693.002/613: Telegram
The Ambassador in China (Johnson) to the Secretary of State
[Received April 26—11:45 a.m.]
217. My 215, April 26, 10 a.m. Arthur Young gave me on April 25th copy of a confidential memorandum which he had presented on that day to British Ambassador at the latter’s request regarding customs secured internal loans issued prior to outbreak of hostilities. Memorandum states that such loans outstanding amount to about 1,800 millions and that amount required for their service in 1938 is about 130 millions; that the corresponding figures for external customs secured obligations are approximately 650 millions and 90 millions. He states that since hostilities the service of foreign obligations has absorbed nearly all the net customs revenue exclusive of sums seized by Japanese controlled agencies at Tientsin and other ports, and that central bank has advanced to the customs amounts required to make up shortage.
Memorandum points out that as a matter of legal right obligations for which customs revenue is pledged are equally valid with rank according to seniority, and that an arrangement prejudicing position of some obligations by selecting others for favored treatment and permitting diversion of revenue for purposes other than those for which revenue is pledged would cause far-reaching injury to China’s credit. Memorandum emphasizes importance of domestic loans to China’s financial structure, pointing out that they are an essential part of the backing of the currency and comprise practically all of the required 60% of the fiduciary reserve against note issue. Memorandum was intended to impress British with necessity of including domestic loans in matters being considered in negotiations which British Ambassador has been conducting in Tokyo.
I am personally persuaded that on or about May 1st Japanese Government may attempt to arrange with Japanese controlled regimes at Nanking and Peiping to put into effect agreement recently arrived at between British and Japanese at Tokyo, and that British will find that customs in those areas have for all practical purposes been handed over to only Chinese authorities which Japanese recognize. Whether or not this result has been contemplated by British in negotiations at Tokyo I do not know. British Ambassador doubtless sincerely believes that he has been discussing an arrangement which Japanese will accept as between them and Nationalist Chinese authorities at Hankow, but I feel certain that Japanese will not recognize Chinese [Page 683] Government as party to this arrangement, but will communicate it to regimes set up by them.
Not repeated to Tokyo or Shanghai.