Foreign Relations of the United States: Diplomatic Papers, 1943, China

893.00/14973

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

No. 962

Chungking, February 26, 1943.
[Received April 14.]

Sir: I have the honor to refer to the Embassy’s telegram no. 1486 of December 12²⁹ and despatches no. 773, December 3, no. 785, December 10,³⁰ and no. 800, December 16, 1942,³¹ and to enclose a translation of the Resolution on Fiscal Policy passed by the Central Executive Committee of the Kuomintang at its 10th session at Chungking November last.³²

It will be noted that the resolution contains four recommendations for fiscal policy and details eight measures for putting the recommendations into effect. The first recommendation is for a balance of receipts and expenditures. The deficit is to be covered by flotation of loans but in order to prevent inflation, a loan quota is recommended. Secondly, revision of the tax system to increase revenue should not overlook the desirability of simplification, the difficulties of the people, and the need for war-time and post-war stability. Thirdly, state-operated enterprises and state-owned property should be managed in a manner to benefit both national finance and the economic life of the people. Fourthly, financial self-sufficiency of the district governments should be an aim of fiscal policy.

Y. C. Koo, Vice Minister of Finance, in conversation with the Counselor of Embassy,³³ explained that, whereas the Central Executive Committee had shown considerable interest in the financial situation and in methods for improvement, it had not been adversely critical of the Ministry of Finance’s past performance. (The Embassy has heard otherwise from other sources.) Dr. Koo said that every effort would be made to put into effect the recommendations of the C. E. C.

It is significant that, in suggesting a quota on loans, the C. E. C. goes definitely on record as desiring a limitation of expenditures. The thirty-six billion dollar budget for 1943 does not reflect an intention to economize, however, and it is doubtful that expenditures for the year will be kept below forty billion, most of which will be obtained through issuance of currency.

The recommendation on taxation contains a warning note against adding to the difficulties of the people. It does not mention the fact that taxation on high bracket incomes and speculative profits is inadequately and ineffectually applied and administered. Dr. Koo states that the Ministry of Finance will improve and expand its direct tax system. (See Embassy’s despatch no. 807 of December 21, 1942.³⁴)

It is interesting to note in the third recommendation the phrase “Now that planned economy is being introduced into China …” Chinese businessmen and some officials are concerned over the tendency toward state ownership of productive enterprises, toward the creation of state-owned companies in control of exports, and the establishment of state monopolies of commodities such as matches, salt, tobacco, etc. There are those who fear that after the war the government will be in control of a large portion of external and internal trade and of national production.

The policy of promoting fiscal autonomy for the district governments is two-fold in purpose. The Government believes that a sound and, in so far as practical, self-sufficient system of district finance will promote financial stability. It also believes that in creating autonomous fiscal units in the districts depending directly from the national Ministry of Finance, rather than from the provincial governments, a long step will have been taken in breaking up provincialism which is viewed as one of the most potent disintegrative forces in the country. The provinces have in the past been the most fertile field for the militarism of non-conformist and revolting warlords. While endeavoring to build up financial autonomy in the districts, the central government has taken steps during recent years to destroy financial autonomy in the provinces primarily through taking over taxes formerly collected by the provinces (notably the land tax) and making grants to the provinces from the national treasury.

Dr. Koo explained that direct taxes on income, transactions, inheritance, etc., constitute one of the principal forms of revenue collected on a district basis, but in accordance with national law and for remittance to the national treasury. However, the Ministry of Finance remits one-third of these taxes back to the districts; not necessarily to the district from which they are derived but in accordance with a schedule of relative need prepared by the provincial authorities. In this way poor districts may benefit at the expense of the richer districts.

The program of fiscal autonomy for the districts, directly controlled by the national government, operating alongside the program for establishment of district self government, and displacing the former system of fiscal and, in a large measure, political autonomy in the provinces is one of the most interesting current developments in China. Hailed at times as a move toward democratic forms, it is more realistically described as a preventive against the resurgence of disintegrative provincial forces after the conclusion of the war.

The National (Kuomintang) Government is intent upon retaining its authority in the country and it proceeds on the thesis that the best means of doing so is to maintain unity and that the best way to maintain unity is firmly to establish its financial control. If, hand in hand with this program, it has the foresight to adopt an enlightened policy which will benefit and gain the support of the masses of farmers and workers it has a good chance of achieving its objectives.

There is much talk in the press and elsewhere of a democratic China after the war. However, a highly centralized and authoritarian government such as that of the Kuomintang is not uncongenial to the Chinese people provided it rules for the people in sufficient degree to prevent widespread feeling of discontent and injustice. The Kuomintang should take more to heart than it has in the past the words of the Book of History (Confucius): “Heaven sees as the people see; heaven hears as the people hear”. Therein is the democracy of China; and in the innate individualism of the people; not in the ballot and parliaments. If the Kuomintang can adjust its rule to the Confucian precept it should be able to maintain itself against the disintegrative forces of provincialism and regionalism and it need retain little fear of its bête noire, Communism.³⁵

Respectfully yours,

C. E. Gauss

29. Foreign Relations, 1942, China, p. 260.
30. Neither printed.
31. Foreign Relations, 1942, China, p. 264.
32. Enclosure not printed.
33. John Carter Vincent.
34. Not printed.
35. In a memorandum dated April 12 Troy L. Perkins of the Division of Far Eastern Affairs wrote by way of comment on this despatch: “China’s fiscal policy does not appear adequate to overcome or even to relieve the present serious economic situation. The absence of effective proposals for siphoning off war profits, and the indicated large increase in governmental expenditures—without a comparable increase in production—do not augur well for the control of inflation. The present situation in China caUs for more stringent measures. The C. E. C. proposals recall the steps already taken in China for price control, which have been (1) too tentative and too late, and then (2) too rigid (fixed prices instead of controlled prices), and (3) unaccompanied by rationing, the necessary concomitant of price ceilings.”