Foreign Relations of the United States Diplomatic Papers, 1939, The Far East, Volume III

793.94/15447

Memorandum by Mr. Joseph M. Jones, of the Division of Far Eastern Affairs

[Washington,] October 6, 1939.

So far as economics are concerned, Japan’s new order in East Asia means economic sufficiency within an area under Japanese control. The Japanese have, for many years, regarded their dependence for materials vital to the carrying on of a war (iron, petroleum, and so forth) upon remote foreign areas not under their control as the weakest point in their armor and have devoted their principal energies to reinforcing it. Japan now actively seeks in China a source for raw materials which she requires and a market for her goods which cannot be cut off by foreign countries.

In making her present effort to develop in China a source of her materials and a market for her products, Japan has to a considerable degree burned her bridges behind her. It is generally recognized in Japan and throughout the world that Japan’s principal economic asset is an abundance of cheap labor and that the present economic strength of Japan (aside from silk culture) has been built upon the exploitation of that labor, e. g., in importing raw materials and manufacturing products for export. Japanese industry has concentrated hitherto principally upon light industries, that is, industries manufacturing consumption goods. Witness the wide range of Japanese industries producing consumption goods for exportation (textiles, toys, pottery, rubber goods). It appears now, however, to be an essential part of the plan of the Japanese military authorities to convert Japan within a very brief period of time into a country producing heavy industrial products, such as iron and steel and manufactures thereof, heavy chemicals, et cetera. Since the beginning of the hostilities with China, the Japanese Government has deliberately concentrated capital and energy upon an expansion of heavy industries. There has thus occurred a marked shift in Japan’s industrial set-up. Meanwhile, Japan’s light industries have because of lack of capital and lack of raw materials declined both in absolute and relative importance in the Japanese economy. Japan’s heavy industry is at present, of course, engaged principally in manufacturing materials and instruments of war. It appears to be the plan of the Japanese military authorities, once the present hostilities are ended, to direct the production of Japan’s present heavy industries from war products to peacetime products and to create a market for those products in China.

What has been the procedure which Japan has followed in establishing her new economic order in East Asia? (1) As the Japanese troops have advanced in China they have taken possession of all Chinese national, provincial, and municipal enterprises. These public enterprises consist principally of railways, electric power companies, salt fields, water works, navigation facilities, and certain iron and coal mines. (It must be pointed out that these enterprises are taken over free of debt, both local and foreign debts (if any) being repudiated.) (2) Japanese troops have also occupied practically all privately-owned Chinese industries of substantial size (cotton and woolen mills, flour mills, chemical plants, cement factories, privately-owned iron and coal mines, and so forth). (3) At the same time the Japanese troops have confiscated or purchased at arbitrary rates with questionable currency available stocks of raw materials (cotton, wool, hides and skins) and have instituted Japanese purchasing monopolies.

Privately-owned Chinese enterprises which were seized by the Japanese have in general (with the exception of certain privately-owned coal and iron mines) become “Sino-Japanese enterprises”. The usual procedure which has been followed in the organization of these enterprises is as follows: While Japanese forces are in occupation of the properties, either individual Japanese or groups of Japanese engaged in similar enterprises in Japan “persuade” the Chinese owners to “invest” their plant and properties in a new company. The capitalization of the new company is expanded, the Japanese taking the controlling share. The Japanese interests may or may not furnish new operating capital but they usually assume management of the new enterprise.

