893.516/584: Telegram

The Consul General at Shanghai (Gauss) to the Secretary of State

167. Reference Department’s 62, February 24, 3 p.m.,1 and Peiping’s 103, February 27,4 p.m. The managers of the three American banks in Shanghai state that they have no information in regard to the reported plan for the establishment of a “new China bank” or any similar bank at Shanghai in the near future. Their considered opinion is that as long as the Chinese Government continues to support the Chinese dollar at its present level the Japanese authorities are almost certain to refrain from setting up such a bank, unless its major purpose is to serve as an excuse for the introduction of trade control in Central China, which they consider most unlikely.

The exchange broker E. Kann states that he has received no indication that such a move is imminent and that he considers it most unlikely that the Japanese authorities would make such a move so long as the Chinese Government continued to support the Chinese dollar at its present foreign exchange value. The head of a very large Dutch trading company who has frequent conversations with prominent Japanese officials in Japan informed this office in strict confidence that during a conversation in Japan 2 weeks ago Mr. Septao Sonoda, a director of the Central China Development Company, had informed him that the Japanese authorities would set up a new bank in Central China similar to the Federal Reserve Bank in North China but that the rate would be pegged at 8 pence and that great care is now being taken to make complete and foolproof arrangements in advance so that the success of the venture will be assured. When asked whether such a bank would be established within the coming month Mr. Sonoda said definitely not and implied that it would be a matter of 3 to 6 months at least before the plan was put into operation. Mr. Sonoda emphasized that the new currency would be maintained at a different level from the Federal Reserve currency but gave no indication that trade control would not be required to support the currency.

American bankers state that the Hong Kong and Shanghai bank sold approximately 300,000 pounds of foreign exchange Monday and as much again yesterday at the rate of 8⅛ pence but that the market is firm and there is no indication to be obtained from the trading that the establishment of a new currency in Central China is imminent. Colleagues here are nevertheless considerably perturbed by the steady drain on the foreign exchange reserves set up by the Chinese Government banks with the Hong Kong and Shanghai Banking Corporation [Page 370]for the support of the Chinese dollar and question how long the Chinese Government will be willing to meet the heavy demand for foreign currency if it continues at the present rate. The Chinese banks are the heaviest buyers but whether they are buying on their own account or for merchants or speculators is not clear. There are strong rumors here that official or unofficial British support for Chinese currency has been promised but if this fails to materialize banks consider it doubtful if the Government will continue to meet a heavy demand indefinitely.

If the exchange value of the Chinese dollar is allowed to depreciate markedly, American bankers consider the early introduction by the Japanese of a new Central China currency very likely but insist that if it is to succeed it must be accompanied by the institution of restrictive trade controls.

Repeated to Peiping, to Chungking, Tientsin.

Gauss
  1. Not printed.