893.51/7376: Telegram

The Ambassador in China (Gauss) to the Secretary of State

11. TF–Z. From Fox2 for Secretary of the Treasury.3

1. (a) I find much talk in Chungking and also in Yunnanfu of a loan by the United States and Great Britain to China and am informed the Generalissimo4 has already raised the subject with respective governments. The talk in Chinese Government circles is of a United States dollars 500,000,000 loan by the United States and of a pound 100,000,000 loan by Britain.5

(b) I have felt for some time prior to the outbreak of war that in view of the extreme gravity of the internal economic situation here a new loan to China was needed. This feeling has been reinforced since December 8 in view of the effect on Chinese political opinion of the initial Japanese successes, of the probable effect of temporary Japanese successes in southeast Asia in the near future, and of the perceptible strengthening of defeatist elements in Chinese Government circles. In this situation a substantial loan to China, the bigger the better, would be invaluable in keeping China going as an anti-Axis power. The very fact that the larger portion of such a loan could not be used is an argument in favor of making it as big as possible.

(c) While the internal economic effects of such a loan, after the initial psychological effects have worn off, might not be commensurate [Page 420] with its size, owing to the physical difficulties in the way of importing goods, they would nevertheless be beneficial. But, more important, the political advantages would be very great. A loan might make all the difference between a victory of the Chinese defeatist[s] (and they are lukewarm) and their neutralization. As already indicated, the actual outlay would be much smaller than the nominal amount of the loan. Its political effects would be reinforced if no specific guarantees were required. It would be desirable to have the loan used as an occasion for insisting on the improvement and strengthening of the Central Bank and banking system of China.

(d) The loan could be used: (1) to guarantee the issue of attractive government bonds to absorb fapi and make it unnecessary henceforth for the Chinese Government to issue more notes to cover its budgetary deficit, thus retarding the inflationary spiral; (2) to promote trade with India as long as the Burma Road remains open and with Russia and thus ensure the maintenance of an inflow of goods from abroad. The political aspects of financing trade with Russia I am in no position to evaluate but economic advantages would certainly accrue; (3) if possible to finance loans to promote internal small scale production, for which there is a crying need, and agricultural production. (Both (2) and (3) would help retard the rise in prices by increasing the supply of goods.) And possibly (4) to provide a backing in foreign exchange for the note issue which would have temporarily beneficial effects on internal confidence in fapi. It might be desirable to tie up the Stabilization Board with the loan in one way or another, if only because the Board might more easily secure confidence than could the Chinese Government itself.

(c) [e] A scheme has been submitted to the Board by the Ministry of Finance proposing that its remaining United States dollar and sterling assets be used as a guarantee fund for the issue of Chinese Government bonds on the lines of (d) 1 above. There are three objections: first, that the amount involved would not suffice to contribute appreciably in the absorption of granting insurance; secondly, there is some doubt as to the legality of such a procedure under the terms of agreements instituting the fund; and thirdly, it would deprive the Board of its function of providing foreign exchange for imports and as long as imports are possible this function must be performed.

2. The above except for a few modifications was prepared on December 31 immediately upon my return from Kunming. Yesterday morning Ambassador Gauss kindly brought me up to date with respect to the steps taken thus far by the Embassy concerning a Chinese loan. I was interested in the suggestions made by Niemeyer6 to the Chinese [Page 421] Government and impressed by the Ambassador’s comments7 who seemed to be particularly [influenced?] by his suggestion for immediate action by Congress. I have not as yet discussed the subject of a Chinese loan with any Chinese or British official. [Fox.]

  1. A. Manuel Fox, American member of the Chinese Stabilization Board.
  2. Henry Morgenthau, Jr.
  3. Chiang Kai-shek, President of the Chinese Executive Yuan (Premier).
  4. See telegram No. 548, December 30, 1941, 6 p.m., from the Ambassador in China, Foreign Relations, 1941, vol. v, p. 768. A paraphrase of a telegram of December 28, 1941, from the British Ambassador in China (Clark Kerr) to the British Foreign Office reporting the Chinese loan proposal was transmitted on January 3 to the Department by the British Embassy (893.51/7630).
  5. Sir Otto Niemeyer, head of the British economic mission in China.
  6. See telegrams Nos. 516, December 21, 1941, 10 a.m., and 549, December 31, 1941, 5 p.m., from the Ambassador in China, Foreign Relations, 1941, vol. v, pp. 766 and 771.