893.5151/927: Telegram

The Chargé in China ( Atcheson ) to the Secretary of State

826. [Section I.] From Adler to Secretary Treasury only. TF–126. Re my TF–122, May 22.36

Board has been officially informed of arrangement foreign missionary, philanthropic and cultural organizations will receive official rate plus 50% from Central Bank. Board will discuss its reply at next meeting which will probably not take place till next week owing to chairman’s indisposition. Should appreciate receiving your comment on point 4 of my TF–122 before Board meeting takes place.
Mr. K. K. Kwok of Central Bank informs me that a similar arrangement is to be extended to foreign military officers and foreign journalists. NB. a. It will be difficult to refuse all other foreign soldiers what is being granted foreign officers. b. This concession will be largely a paper one, as most American soldiers and journalists convert their foreign exchange in black market.
Mr. Pei of Bank of China tells me that he has already had inquiries from his New York office as to “what this new arrangement is all about” and as to whether it will be extended to overseas remittances. It would appear that it is only a matter of time before Chinese Government will have to make same concession to overseas Chinese.
In that case, excluding foreign armies official expenditures which presumably will eventually be covered by a reverse Lend-Lease arrangement and foreign exchange accruing from such Chinese exports [Page 549] as are paid for in cash, almost all Chinese foreign exchange receipts will be converted by Central Bank at official rate plus 50%. With respect to foreign exchange outgoes, in case of arrangement for diplomats Board called Ministry of Finance’s attention to fact that it would be absurd to give diplomats official rate plus 50% and allow them to get foreign exchange at official rate. Ministry therefore agreed that diplomats should henceforth apply to Central Bank for foreign exchange which they would pay at same rate as they received it and Ministry will presumably impose same requirement on other parties to which it is granting same concession.
In situation arising from extension of arrangement for diplomats to foreign missionary, et cetera organizations to foreign soldiers and journalists and presumably to overseas Chinese, unless other adjustments are made:
Chinese Government will receive benefits of official rates as far as exports are concerned as prices of exports are calculated by converting their cost in fapi into foreign currencies at official rate;
Chinese Government will receive benefits of official rate as far as its foreign exchange expenditures are concerned, as unless November 1, 1941 Agreement is revised it will continue to be reimbursed by Board for its foreign exchange expenditures paying the Board in fapi at official rate;
Private foreign individuals and businessmen will continue to get official rate for their foreign exchange from Board. The number of people and firms involved is small but they may well object to “discrimination”.
With respect to position of Board, consideration raised in point 4 of my TF–122 would gain added force. In fact whole position of Board would become difficult. While November 1, 1941 Agreement and paragraph 4 of General License 75 would require reconsideration in light of changed circumstances, major question would be what would be the function if any of the Board in a situation in which major part of foreign exchange business would be handled by Central Bank at official rate plus 50% completely independently of Board and in which amount of commercial imports foreign exchange, cover for which is provided by Board, is negligible (see section II, 2);
Concentration of most foreign exchange business into hands of Central Bank will strengthen existing trend toward monopolization of business by Government and semi-Government institutions.

Section II. 1. Had a long informal conversation with Dr. Kung on the 27th when he discussed foreign exchange situation with me. He indicated that pressure had been put on him to make adjustments for foreign diplomats, missionaries, et cetera. He could do so in one of three ways:

He could recommend a reduction in official rate. But he was not convinced that a reduction to say 40 was in best interests of China. (This is the mildest expression he has yet used re a reduction in rate his attitude toward which was much less intransigent than formerly.)
He could grant official rate plus 50% and have whole arrangement handled by Board which would receive the 50% from Ministry of Finance just as Central Bank will under arrangements actually adopted or in course of adoption. (This answers point 1 of your 587, May 6 and clarifies section 1 paragraph 3 of TF–120, May 12,37 i. e., settlement of accounts there referred to will be solely between Ministry of Finance and Central Bank.) But it would be embarrassing to Board to do a large part of its business at 30 while official rate was maintained at 20. He had therefore decided on third alternative, namely:
To grant various foreign organizations and individuals official rate plus 50% but to have all such transactions handled by Central Bank. He emphasized repeatedly that this arrangement was ad hoc and temporary and could be abandoned if found to be unsatisfactory in practice. It existed on a 24 hour basis and could be immediately scrapped if unsuccessful.

With respect to the position of Board, Dr. Kung pooh-poohed an article appearing in April Central Bank bulletin (forwarded by pouch)38 which stated that retention of foreign representatives on Board was inconsistent with abolition of inequal treaties and advocated fusion of Stabilization Board with Foreign Exchange Control Commission. Dr. Kung made it clear that this article did not express official attitude of Chinese Government. I called his attention to need for tightening up supervision of sales of United States dollar backed savings certificates in order to prevent foreigners receiving fapi at 30 from buying certificates at 20. He thanked me for raising point and said it would be attended to. He concluded by promising to review situation with me again in near future.

2. While there is no doubt that Dr. Kung was sincere in stating that Chinese Government wished Board to continue to exist, in situation which would arise if most foreign exchange transactions would be handled by Central Bank independently of Board at official rate plus 50%, Board would be faced with danger of extinction through atrophy. In Chungking Chinese members of Board cannot take initiative in differing from positions taken by Chinese Government. It is not too much to say that Board derives its strength solely from support you and British Treasury are prepared to give it. At least one and probably two of Chinese members would welcome concrete manifestation of such support at this juncture.

In view of Board’s predicament and on basis of above and other conversations with Dr. Kung I wish to report my impression that Treasury’s opinions would carry weight and would at least strengthen position of Board if Treasury found it expedient to express its attitude [Page 551] on following to Minister of Finance either through Chinese representatives in Washington or through me:

Treasury’s preference for an outright reduction in official rate—say to 40—on grounds that official rate grossly overvalues fapi and that procedures now being adopted by Chinese Government create unnecessary complications and anomalies such as indicated in section I, paragraph 5 above, all arising from fact that Chinese Government is trying to change rate without changing it.
If ad hoc arrangements without reduction in official rate are to be retained, Treasury’s preference for their being so handled that foreign exchange receipts and outgoes made under them would be canalized through Board.

  1. Telegram No. 755, May 22, 10 a.m., p. 544.
  2. Telegrams No. 587, May 6, 6 p.m., and No. 692, May 12, 10 a.m., p. 535.
  3. Not reprinted.