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

893.51/6995

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

No. 2532

Shanghai, September 15, 1939.
[Received October 17.]

Sir: There has lately been considerable concern amongst the foreign officials of the Chinese Maritime Customs Service and the Chinese Government Salt Revenue Administration regarding the effect of a new Chinese Public Treasury Law on those services and on China’s financial integrity and credit in foreign banking and financial circles.

In this connection, Dr. O. C. Lockhart, Associate Director General of the Salt Administration and one of the financial advisers of the Government, has given me, in confidence, copy of a memorandum on the subject which is being submitted by him to the Minister of Finance. A copy is enclosed.¹⁴

At the same time, Dr. Lockhart gave me, for confidential information, copies of an exchange of letters between the British Embassy and the Minister of Finance at Chungking,¹⁵ from which it appears that the Ministry of Finance has continued to give assurance to foreign financial interests of the integrity of loan services and of the foreign staffs of the Customs and Salt. In this connection copy of the memorandum of August 8, 1939, to the Minister of Finance from Dr. Arthur N. Young,¹⁵ one of the American financial advisers, is of interest.

Dr. Lockhart also handed me an extract¹⁵ from the (at present, unissued) prospectus for the Canton–Meihsien and Pukow–Siangyang railway loans in which the Chinese Ambassador at London, Mr. Quo Tai-chi, makes the statement that the Minister of Finance of the Chinese Government has given assurances that the Organic Law of 1936 (that is, the organic law relating to the Salt administration) is to be interpreted as maintaining the existing rules, regulations and practices of the administration of the Salt revenue and that the foreign Associates of the Salt service continue to have joint responsibility in the essential functions of that administration and in the joint signature of official documents.

I have received from a strictly confidential source (not, I may say, from the Customs) a copy of a communication and an official despatch of the Inspector General of Customs to the Chinese Government authorities at Chungking, in reference to the new Treasury Law and the Customs service. I enclose copies.¹⁶

It will be observed from the documents enclosed that it is apparently the advice of the foreign officers of the Chinese Government connected with the Customs and Salt administrations and the servicing of the loans secured on Customs and Salt revenues, that the new Treasury Law, if enforced in respect of those administrations, may seriously affect the credit and standing of the Chinese Government in foreign banking and financial circles.

It is astounding to me that at a time when China is so dependent upon the foreign Powers and their financial resources, and when it is evident that she will be dependent upon them for many years to come in any reconstruction following the hostilities with Japan, China goes merrily on her course of gradually breaking down foreign control and influence in the Customs and Salt services, to the prejudice of her own interests through resulting lack of confidence on the part of foreign bondholders and financial and banking interests in the integrity of the Chinese Government and the integrity of the security of existing loan services.

Respectfully yours,

C. E. Gauss

14. Not printed. In this memorandum Dr. Lockhart stated: “Article 19 of the Public Treasury Law appears clearly to contemplate the continuance of past practice with respect to the custody and disbursement of funds destined for the service of loans, but it is understood that at a recent conference on application of the law it was decided that loan funds would be held in custody of the Treasury and disbursed by them at due dates. The proposed procedure disregards the provisions of several loan contracts, which specify that loan funds shall be kept in custody of the Inspector-General of Customs or Chief Inspectors of Salt Revenue.”
15. Not printed.
15. Not printed.
15. Not printed.
16. Neither printed.