893.51/6951
Memorandum by Mr. Joseph M. Jones of the Division of Far Eastern Affairs
Recent Financial and Economic Developments in China and Their Significance
North China
The new trade and exchange control measures which are to become effective July 17 in north China provide that the foreign exchange accruing from all export transactions must be sold to the Federated Reserve Bank at the official rate of 1s. 2d. (27½ cents), either directly or through exchange banks. (Since March 10 a similar control has been applied to 12 selected items.) The Federated Reserve Bank promises to sell to individuals or to banks import exchange up to 90 percent of the export exchange purchased (instead of 100 percent as has been the bank’s promise since March 10—the change is probably made in order to allow the banks to acquire foreign exchange reserves). The Bank maintains a list of articles, however, for which preferential treatment is granted in the selling of import exchange and maintains discretion in the matter of selling import exchange. As a result of these measures, then, full import and export control is established in north China in support of an unbacked, fiat currency pegged to the yen at par.
It appears that American banks and merchants in north China will either be obliged to cooperate in the new measures or retire from the [Page 425] field. Since March 10, American and other foreign banks have refused to cooperate with the Federated Reserve Bank and have refused to finance the export of commodities subject to official control, but they have had something to live on: the financing of uncontrolled commodities, financing exports of controlled commodities for which contracts were made prior to the imposition of control, et cetera. But now they must either cooperate or surrender their major business—the financing of foreign trade. Since March 10, American merchants in north China have been occupied in exporting uncontrolled commodities and in exporting controlled commodities on a link basis, financing being done by Japanese banks and trading companies. They may endeavor to continue this business, cooperating with the local control, but according to a telegram from the American Chamber of Commerce in Tientsin, American merchants feel that if they deal with Japanese banks and agencies they will be discriminated against in favor of Japanese competitors, a fear probably well-founded.
It appears from the foregoing that we have reached a point where the intangible obstruction of foreign banking and commercial interests to Japanese economic and financial schemes must decline and probably cease. This Government does not appear to be in a position to ask American banks to continue a policy of non-cooperation with the Japanese authorities in trade and financial matters when compliance would virtually mean their elimination from business. Even if the British-Japanese negotiations in regard to the Tientsin affair do not result in British capitulation on financial matters, the new trade and exchange control measures will probably overcome foreign obstruction of this nature. Although the removal of this obstruction will probably have few important economic effects, the effects of this development upon China’s morale, upon the loyalty of the masses in north China, may be serious. This would seem to suggest the importance of devising some immediate measure, either of retaliation against Japan or of assistance to China, to offset the effects of the crumbling of foreign obstruction to Japanese financial schemes in north China. Incidentally, it may be noted that the extension of export and trade control in north China will probably cause a further drastic decline in north China’s already severely reduced foreign trade.
Chinese Government Areas
In an endeavor to balance her foreign payments, stimulate exports, and conserve reserves of foreign exchange, the Chinese Government on July 2 announced the immediate imposition of sweeping import prohibitions and revised measures of import and export control. Commodities listed under 237 tariff items, mostly luxuries and unnecessaries, [Page 426] were prohibited except under special permits issued by the Ministry of Finance. (According to the Ministry of Finance, imports of the banned items in 1938 were valued at United States $68,000,000.) Provision was made that the Bank of China and the Bank of Communications should buy the export exchange accruing on all commodities (except tung oil, tea, bristles, and mineral ores—commodities tied up with loan and barter arrangements) at the official stabilization rate (29½ cents) plus the difference between the official rate and the market exchange rate (meaning virtually the open market rate). Purchases of exchange accruing from exportation of the four excepted commodities is to continue at the official stabilization rate. On the import side applications for exchange for imports are to be considered by an exchange examination committee in Chungking and exchange may be granted by the Bank of China and the Bank of Communications at rates to be announced from time to time by the two banks, the rates to be official stabilization rates plus the difference between these rates and the open market rates (virtually the open market rates).
The new measures practically recognize the open market rate; they accept it for practical purposes. The measures should go far toward stimulating exports from Chinese Government areas—the exchange accruing to the Chinese Government for its money needs—and toward cutting down imports of all but vital needs connected with national defense. These measures, together with the modification of exchange policy adopted recently (that of blocking bank deposits and offering less support to the Chinese currency in the open exchange market) appear to indicate that the Chinese Government is “digging in” for a long siege and is determined to conserve her resources. These steps might logically have been taken long ago, but it appears that the Chinese Government has been following a policy suggested by its foreign advisers. The new policy will undoubtedly deal a severe blow to foreign trade and investments, but it seems to be the logical policy for China to follow.