The Chinese Embassy to the Department of State
The Chinese Government has been much concerned to continue the debt service despite the unprecedented difficulties and only with the greatest reluctance announced on January 15, 1939, that it could no longer provide service of full customs obligations. In view of Japanese interference with the salt revenue, the Government now is obliged to apply similar measure in respect of salt secured debts. The salt administration has been provisionally instructed to act accordingly and also to set aside in special account in the Central Bank of China appropriate share of service of salt loans. This measure will be shortly announced and meanwhile is confidential.
The Chinese Government does not wish the situation resulting from these measures to continue without an effort to arrive at a reasonable arrangement to maintain debt service so far as practicable having regard to the abnormal conditions of obtaining vital necessities for prosecuting the war and to the pressing demand for financial and economic stability. The Chinese Government is therefore initiating negotiations with the representatives of the creditors in respect of the customs and salt secured loans.
The present debt situation is due solely to the war. Prior to July, 1937, China had been making great financial and economic progress. Adequate revenues were being developed, financial administration improved, currency stabilized, old debts in arrears mostly settled, and budget equilibrium within reach. Railways, roads and air communications were being improved and extended and industry developed. Japanese aggression destroyed over night this promise of a new era of progress.
Notwithstanding the disparity of resources and equipment, China has waged the one sided war much longer than expected, but until recently, she has been left to fight almost unaided other than by valuable [Page 825]aid from American silver purchases. She has no heavy industries and her export trade has been crippled; hence the import of essential supplies is largely against cash. Her economy is gravely disrupted by the Japanese and it is a matter for wonder that during recent months her financial organization has not been broken down.
Nevertheless, the Government has made all efforts to maintain currency and credit, and feel entitled to recognition of its attitude toward debt in foreign currency which was fully maintained for eighteen months of war. The Government has reluctantly concluded that there is no alternative but to seek cooperation of the bondholders. It therefore proposes for the next twelve months to pay in exile foreign currency in respect of customs and salt secured loans held by public one coupon on loans receiving full interest, and half annual interest on loans paid under settlements providing for less than full interest. Reduction in payments is to be regretted, but the Government would point out that the bondholders have received more than would be usually expected under the circumstances of the past twenty months of war. This would be a temporary arrangement and it is intended to resume full service at earliest possible moment. Similar proposals are being made to appropriate creditors’ representatives in other countries.
The Chinese Government appeals for sympathetic and favorable consideration of this offer by the friendly governments and peoples. In order to avoid delay the Government is putting forward in the first instance the utmost it can do and would make it clear that this is not a basis for bargaining. Half of annual interest on these loans is about $4,700,000.00 in American currency and is roughly equivalent to the unoccupied area’s share which would be about $5,100,000.00 in American currency based on the Chinese Government receipts of about 20% of customs collection and, according to quotas, 35% of salt for which the collection data is still unavailable. The Government however does not relate the proposal to the share of this area because it is unwilling to imply any possible derogation of sovereign rights in the occupied area.