893.51/7723: Telegram

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

2361. For the President and the Secretary and Under Secretary.

1. The Embassy has recently had several intimations that China proposes soon to ask the United States for another substantial political loan.

We here perceive no sound basis, political or economic, for supporting any such loan proposal at this time.

China does not lack substantial United States dollar resources, Government and private. Including the [$]200,000,000 included for the purchase of American gold, Government balances in the United States are believed to be in excess of [$]300,000,000 and to be mounting very substantially each month. Private holdings are estimated at between 4 and 500,000,000 [dollars].

It is not feasible for China to mobilize her United States dollar resources to combat internal inflation, and the manner in which the half billion dollar American credit96 was employed does not inspire confidence that a further loan would be better handled. Further, China has not yet begun to use the British sterling credit granted at the same time as the American loan.

Even if the Burma Road is re-opened, China has adequate resources to finance purchase of such commercial goods as could be permitted to be brought in. While the war continues, the Burma [Page 477] Road would need to be restricted principally to military supplies and equipment and most of these would be Lend-Lease.

From the political angle, there is now no need for any further loan. The military action of the United Nations promising eventual complete victory and restoration to China of all lost territory,97 there is no reason to fear that China might seek a separate peace. It is true that there is gradual increasing deterioration in the whole Chinese structure, military, economic and administrative but a further American loan at this time would not improve that situation or retard the deterioration.

China’s political and territorial aspirations have largely been assured by the pledge to continue the war until the unconditional surrender of Japan, by recognition of China in the Moscow Declaration98 and at the Cairo Conference as one of The Big Four Powers, and by the Cairo Declaration, which appears to be particularly reassuring in reference to Manchuria toward which area China has feared possible Soviet ambition.

2. Constant careful observation of the situation in China, leads to the conviction (a) that there is a strong disposition in the Chinese Government to exploit to the full the existing openhandedness and good will of America, with little or no thought of accepting any refusal of Chinese requests or of giving any quid pro quo or even of considering mutual benefits; (b) that there is growing complacency in regard to the war, extending up to many influential officers and advisers to President Chiang, who are disposed to feel that China has done her full part in resisting the Japs for more than 6 years and that America should now undertake the full burden of the conflict; and (c) that in discussions for the formulation of plans for a new and powerful China the tendency is distinctly toward a closed economy designed solely for Chinese benefit and definitely away from those liberal principles for mutually beneficial world economy set forth in Secretary’s address on July 16, 1937,99 the Hull-Quo exchange of notes of May 1941,1 the Mutual Aid Agreement of June 2, 19422 and other expressions of our post-war objectives.

No fair minded observer can fail to credit China for containing in this country a substantial Jap force which might otherwise be used against us elsewhere. (Soviet Russia has done likewise on the Siberian-Manchurian border.)

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No one familiar with the condition of China’s armies and the logistics of the military situation in the China theater could expect any substantial major military effort by China against Japan. But there is nevertheless a great deal that China can and should do but is not doing, within the scope of Chinese resources and ability, to help herself and thus further the war effort by giving whole-hearted assistance to the American Air Force and other American operations in this theater and by reasonable and equitable arrangements for the American financing [of] the war in the China area.

Within recent months at the instance of General Stilwell3 the Embassy has been exerting constant quiet [pressure?] in political quarters to impress upon China the necessity of getting on with such works as the construction of new air fields, construction and improvement of roads for military transport and communication purposes, etc. Investigation has shown that Chinese budgets for such purposes have been cut and have only been restored under pressure and that funds appropriated have been long delayed in being issued by the Treasury, thus delaying the work. Quiet confidential investigation in assistance to our Army has disclosed indications of extensive corruption, jealousies, delays and sabotage of honest effort.

Our Army is paying out large sums monthly in financing airfield installations, paying transportation charges, etc. These payments run to 20 or more million American dollars monthly and are constantly rising. Our costs are stated to be from 8 to 10 times those which would be incurred in the United States for similar facilities and services due to Chinese insistence on maintaining a fantastically arbitrary exchange rate for Chinese dollars against United States dollars. With the runaway inflation in China, prices of commodities and services have increased 16 to 18,000 percent (160 to 180 times) over 1937 levels and are continuing to increase at a rate of about 10 percent monthly. But the Chinese dollar has been pegged at 5 cents United States currency against a prewar rate of 33 cents. In relation to price levels and prewar exchange rates the Chinese dollar should not now be worth more than one half cent to one cent. Proposals made for some exchange adjustment or arrangements under reverse Lend-Lease have been evaded. The army continues its heavy and increasing monthly expenditures at the arbitrary rate and China meanwhile is quietly building up a substantial United States dollar reserve at our expense.

Some may argue that in her present deplorable economic position China is unable to assist the United States financially in our war [Page 479] expenditures in this country. I do not suggest that China should bear such expenses but I suggest that China should not exploit the United States in the matter. China should be encouraged to realize that it is blessed to give as well as to receive and that by helping us she will be helping herself.

In the face of all the foregoing I am of opinion that no further American political loan to China can be justified at this time.

3. I am convinced that there should be a quiet but persistent forming of our attitude toward China, that it should be emphasized that mutual benefit is requisite in all our inter-governmental arrangements and exchanges, that Chinese should be impressed with the necessity of an all out effort within the limits of her resources and ability toward winning the war, toward helping herself by helping us in our war effort in the China theater, and that a more realistic and equitable attitude must be insisted upon from China in reference to the exchange financing of our American expenditures for military and Government purposes in this theater.

4. On the subject of Chinese tendency toward a closed economy in the postwar period [I] strongly recommend that we should without further delay quietly put China on notice as to our expectations before she adopts policies which for reasons of oriental face she may not later be willing to alter, by opening negotiations for our commercial treaty, advancing our proposals regarding the treatment of American commerce and American financial and industrial interests, emphasizing the necessity for mutual consideration and mutual benefit and insisting that Americans and American interests in China all enjoy rights and privileges comparable to those enjoyed by Chinese in the United States.

  1. For correspondence on this subject, see Foreign Relations, 1942, China, pp. 419 ff; for text of agreement signed March 21, 1942, see Department of State Bulletin, March 28, 1942, p. 263, or United States Relations With China, p. 510.
  2. See Cairo Declaration issued December 1, 1943, Department of State Bulletin, December 4, 1943, p. 393. The records of the Cairo Conference are scheduled for publication in a subsequent volume of Foreign Relations.
  3. For correspondence on the Moscow Declaration, see pp. 819 ff.
  4. Foreign Relations, Japan, 1931–1941, vol. i, p. 325.
  5. Ibid., pp. 927930.
  6. Department of State Executive Agreement Series No. 251, or 56 Stat. 1494. For correspondence, see Foreign Relations, 1942, China, pp. 566 ff.
  7. Gen. Joseph W. Stilwell, Commanding General, United States Army Forces in China, Burma, and India.