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

No. 2004

Sir: I have the honor to enclose a copy of a confidential memorandum2 prepared for his head office by an American, Mr. Richard Smith, representative in Chungking of the Yee Tsoong Tobacco Distributors Ltd., a British-American Tobacco Co. subsidiary, outlining his conversations with Government officials and Chinese business men in Chungking on the subject of Chinese policies for the future in regard to Government ownership and private enterprise, as well as a memorandum of a conversation on the same subject between the Minister of Economic Affairs3 and an officer of the Embassy.

Summary of Mr. Smith’s memorandum: Sentiment in Chinese official circles favors retention of a tobacco sales monopoly after the war, some influential persons recommending a Government monopoly on the manufacture of cigarettes and other luxuries. Alternatively, joint ownership by Government and private capital of the tobacco and other industries, including shipping, has been suggested. President Chiang4 is said to favor Government monopolies. The Minister of Finance5 privately expressed the opinion that a Government sales monopoly could be operated successfully but said that he had opposed proposals that the Government take over cigarette factories. He said that the Government does not wish to encourage heavy investment in the tobacco industry, feeling that China will not desire to stimulate the production of such luxuries. Recommendations that the tobacco monopoly be abandoned in favor of a return to the system of private distribution with adequate taxation have apparently been pigeonholed. Dr. Wong Wen-hao, Minister of Economic Affairs privately expressed the view that Government development and control of certain industries would be necessary but might extend only to certain phases. With regard to the CEC6 resolution on the subject of foreign [Page 1041]investment in China (Embassy’s despatch no. 1595, September 18, 19437), Dr. Wong said that four ministries have been asked to submit their suggestions, before January 15, 1944, to the Executive Yuan. He expressed the opinion that registration of industrial companies with more than 50 percent foreign capital would in each case be subject to Government approval. He intimated that foreign loans would be preferred to direct foreign investment in railroads. The foreign investment policy is still in a formative state but may crystallize to some extent within the next few months. End of Summary.

In conversation with an officer of the Embassy, reported in the attached memorandum of conversation, Dr. Wong Wen-hao expressed the opinion that direct investments by foreign companies should be in the form of Chinese subsidiaries in which the Chinese Government might participate.

In conversation with the representative of an American steel company, Dr. Wong recently stressed the point that foreign investors in joint enterprises may expect to be permitted a 50 percent participation, instead of being limited to a 49 percent participation, as in the past. It appears from various conversations with officials and from published articles that there is not yet any settled policy on foreign investment, despite the CEC resolution on the subject referred to above, which favored permission for direct investment as well as abolition of all limitations on the percentage of foreign investment in joint enterprises, subject to government approval. It is possible that there might be some difficulty in obtaining that approval in the case of industrial companies whose capital is more than half foreign.

Respectfully yours,

C. E. Gauss

Memorandum of Conversation, by the Commercial Attaché in China (Richards)

In the course of conversation at a dinner on December 27, 1943, Dr. Wong mentioned that he had received from Dr. Wu Ching-chao, Senior Secretary of the Ministry of Economic Affairs, who is now in Washington, D. C, a memorandum in which Dr. Wu outlined and expressed approval of a theory advanced by a financial expert in the Department of Commerce (whose name Dr. Wong did not remember) that China would be well advised to use direct investments of foreign capital so far as possible in building up her industries, rather than foreign loans. I mentioned that there seemed to be a considerable weight of opinion in China in favor of government ownership, at least in the [Page 1042]heavy industries. Dr. Wong said that he thought that a combination of direct investment and government investment could be worked out and that foreign capitalists investing in China would be willing to accept investment by the Chinese Government, through the NEC,8 in their companies. Such investment, he said, might represent only a minority interest and the Government would exert no more influence in the management than any other minority stockholder. Government restrictions would be independent of Government investment and would be applied equally to those companies having Government investment and those without such investment. Dr. Wong also suggested that companies might be formed in China with investment of foreign capital, private Chinese capital and Chinese Government capital. (He did not suggest that foreign investors in joint enterprises should be limited to 50 percent participation, although in conversation with the representative of an American steel company, he has several times stressed the point that foreign investors may expect to be permitted “a full 50 percent participation in joint enterprises, rather than only 49 percent, as in the past”.)

J. B[artlett] R[ichards]
  1. Not printed.
  2. Wong Wen-hao.
  3. Chiang Kai-shek, President of the National Government of the Republic of China.
  4. H. H. Kung.
  5. Central Executive Committee of the Kuomintang.
  6. Foreign Relations, 1943, China, p. 867.
  7. National Resources Commission.