Office of the Historian

600.939/347: Telegram

The Second Secretary of Embassy in China (Smyth) to the Secretary of State

Peiping, July 7, 1939—5 p.m.
[Received July 8—6:30 p.m.]

333. Peiping, 330, July 6, 4 p.m.76

1.
In the statement issued by the Provisional Government it is stated that the export control measure is believed to be the most effective [Page 422] one to eliminate the old National Government notes even from foreign trade transactions; that the present revised regulation only differs from the one now in operation (covering 12 articles) in that the scope of its application has been extended; and that “as far as possible due respect should be paid to the existing contracts made in good faith.”
2.
It is stated that the regulation envisaged the sale of exchange for “invisible trade” such as remittances to families abroad. It is explained that the creation of a fund whereby such non-commercial remittances may be made is made possible by the ruling that the Federal Reserve Bank will sell for commercial purposes only 90 per cent of the foreign exchange purchased. While the foregoing is the ostensible reason for withholding 10 per cent, it appears that the Federal Reserve Bank will be able to create a foreign exchange reserve corps fund at the expense of exporters and the exchange banks.
3.
The notice of the superintendent of customs (issued at the same time) states, inter alia, that exporters to countries other than Japan and Manchukuo must sell their exchange to exchange banks in North China “at the rate above the basic rate of exchange of 1 shilling 2 pence on London in currencies other than those of Japan, Manchukuo, Mengchiang, and North China, for the whole amount of the merchandise valued at a fair price against Federal Reserve Bank notes.” Regarding exports to Japan and Manchukuo, exporters should sell exchange at par for the whole amount of the merchandise valued at a fair price against Federal Reserve Bank notes.
4.
The list of imports to which preferential allotment of exchange will be made includes 71 items not mentioned in the previous list.
5.
So far there has been little reaction in foreign business circles here other than extreme pessimism as to the future of non-Japanese business in North China. Yesterday the market in Tientsin weakened slightly but today is slightly easier. The telegraphic transfer selling rate is 9⅞ths and the buying 10⅛th for national currency. Federal Reserve Bank currency is at only 4 per cent discount. One observer has suggested that the extension of exchange and export restrictions are imposed at this time because Japan is convinced that none of the powers will undertake economic reprisals.

Repeated to Chungking and Shanghai, by air mail to Tokyo, by mail to Tientsin, Tsingtau, Tsinanfu, Chefoo.

Smyth
  1. Not printed.↩