The Ambassador in the United Kingdom (Bingham) to the Secretary of State
[Received June 21—12:34 p.m.]
394. Cadogan sent for me this morning and handed me a “very confidential” memorandum regarding Kung’s currency loan negotiations here. Inasmuch as he is, according to the radio bulletin, due to arrive in Washington in a few days, I am cabling text in full.
“The Chinese Minister of Finance Dr. Kung, during his recent visit to England raised the question of the issue in London of a currency loan for China. Discussions in regard to this proposal are still in an early stage but His Majesty’s Government in the United Kingdom desire to inform (the United States Government) confidentially of their course as they are anxious that in matters of this kind there should be close consultation between the governments principally concerned.
- His Majesty’s Government are disposed to view Dr. Kung’s proposal with favor provided that it forms part of a well considered program for maintaining the stability of the Chinese currency and for the execution of a sound financial policy on the part of the Chinese Government. They feel that the carrying out of such a programme is essential in the interests of China and is to the advantage of all countries which trade with China and intend to cooperate in her economic developments.
- In particular His Majesty’s Government attach importance to the establishment in China of an independent and non-political central reserve bank. The principles for the setting up of a central reserve bank have already been adopted by the Chinese Government and it is satisfactory to note that Dr. Kung has stated his intention of putting these principles into practical effect without delay. In discussing the question of a currency loan it was made clear to Dr. Kung that His Majesty’s Government regard it as very important that satisfactory legislation for a central reserve bank should be put into force as soon as possible and that it would be essential that this step should have been taken before the issue of any currency loan.
- The programme envisaged would of course include provisions as to the disposal of the proceeds of a currency loan. The sterling would be sold by the Chinese Government to the central reserve bank and would be used by the bank solely for foreign exchange transactions in order to maintain the stability of the Chinese currency. It would clearly not be desirable that the Chinese dollars thus received by the Chinese Government from the central reserve bank should be available for current budget expenditure and the programme would provide that these dollars should be used by the Chinese Government gradually over a period for the redemption of existing domestic bonds which would have the effect of improving the credit of the Chinese Government in their own internal market. It would also be part of the program that the Chinese Government should pursue a policy of balanced budget.
- Provided that a currency loan formed part of a well considered program on these lines His Majesty’s Government felt that they could themselves view it with favor and could hope that the proposal would be viewed sympathetically by the United States Government and the other governments concerned. But it was made clear to Dr. Kung that His Majesty’s Government could not express any opinion as to whether, and on what terms, a loan could be successfully issued in the London market and that this must depend on negotiations with the financial institutions concerned.
- Dr. Kung proposed that the loan should be secured on the Maritime Customs revenue in which connection His Majesty’s Government stated that they would expect an assurance that the existing system of the Maritime Customs would be continued. They here emphasized the importance of the resumption of the recruitment of foreign personnel.
- The discussions with the financial institutions concerned are still at an early stage and it is not yet clear whether the Chinese Government will be in a position to offer security which the market would regard as adequate even for a comparatively small currency loan of say not more than pounds 10,000,000 to pounds 20,000,000. (If the total were more than pounds 10,000,000 only pounds 10,000,000 would be issued in the first instance). Discussions on this point are understood to be continuing.
- Should these discussions be successfully concluded it is understood to be the desire of Dr. Kung to issue a currency loan in the autumn. In this connection the question of the Consortium has of course to be recalled into account. His Majesty’s Government trust that they will shortly receive from the French and Japanese Governments, as they have already received from the United States Government, an intimation that they agree to negotiations between the groups for the dissolution of the existing Consortium by mutual consent. In that event it may be expected that the Consortium will have been dissolved before the autumn and no question of a formal decision by the group will be involved; but it would of course continue to be the policy of His Majesty’s Government to keep in close touch on the matter with the other three interested governments. In the alternative event of the Consortium not having been dissolved by the autumn His Majesty’s Government trust that the United States Government would find no difficulty in using their influence with the United States Group to secure the consent to the issue in London of a currency loan as part of a well considered program on the lines described above.”
Cadogan went on to say that he had had several conversations with the Japanese Ambassador in the course of which Yoshida made a proposal for an agreement to protect the territorial integrity and independence of China. Cadogan also said that his Government would cooperate with the Japanese or any other government along this line and that Yoshida had then proposed the discussion of an agreement for the protection and rehabilitation of China and Cadogan said he had told him the British Government would in no circumstances go into any such agreement; that cooperation with the United States, China and Japan for peace and stability in the Far East would be supported by his Government but no form of special agreement would be considered at all. This allowed me to refer in passing to the purport of your number 1757 of May 24, 1937.78
Cadogan then went on to say that Yoshida was to provide him with a memorandum on the Japanese proposals for discussion but that the presentation of this memorandum had been much delayed because of the changes of government in Japan. However, he looked for it in the near future. Meanwhile he had undertaken to keep this Embassy informed and would continue to do so and also he had told the Chinese Ambassador that he would keep him informed of any negotiations with Japan.