893.51/7668: Telegram

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

137. From Adler for Secretary of Treasury. TF–85. Re your 106, January 20.

1. In a conversation with Dr. Kung8 yesterday, I informed him of the status of savings certificates, post dated checks and drafts under existing regulations. He was most upset by the fact that the United States dollar proceeds of certificates et cetera would have to be paid into a blocked account on maturity if they are payable to blocked nationals. He indicated that most of the purchasers of certificates et cetera are blocked nationals who made their purchases on the understanding that the United States dollar proceeds would be free and that, if Chinese investors realized these proceeds would be blocked, sales of certificates, which had picked up encouragingly with the announcement that drafts or post dated checks could be obtained in lieu of or in exchange for certificates, would very sharply fall off. A situation would then arise in which one of the purposes for which the American loan to China was made and the certificates were issued—namely, as an anti-inflationary measure to facilitate absorption of fapi—would be defeated. He felt therefore that in this connection the Treasury could best implement its desire to help China by a modification of FFC9 regulations which would leave the United States dollar proceeds of certificates et cetera free on maturity.

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2. I pointed out that

(a)
Most of the purchasers of certificates et cetera would have no need for United States dollars in the near future.
(b)
It was the purpose of Foreign Funds Control to prevent Axis nationals or agents from utilizing such United States dollar assets as are or may come in their possession, and unless there was some check on the bona fide character of purchases of certificates et cetera I was sure the Treasury would be reluctant to consider any modification of existing regulations.

With respect to (a), Dr. Kung agreed; such was the psychology of Chinese investors, however, that they would shun certificates the United States dollar proceeds of which were blocked on maturity for fear that Chinese authorities might later play some trick on them, and it would then be impossible [for] Chinese Government to derive any immediate benefit from the American loan. The 1942 budget, he added, had been planned on assumption that the whole of the issue of certificates would be taken up by the public; since beginning of year, between United States dollars 6 and 7 million had been bought and prospects for selling the issue out were most favorable. But with discovery that United States dollar proceeds would be blocked investors would cease to buy the certificates.

With respect to (b), he was of course fully aware of the necessity for safeguards but felt that fact the government banks selling the certificates, et cetera, kept records of the identity of purchasers constituted a check; a reporting requirement in the United States for transactions with United States dollar proceeds could constitute an additional check.

3. It is most unfortunate that Chinese Government raised the question of the status of certificates, et cetera, only when it was about to adopt the plan of issuing drafts or post-dated checks in lieu of or in exchange for certificates. However, speedy settlement of question is now desirable. I am afraid that Dr. Kung’s point with respect to the psychology of Chinese investing public is only too well taken and that unless there is some modification of existing FFC regulations in relation to status of certificates, et cetera, their sales will be drastically curtailed and confidence in Chinese finances seriously undermined. [Adler.]

Gauss
  1. Chinese Minister of Finance.
  2. Foreign Funds Control.