Memorandum of Conversation, by Mr. John D. Sumner of the Embassy Staff 32

[Participants:] Mr. Donald Nelson
Mr. Vincent, Department of State—CA
Mr. Stanton, Department of State—FE
Mr. Woodard, Department of State—CA
Mr. Sumner, Department of State—CA

In conversation Mr. Nelson made the following points:

1. With respect to war production.

China is producing at considerably less than its capacity to produce from utilization of its own resources. For example, Mr. Nelson stated that ordnance plants, which he described as “pretty good” are [Page 261] working at 55 percent of capacity. In the case of steel, he stated that 8,000 tons are being produced against a theoretic capacity of 117,000 tons. He stated that Chinese agreed that production could be increased at least 100 percent.
As to reasons, Mr. Nelson emphasized the complete lack of coordination between the various Ministries responsible. For that reason he recommended a “WPB for China.” He stated that the Generalissimo agreed to this proposal, stating that he would delegate full authority to the Minister of Communications, but stating that China did not have the personnel (in terms of the technical skills necessary) to make such an arrangement effective. When asked if any steps are being taken to assist China in this respect, Mr. Nelson stated that he is drawing specific recommendations for such assistance for transmission to the President and would welcome any suggestions from the State Department.
Aside from the lack of coordination between Ministries, Nelson emphasized several factors as being responsible for the unsatisfactory and deteriorating character of Chinese war production. Among these is inadequate transportation—only 6,000 trucks are now in use. To correct this situation he referred to Mr. Harriman’s effort to send trucks via Russia, and stated that there is a prospect that 500 such trucks would be dispatched for the use, however, of General Chennault’s forces rather than of the Chinese directly. He believed that if the President were to approach Mr. Stalin, consent would readily be given for transit privileges. Another suggestion—that the present planes (C47’s) operated by CNAC, transporting some 1700 tons monthly, be replaced by C46’s which would double the amount carried by use of the same crews and airports.
Improvement in transport would be used in part for essential civilian goods.
Another measure recommended by Mr. Nelson is the development of manufacture of repair parts for transport equipment.
Another remediable handicap to production, especially in the steel industry, is the lack of standard specifications. To accomplish such standardization in this country the government had to obtain outside metallurgists. China has no one competent to do the job.
c. [d.]
Mr. Nelson described the situation in war production as going from bad to worse and stated that there is a feeling of hopelessness in Chungking. At the same time, while he regards the situation as grave, he does not believe it is hopeless. He believes it perfectly possible for the Generalissimo to reverse the trend.

