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

No. 464

Sir: I have the honor to recall that the Embassy, Nanking, has on more than one occasion brought it to the attention of the Department [Page 596]that there was observable in China a tendency toward “state capitalism”, that is, the initiation and control of large economic enterprises by the National Government to the exclusion of private initiative.

There is enclosed a copy of the report of an address71 given by Dr. Wang Ching-wei, Chairman of the Central Political Committee, on May 3, as published in the Kuo Min News Agency release of May 4, 1937. The entire address is interesting, but the Department’s attention is invited particularly to those portions which bear on the policy of the National Government, acting in accordance with directions given by the late Party Leader Dr. Sun Yat-sen, to initiate and control certain basic enterprises in China, with a view to placing the country in position to defend itself from foreign aggression.

For convenience of reference excerpts from the address of Dr. Wang Ching-wei are quoted below.

Dr. Wang was discussing the general policies of the Government and could hardly have omitted reference to relations with Japan. In regard to such relations he said:

“Our attitude towards Japan may be summed up thus: We are resisting Japan. We are not anti-Japanese. In saying that we are not anti-Japanese we mean that we have no wish to injure others; in saying that we are resisting Japan, we mean that since other people are injuring us, we cannot but offer resistance.

“Doubtless in the course of the past few years we have been immersed in the task of augmenting the power of resistance of the State. An individual with no power of resistance can not avoid death when attacked by disease. A State with no power of resistance, will, when beset by foreign menace, not only perish, but its people will be completely wiped out from the face of the earth. In all our work today there is a central objective: namely, to strengthen the power of resistance of the State”.

These remarks substantiate observations made to the Department by the Embassy in earlier despatches, based on statements made by other Chinese leaders, that the National Government’s motive in attacking the problems of economic development in its present energetic manner is largely, if not primarily, the desire to increase the country’s ability to resist Japan’s aggressive activities.

Another important Government policy discussed by Dr. Wang was that of “economic reconstruction”. Dr. Wang recalled that Dr. Sun Yat-sen had repudiated the idea of the Third International that complete destruction of the existing capitalist regime must precede the attempt to set up a better social system and that he had advocated “peaceful means to reach the ultimate objective”. Dr. Wang said:

[Here follows quotation from address.]

[Page 597]

These remarks somewhat explain Dr. Wang’s opposition to General Chiang Kai-shek’seported willingness to come to a working agreement with the Communist forces in the northwest, leaving those forces intact (see my despatch No. 359 of February 26, 1937,72 page 3). The remarks show, also, that the Chinese Government has adopted the modern idea that the success of a nation in war is conditioned by its strength as a complete economic unit and not only by the efficiency of its war machine.

That there is in the United States a similar impression that it is necessary for the Government to intervene in certain types of economic development for the joint purpose of assisting industry and providing for national defence is suggested by the following item from the Department’s radio bulletin of April 30:

“Mineral Resources. Senator Reynolds73 yesterday introduced a resolution which would authorize the investigation of the country’s mineral resources by a technical commission to be appointed by the President. The Commission would be required to recommend legislation to acquire and preserve strategic material necessary for national defense and industrial needs.”

Since the attitude of the United States toward international questions involving China has been based upon the hope and the belief that China will become politically and militarily strong enough to maintain an independent position in the family of nations, the United States is undoubtedly very keenly interested in everything which bears upon China’s progress toward that condition. Nevertheless, we are also interested in maintaining friendly and profitable relations with China during this period of growth. We are interested, for example, in the opportunities which American individuals and firms are to have in business ways in China. There is quoted below a passage in Dr. Wang’s address which confirms the prediction already made by the Embassy in other reports that American firms, in common with other private enterprises, are confronted with an ever narrowing field of activity, mainly because of the creation of semi-Government companies having monopolistic rights in important industrial and commercial lines:

“If we are to achieve economic reconstruction, we must, basing on the principle of the People’s Livelihood, stir up the spirit of action of the entire people so that the nation will be inspired by a common idea and a common faith. We should study how to create state capital so that the Government may undertake the various colossal industrial projects; and how to protect private capital so that it may be utilized for the development of medium and small industries. It should be remembered that the burden of the state in undertaking the large industries is already very heavy. Under the circumstances, the state [Page 598]can hardly undertake the smaller industries which cannot but be left to private capital. If no protection is offered by the state to the smaller industries, the latter can never be developed. Since the main industries are undertaken by the state, private capital is thereby restricted.”

It is within the personal recollection of officers of the Embassy that throughout the last three decades successive Chinese Governments have issued innumerable paper plans of political and economic projects. The greater part of these plans have not been executed; a small residue were carried out and are now the foundation of progress, e. g., various railways. On a smaller scale, American enterprises in China in the same period have presented a similar aspect. Railway contracts have been obtained for American firms and have resulted in troublesome negotiations and large Chinese debts instead of profitable railways.

In spite of the fact that the discouraging experience of thirty years may have chilled the interest of the Department and of American banks and business men in the present plans of the Chinese Government for economic and industrial development, the Embassy feels that present developments in this direction merit attention. Railways are indubitably being constructed, factual surveys are being made, and European capital is being invested.

The point of immediate importance which it is the purpose of this despatch to emphasize is that in large enterprises such as railways, steel producing plants, large factories in most lines, et cetera, American firms must deal with Chinese Government departments or with companies largely financed and controlled by the Government. This circumstance inevitably involves the Department of State and other agencies of the American Government in practically every important enterprise, in a consultative and auxiliary capacity, because American firms have always found themselves more or less helpless when dealing unaided with the Chinese Government departments. Moreover, the Chinese Government department concerned usually wishes to make the transaction a matter of record in American official archives. In this field of official finance it is impossible to refer disputes to any court of law.

Respectfully yours,

Nelson Trusler Johnson
  1. Not reprinted.
  2. Not printed.
  3. Robert R. Reynolds, United States Senator from North Carolina.