With respect to public enterprises seized (including the privately-owned coal and iron mines) there is a great disparity between the Japanese plans and actual facts. During the fall of 1938 the Japanese organized two large official development companies, the North China Development Company and the Central China Promotion Company, each with a large capital stock and each controlled by the Japanese Government. It appears to be the plan of the Japanese to reorganize and reshuffle Chinese public enterprises into industry groups dominated from a managerial standpoint by similar industry groups in Japan but controlled effectively, by reason of stock ownership, by one of the two official development companies. For nearly two years now the press in the Far East has been filled with Japanese plans for the organization of these new companies, the details as to capitalization and the position of the new companies in Japan’s “new order” being supplied. The fact is that as late as August 1939 only two of the proposed subsidiaries of the North China Development Company are believed to have been organized: the North China Telephone and Telegraph Company and the North China Transportation Company. Obviously, reconstruction of communications was essential to military operations and was given priority. The transportation company is still more or less of a fiction as far as the railways are concerned, however, for the railways of north China are under the effective management of personnel of the South Manchuria Railway. Subsidiaries of the transportation company—the North China Automobile Company and the Menchiang Automobile Company—control automobile and truck transportation in north China and Inner Mongolia respectively, and another subsidiary is projected to control transportation of inland waterways. Those in charge of railway transportation have positive achievements to their credit: They have repaired and restored to operation the Chinese railways which had fallen into Japanese hands.

Numerous other projects are planned as subsidiaries of the North China Development Company: The North China Salt Industry Company is projected to exploit the north China salt fields; a clay mining company is proposed; seven new companies are projected to exploit coal mines in seven districts of north China; a new electric power and electric light company is projected with a large capital to take over the management of the various electric power and distribution facilities in north China; a new mining company is projected to develop the Lungyen iron mines and an iron manufacturing company to operate the iron works at Shihchingshan and Taiyuan. Japanese plans for the organization of these companies have been retarded by various factors, chief among which are absence of decision as to the ultimate policy to be pursued, lack of coordination between the various agencies involved in Japan and China, and failure to establish peace and order throughout the occupied regions. Meanwhile, the plants and properties which have been seized are being occupied and worked by such Japanese interests as are able to persuade the military authorities to entrust them with their exploitation.

The Central China Promotion Company is projected on a smaller scale. At the time of its organization, the Company was slated to control the following subsidiaries which were planned at that time:

Central China Iron Mining Company (to exploit the iron mines in the Yangtze valley, particularly the iron mines near Wuhu)

Central China Water and Power Company (to control all electric power plants and waterworks in central China)

Central China Telecommunications Company (to operate the telephone, telegraph and radio services)

Central China Fishing Company (to control the marine products industry)

Central China Bus Company

The Shanghai Inland Steam Navigation Company

The Shanghai Real Estate Company (to take over confiscated real estate)

Whether these subsidiaries have in fact been organized is not known, but it is probable that most of them have been brought into existence in as much as they involve principally the taking over of existing facilities and their operation under monopoly conditions. Another subsidiary, the Central China Sericultural Company, has been organized with the object of exercising a monopoly control over the production and trade in raw silk.

With equal thoroughness, Japanese have set about monopolizing the products of China’s agriculture—cotton, wool, silks, hides and skins and tobacco. In as much as Japanese troops are in control of most of the lines of communication in north and central China, and as agricultural products originate in the interior and congregate at various points along the communication routes, the Japanese military forces have been in a strategic position to exercise monopoly control. Competing buyers have simply not been allowed in the agricultural districts, except with the permission of the military authorities, and transportation facilities have not been allowed except for those products which the Japanese have desired to ship. In fact, therefore, the Japanese military authorities in north China have established purchasing monopolies for cotton, wool and hides and skins. In addition, the Provisional régime at Peiping bolsters the monopoly control by issuing from time to time embargoes upon exportation, decrees providing for export permits, et cetera.

Before leaving the subject of Japan’s efforts in the economic field to create a “new order” in East Asia, mention should be made of the rehabilitation work done by the Provisional régime in Peiping. Substantial amounts of money have been spent upon improving highways and waterways. Mention should also be made of the fact that the Japanese cotton mills at Tsingtao, which were destroyed by the Chinese, have been rebuilt. Further, Japanese interests have completed in Tientsin various factories, including an electric power plant, which were either planned or under construction at the beginning of the hostilities.