2. Postwar economic plans.

The same lack of coordination that plagues war production, exists with respect to postwar economic plans.
The Ministries, Nelson feels, are not at all realistic in their planning. They assume that after the war, production, rather than developing gradually out of the present and past productive record of China, will start suddenly on a new high level. He further noted a tendency to start at the top, i. e. with respect to large quantities of final goods desired by the Chinese rather than building from the bottom—i. e. planning in terms of a normal growth from Chinese present economic and industrial structure.
Mr. Nelson feels that China has a number of real possibilities for substantial and quick industrial growth. As examples he cited the textile industry where before the war there were in China some five million spindles. China could build a large textile industry, not for export to the United States or Britain but for sale in China and elsewhere in the Orient. Again, he cited an excellent possibility for a “TVA type” of electric power, irrigation, flood control, and navigation improvement project centered near Ichang. He stated that John L. Savage, hydro-electric power specialist and cultural relations expert, has recently investigated this project and is enthusiastic about it. On the other hand, the Generalissimo asked him his reaction to a postwar automobile industry to which Mr. Nelson replied that this could not even be thought of for at least ten years, since so many parts industries must be developed before automobile manufacture is a possibility.
The point of taking away Japanese trade after the war was referred to by Nelson as follows: In discussion with the Generalissimo, Mr. Nelson made the point that this country looks to China to be a leader of postwar Asia, and that the permanent defeat of Japan requires that some of her trade be taken away. If China does not take the steps necessary to a healthy economic growth, its ambitions will fail and this country would be unable to act on the assumption of Chinese leadership. At the same time, Nelson said, he urged that the economic development be a “natural one” for China. In other words, he apparently did not recommend that China build particular industries with the purpose of taking part of Japan’s trade, but urged that a normal and healthy expansion of the Chinese economy would have this result.
Mr. Nelson stated that there was much discussion of agricultural development and that, rather than taking a social welfare line, he argued merely that common business sense dictates an improvement in the position of the farmers in order that industry have a supply of good workers (sketchy).
Mr. Nelson stated that he told both the Generalissimo and others in emphatic terms that China could not expect a grant of many billions of dollars from the United States, but must plan only in terms [Page 263] of projects that would stand on their own feet—i. e. be self-liquidating. He assured the Generalissimo that, regardless of what the President or anyone else said, Congress would not tolerate substantial appropriations of taxpayers’ money. Mr. Nelson stated that the Generalissimo apparently had been encouraged by various Chinese and by “some Americans” to believe otherwise.
Also urged upon the Generalissimo was the proposition that China would have to make up its mind about certain key matters, including the degree of government control of business and necessary changes in law, if foreign investment were to be forthcoming. He recommended to the Generalissimo that certain industries, e. g. transportation and power projects, be developed by the state, since that would be the only way to get the job done adequately. On the other hand, he urged that most industries, e. g. textiles, be developed entirely by private enterprise. This could be done, Nelson urged, by the setting up of Sino-American corporations—e. g. from five to ten in the textile industry—in which the major investment and control would initially be American.

3. Political.

Mr. Nelson said he informed the Generalissimo fully, with respect to his conversations with Molotov. He also urged this country’s view that China should establish better relations with Russia. Russia’s attitude, as transmitted to the Generalissimo, is only one of determination that China be a “good neighbor”. He reported the Generalissimo as being entirely in agreement and as stating confidentially that he was planning to send T. V. Soong as an emissary to Moscow.
While Mr. Nelson stated that he found the Generalissimo, and people in the Ministries, sympathetic to his recommendation that the Chinese economy be permitted to develop “normally” from its present status, he nevertheless found a disposition to believe that China should build promptly a strong defense economy. Presumably these inconsistent views were brought together by his statement that the Chinese reaction was favorable after he had assured them that China could expect no large “gifts” from this country.
With respect to Great Britain, China remains highly suspicious. Nelson knew of the reported offer of the British to send a general economic mission to China to do its planning but believed that nothing would happen in respect to it. He thought the British are playing a waiting game and expect to see the United States make mistakes on which Britain can capitalize.
Mr. Nelson stressed the “very bad” relations between China and the United States, particularly in the military sphere.
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4. General.

Mr. Nelson offered to have Mr. Locke and Mr. Jacobson give us full information as to data collected in China which, Nelson believes, are in many respects better than those otherwise available.
He stated that Mr. T. V. Soong was translator in all his discussions with the Generalissimo. He also referred to Mr. K. C. Wu, Vice Minister of Foreign Affairs, as being with him during talks with the Ministries and with the Generalissimo.
Mr. Nelson stated that Mr. Wu had promised to write up his final conversations, particularly with the Generalissimo and would send copies to the American Embassy as well as to himself.
Asked what he thought of the idea of sending an economic or business mission to China, Mr. Nelson stated that he thought this should not be done until the Chinese had taken the steps necessary to bolster the particular situation in war production.
According to Mr. Nelson he was able, during repeated and lengthy conversations, to give the Generalissimo the suggestions and points of view described above. With reference to each point he stated that he found the Generalissimo in full agreement!
  1. Addressed to the Director of the Office of Far Eastern Affairs (Grew), to the Director of the Office of Economic Affairs (Haley), and to the Adviser of the Liberated Areas Division (Moffat).