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

893.51/6914: Telegram

The Counselor of Embassy in China (Peck) to the Secretary of State

Chungking, June 10, 1939—11 a.m.
[Received June 11—2 p.m.]

373. Young has handed the Embassy the text of a communication telegraphed to Washington, London and Paris on June 6 concerning debt service⁸³ and also a memorandum telling of informal discussions that have been going on between him and the British Ambassador in the hope of finding a way of dealing with customs collections in Japanese occupied territories that would be accepted by the Japanese Government and to which the Chinese authorities could refrain from making objections. He desired that the Department be informed of these conversations in conjunction with the communication in reference. Memorandum follows and Young requests that it be treated as strictly confidential.

“Following receipt of the communication made by the Chinese Government about April 20 to the American, British, and French Governments concerning treatment of debt service that would remain unpaid under its debt proposal, which communication expressed the hope that friendly foreign governments can prevail upon the Japanese to allow utilization for debt service of pledged revenues in occupied territory, the British Ambassador inquired as to the position as regards the Anglo-Japanese customs agreement. Mr. Young pointed out that the chief specific difficulties encountered by the Chinese Government other than points of principle were (1) payment by customs officers to the Yokohama Specie Bank of customs collections; (2) payment to Japan of arrears of the Japanese portion of the Boxer Indemnity; (3) payment to Japan of future monthly installments of the latter; and (4) transfer of $27,000,000 from the Hong Kong and Shanghai Bank to the Yokohama Specie Bank.

As to these four points, he pointed out, the first was dealt with as a matter of force majeure; the third no longer arises in the same form because payment of all portions of the indemnity was suspended on January 15 last and the Japanese cannot complain if all are treated alike; and the fourth point need not be considered now as under the terms of the customs agreement the money should now come to China. There remains only the second point, namely, arrears of Japanese Boxer Indemnity payments.

The British Ambassador asked whether some formula could be devised for this, and Messrs. Young and Rogers⁸⁴ informed him that the formula which would appear least objectionable to China would be a setoff as of January 15, 1939, among (a) accumulated loan quotas calculated on the lines of the customs agreement; (b) the $207,000,000 [sic] accumulated in the Hong Kong and Shanghai Bank, and (c) the Chinese dollars equivalent of arrears of the Japanese portion of the Boxer Indemnity. In case of such a setoff the Chinese Government would receive a cash contribution which in note [effect?] would be reimbursement of part of the sums already paid for debt service, but the [as to?] points of principles, chief of which under such a scheme would be non-payment in respect of internal loans, could be covered by a reservation. Affirmative action by the Chinese Government would be necessary but it should be understood that the Government would not blame the customs officers for action that would be technically necessary in drawing checks and passing entries.

On May 5 after sounding Dr. Kung the British Ambassador telegraphed the foregoing to Condon and Tokyo. The British Ambassador at Tokyo telegraphed on May 7 that the Japanese if prepared to discuss the matter would raise two main points: (1) They would object to paying quota after China had suspended debt payment; and (2) they would insist upon payment of the Indemnity in sterling. The first point, in Ambassador Craigie’s opinion, could probably be overcome. The second would give very little difficulty, as during the previous negotiations the Japanese had insisted upon being treated therefore as other powers in respect of payments, and as the others were paid in foreign currency the Japanese would insist upon this also. Craigie said that if he took up the matter on the line suggested he would like to have in reserve an assurance that the Chinese Government would not blame the customs people if they paid over the sterling as under force majeure. Finally, Craigie wanted to know whether the suggested setoff would be against the $27,000,000 in the Hong Kong and Shanghai Bank or otherwise; whether a balance would be due to China from quota accrued as of January 15th, 1939; and the amount of the accumulated Boxer Indemnity deposit as of that date and at present.

The British Ambassador’s action on the telegram of May 17 was delayed because he was travelling. On June 2 he asked Mr. Young’s views through the British Diplomatic Mission at Chungking.”

Young’s reply dated June 2 follows:

• “1. As thus [to?] possible Japanese objection to payment of quota with debt payments temporarily suspended, the Japanese Government has accepted the principle of contributions from occupied areas for customs debt service but no workable arrangement has been yet devised. Although at present payments cannot be transferred into foreign currency, practical effect would be given to this principle by contributions in Chinese currency which, in accordance with the practice well established in other situations where debt payments cannot be transferred, would not encourage withdrawal from the market.
• 2. Payment of Boxer Indemnity in sterling would be much more embarrassing to the Chinese Government than a [payment] of the equivalent in Chinese currency against funds detained in Japanese banks.

  (a) It would reverse the policy adopted in September 1937 of setting aside these funds so that during hostilities they would not be available to China’s enemy.⁸⁵ On several occasions the Chinese Government has refused assent to transfer of these funds to Japan directly or indirectly (e. g., by force majeure or loans). From the Chinese side treating Japan like other countries by making payments during hostilities is open to obvious objection of principle.

  (b) For the Japanese to pay themselves in effect out of funds they have detained would be less affirmative than release of funds now effectively controlled by China. In such case the Chinese Government could more readily overlook technically necessary action by customs officers, e. g., drawing checks and passing entries.

  (c) Although in either case the Chinese Government would get considerably more than it would give, payment in foreign currency which Japan greatly needs would be hard to defend.

• 3. As to the specific inquiries, accrued loan quota payable to China are about $50,000,000 as of January 15, 1939, including the $27,000,000 which were to have been paid over to Yokohama Specie Bank under clause 5 (d) of the customs agreement. The set off should be against the remainder in Japanese banks and thus a deduction from sums in effect in Japanese hands.

[Payment due on?] Japanese indemnity from September 1937 through December 1938 is about pounds 500,000. Since indemnity payments to all governments were discontinued as from January 1st, 1939, the total today would be the same if all governments be put on an equal footing.

Sir Frederick Maze⁸⁶ could furnish more exact figures.”

Code text to Peiping.

Peck

83. See telegraphic message received by the Chinese Embassy from the Chinese Minister of Finance, June 7, p. 839.
84. Cyril Rogers, of the Bank of England, Adviser to the Chinese Ministry of Finance.
85. See telegram No. 214, September 18, 1937, 3 p.m., to the Ambassador in Japan, Foreign Relations, 1937, vol. iii, p. 865, and memorandum of September 24, 1937, Foreign Relations, Japan, 1931–1941, vol. i, p. 729.
86. British Inspector General of Chinese Maritime Customs.