It is clear from the foregoing that although Japanese plans far outrun the facts, the Japanese have acquired a strong hold upon economic life in those areas of China which they have seized. But the interesting and important question is, how much is Japan’s economic strength and security augmented by the conquests which have been made? Let us leave aside for the moment the huge and continuing cost of the conquest to Japan in blood and money and concentrate on the assets with a view to their evaluation. We must at once rule out as assets all of those enterprises which are merely engaged in reconstructing war losses in China and all of those service and manufacturing industries in which Chinese management has simply been replaced by Japanese management. Those enterprises may furnish certain Japanese with outlets for their energies and perhaps with financial dividends which will give them a more abundant life in Japan, but they do not add appreciably to the economic strength of Japan. A critical examination of the various Japanese undertakings in the occupied portions of China discloses that basically the only Japanese activities in China which contribute to Japan’s economic strength are those which furnish needed raw materials to Japan’s industries.

What are Japan’s raw material needs? Clearly the most vital are iron, cotton, coal, petroleum, copper, wool, rubber, wood pulp, and others of lesser importance. China cannot, of course, supply to Japan petroleum, copper, rubber, wood pulp or even appreciable quantities of wool (China’s export wool is almost wholly carpet wool and Japan requires clothing wool). The question of the usefulness of China’s resources to Japan then revolves chiefly about iron, cotton, and coal (and the least important of these is coal, in view of the large production in Japan and Manchuria). To what extent is Japan at present obtaining increased supplies of these commodities’ in China?

The greatest benefit which Japan has thus far derived from China is probably increased supplies of coal. During the first five months of 1939 Japan’s imports of coal from China amounted to 805,000 long tons of coal as compared with 610,000 tons during the same period in 1938, and 531,000 tons in the same period of 1937. However, it is notable that shipments of coal from Manchuria to Japan decreased from 1,064,000 long tons during the first five months of 1937 to 504,000 tons during the same period in 1938, and 299,000 tons in 1939. It appears that the industrial expansion programs in Japan and Manchuria are outrunning coal production and apparently coal imports from China at present are not even large enough to offset decreases in imports from Manchuria. Meanwhile, it has been recently reported that industrial production in Japan is being seriously interfered with by shortage in electric power. Coal is being rationed there even among large industrial plants. Nevertheless, China does possess important coal resources and these are being developed by the Japanese.

It appears probable that Japan will eventually satisfy an important part of her coal requirements in China although at the present time such is not the case. As a matter of fact a very large proportion, if not all, of Japan’s increased imports from China consist of increased supplies from the British-controlled Kailan mines.

It is predicted that cotton production in China during the present season will be smaller than in many years. During the 1936–1937 season production amounted to 3,870,000 bales; in 1937–1938, 3,556,000 bales; in 1938–1939, 2,300,000 bales; and production during the current season is estimated less than 1,900,000 bales. Imports of raw cotton into Japan from China during the period September-July 1936–1937 amounted to 195,000 bales; during the same period in 1937–1938, 319,000 bales; and during the same period in 1938–1939 only 65,000 bales. The foregoing pictures give an adequate answer to the question whether Japan is at the present time or may be expected in the near future to obtain increased supplies of cotton in China. The reasons for the sharp decline in cotton production are, of course, the failure of the Japanese to pacify the countryside, guerrilla warfare, and droughts and floods.

With respect to iron, although no statistics of Japan’s imports are available, it is exceedingly doubtful that the amount of iron Japan is now receiving from China approaches her pre-war imports from that country. The bulk of Japan’s pre-war imports of iron from China came from the Tayeh Iron Mines near Hankow, which were destroyed by the Chinese before their retreat from that region. These mines are being repaired but they are not yet in operation. Japan is apparently pinning great hopes upon the Lungyen Iron Mines located in South Chahar, which were seized intact by the Japanese. According to the most recent report on the subject from Peiping, the daily output of the Lungyen Mines has been restored to 600 tons, most of which is being smelted in the iron foundries at Shihchingshan near Peiping. This daily production is equivalent to about 220,000 tons per year, which is only a fraction of Japan’s pre-war imports of iron from China (of about 1,200,000 tons). Furthermore, it appears that production in the Lungyen Mines cannot be further developed without large capital investment in machinery and in railway facilities.