Subject: Proposed Regulations Governing the Post-War
Investment of Foreign Capital in China.
As the document was obtained in confidence and is understood to be secret,
the Embassy hesitated to make an official request for a copy. Upon receipt
of the Department’s telegram, however, an informal note was addressed to the
Foreign Minister requesting the desired copy. It is doubtful whether it will
be forthcoming; but the despatch of the note will at least have the effect
of drawing the matter to the attention of the Foreign Minister and let him
know that there is attentive foreign interest in the plans of the Party and
Government regarding post-war investment of foreign capital in China.
The translation of the document obtained from the Embassy’s confidential
source is crude and some of the points undoubtedly require clarification. If
the Chinese text can be obtained, officially or unofficially, a more careful
translation will be made at the Embassy and transmitted to the
Department.
[Enclosure]
Memorandum by the Commercial Attaché in China
(Richards)
to the Ambassador in China (Gauss)
Chungking, March 22,
1944.
On September 11, 1943, the Central Executive Committee of the Kuomintang
approved a resolution outlining the Party’s policy on industrial
reconstruction and, apparently in connection therewith, another
resolution proposing a policy for the treatment of foreign investments
in China (See Embassy’s despatch No. 1595, September 18, 1943,18 in regard to Chinese official policy on
foreign investments and Embassy’s report of October 6, 194319 on the subject of the policy
of industrial reconstruction). The resolution on foreign investments,
having received the prior approval of the Central Planning Board, the
Executive Yuan and Generalissimo Chiang, was regarded as representing a
declaration of official policy. The Executive Yuan, before submitting it
to the Legislative Yuan for legislation necessary to implement its
provisions, asked for the comments of interested ministries.
We have now received … a document which is understood to be a translation
of the recommendations to be transmitted to the Legislative Yuan with
the CEC resolution on foreign investments, incorporating the suggestions
of the ministries consulted. Although the translation is poorly done and
the original Chinese text is not available, it has seemed best to
forward the translations as received (Attachment No. 1), together with
an interpretation of its provisions (Attachment No. 2).20
Articles A–III, A–IX, A–X and A–XII are intended to implement the
recommendations in the CEC resolution mentioned above, for
liberalization of the Government policy on foreign investments. At the
same time, it appears that the Government proposes to regulate foreign
investments, as well as investments of private Chinese capital, rather
strictly. Article A–II indicates that foreign investments will be
directed into fields of enterprise regarded as urgent in the national
reconstruction program. It is not clear what is meant by limiting the
term of foreign investments, in Article A–VI, but it has been suggested
by a number of writers in Chinese publications that foreign companies be
permitted to build factories in China only on condition that they agree
to train Chinese technicians and to turn the enterprise over to Chinese
control after a certain number of years. Article A–VII suggests that
foreign capital would not be permitted to engage in operations that
might unsettle China’s balance
[Page 1048]
of trade. Article A–XI indicates that agreements between Chinese and
American investors for joint participation will be subject to
examination by the Government, while Article A–XII suggests that direct
investments by foreigners will be supervised and directed by the
Government. Article C–I provides for the establishment of a Government
body to formulate a program for the use of foreign capital, direct such
capital into desired channels, examine applications for the investment
of foreign capital and inspect the records of all enterprises using
foreign capital.
Article B–I merely outlines the various methods by which foreign capital
may be invested, while Article B–II indicates what types of capital may
be used in different types of industrial enterprise. Of interest in this
connection is Article C–II, which apparently means that arrangements for
foreign investment in Government enterprise will be negotiated only by
the Ministry of Finance. A representative of the U. S. Steel Export
Company has recently made tentative arrangements, subject to the
approval of his principals in New York, for investment on a 50% stock
ownership basis in a Government enterprise and in a semi-Government
company, both of which would assumably be regarded as “indirectly
connected with the national defense”. His negotiations were conducted
with the Minister of Economic Affairs and the Minister of Communications
respectively and apparently were not referred to the Ministry of
Finance, as both Ministers stated that they had direct access to the
President (Embassy’s despatch No. 2312, March 15, 1944, on the attitude
of Chinese officials toward American participation in Chinese
industry).
Articles A–V and B–III apparently provide that foreign investors should
have access to Chinese courts, so long as they invest in accordance with
the provisions of Chinese law and do nothing to conflict with Chinese
sovereignty. Investments in Government enterprises would be protected as
to interest and principal. (It is not clear what this means, but
apparently such investments would be regarded as obligations of the
Government. An official of the National Resources Commission, speaking
of the need for foreign capital in hydro-electric projects in China,
referred recently to the Government’s willingness to guarantee dividends
of 8% on such investments). Foreign capital would be assured remittance
facilities to China, but it is not stated whether any preferential rate
of exchange would be granted. Reductions in the customs duties are
assured in the case of capital coming in the form of machinery and
materials. Foreign technicians would not be bound by the Chinese salary
scale but their salary remittances must be reasonable. (It is possible
that differences of opinion might arise as to what constitutes
reasonable salary remittances for foreign technicians).
[Page 1049]
An article of incidental interest is Article A–VII, the language of which
appears to mean that specific revenues should not be pledged to secure
Government loans. A loan for the building of railroads, for example,
would be an obligation of the Chinese Government, but would not be
specifically secured by a first lien on railroad earnings.
A representative of a large American company, who had seen a copy of the
enclosed translation, expressed the opinion to a Cabinet Minister that
some of the provisions would be very disturbing to American investors.
He was assured by the Minister that, though it is necessary to put such
sentiments on the records and even to incorporate them in the laws to
satisfy the reactionaries in the Government, they should not be regarded
too seriously, as they can always be interpreted favorably when
arrangements are mutually satisfactory. The American representative, who
had a number of talks with prominent Chinese officials, felt that there
was a reasonable degree of safety in what he termed the “90 percent
margin of error in the interpretation of Chinese laws and regulations”
and in the common sense of a great majority of the Chinese, who
appreciate the great need for American capital, equipment and technical
assistance. So long, however, as laws and regulations continue to
reflect reactionary and ultra-nationalist sentiment, and it is necessary
to depend on favorable interpretations by friendly officials, it would
appear that American companies proposing to invest in China would be
well advised to choose representatives who are adaptable and competent
at following political trends.
