Foreign Relations of the United States, Diplomatic Papers, 1944, China, Volume VI

102.1/10243: Telegram

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

Chungking, February 29, 1944—10 a.m.
[Received 7:07 p.m.]

392. To Secretary of Treasury from Adler.

(1) Chungking wholesale prices. December, general 20,930, food 14,060, January 21,220 and 14,610 increases of 4, 6, 1 and 4 percent on November and December, respectively. Well informed circles estimate prices have gone up here since Chinese new year at end of January by at least 25%. Weekly economic.

(2) Black market rate for United States currency has risen spectacularly since first February when it was around 90 in Chungking and 110 in Kunming. On February 7 it was 130 in both places, on February 11 it rose to 170 in Chungking and to a little less in Kunming. During last week it jumped to 225 in Chungking and to between 250 and 300 in Kunming. Rupee rate has also risen roughly proportionately. It should be noted that the markets for United States currency are extremely loose and that there are considerable divergencies in quotations at the same time and place. The sharp rise in black market rates is due to a combination of factors including an adjustment to sharp rise in prices since Chinese new year to longer term and consistent drop in purchasing power of fapi, rumors that Chinese Government is about to change official rate to hundred to one as a result of American pressure and that it is about to take action closing black markets and finally a substantial increase in demand due to accumulation of funds in Free China to credit of merchants in Occupied China who have been increasing shipments of goods particularly dye stuffs to Free China as a result of Jap taking over stocks of cotton in Shanghai.

(3) Price of gold has also risen sharply since beginning of year. It is now over CN 20,000 per ounce in Chungking, CN 25,000 per ounce in Chengtu and CN 16,000 in Kweilin and Hengyang. Market has been closed in Kunming since price hit CN 37,000. Government has already sold 50,000 ounces originally held by Farmers Bank and over 80,000 ounces of gold imported from United States. Am reliably informed Ministry of Finance has decided to push up rate of sale which has recently reached 1400 ounces per day but it still appears to err on side of conservatism in its gold sales policy.

(4) Central Bank receipts of foreign exchange granted “special” rate totaled sterling 1,114,000 and United States 9,445,000 form AY October 1943. “Special” rate was increased from 30 to 40 on January 20 and was extended to include Chinese overseas remittances and all foreigners personal expenses.

(5) Industrial production in China continues to decline and there is an increasing tendency to ask Lend-Lease for certain categories of unfinished and manufactured goods previously produced in Free China owing to their exorbitant domestic cost of production. Cotton production for 1943 higher than in 1942 totaling 1,884,000 piculs of which Government has collected over one-fifth in land tax.

(6) Kung has replaced T. V. Soong as chairman of board of directors of Bank of China by instructions of Generalissimo; Soong remains a director. All cash purchases from United States and United Kingdom have been canalized in Central [Bank?] which it is rumored is to take over CDS.⁷³

(7) Dr. Kung visited Chengtu for a day on February 15 to inspect economic impact of airfield construction and to arrange for remedying shortage of notes which is holding work up. I accompanied him at his invitation. Chengtu cost of living jumped 25% in January and has risen by about the same amount in February. Since first of year price of rice and flour has risen 75 to 80% while prices of construction materials have more than trebled. United States Army officers state that shortage of CN currency cost United States an extra CN 1 billion in relation to construction materials alone as during delay in their purchase prices went up. Shortage of currency still only partially remedied. Chengtu flour mills and lumber firms either owned by or have connections with Szechuan militarists which renders price control and curtailment of profiteering even more hazardous and difficult than it usually is in China.

(8) Dr. Acheson of War Department informs me that Kung has asked him to arrange for War Department to ship us 20,000,000 of United States currency to China to be used for reducing and steadying black market rates. Kung indicated he would prefer such sales of this United States currency as took place should be on joint account of China and ourselves.

(9) Chinese recently approached British with proposal that sterling 50,000,000 loan be used for selling sterling backed savings certificates in China. British have replied with counterproposal that sterling 10,000,000 loan be used to guarantee an internal bond issue with method by which sterling would be deposited to China’s credit and rate at which would be repaid to be negotiated later, that a further sterling 10,000,000 be used for same purpose if it successful and that remainder of loan be used for purchases from sterling area during the war. Negotiations are still continuing and Kung has expressed himself optimistically as to outcome. [Adler.]

Gauss

73. Chinese Defense Supplies.