modernisation that as compared with ten or even five years ago, marks many centuries”. I believe that this change will make China not a less but a more fruitful field for British enterprise—commercial, industrial and financial. Our principal interest here is to promote the peace, the prosperity and the trade of China, and in working for this, it seems to me we are working in the interests of all countries trading with China. The reconstruction of China is a vast task which will take years to accomplish and there is room for all to assist her in this task. The present Chinese Government has, despite conditions of peculiar difficulty, made remarkable progress in the restoration of law and order, the resettlement of the devastated regions and the development of communications. Their recent currency reform was, in my opinion, planned on sound lines and it is in the interests of everyone that it should succeed.

13. In conclusion, I should like to express on behalf of my colleagues and myself to the Chinese Government and their officials and to the Chinese and foreign bankers and traders whom we have met our warm thanks for the assistance and hospitality extended to us wherever we went.

43. Handed to the Chief of the Division of Far Eastern Affairs, by the British Ambassador, June 25.
44. See Report of the American Economic Mission to the Far East: American Trade Prospects in the Orient (New York, National Foreign Trade Council, 1935).