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

No. 2379

Subject: Proposed Regulations Governing the Post-War Investment of Foreign Capital in China.

Sir: I have the honor to refer to the Department’s telegram 378, March 23, 1944,16 in regard to tentative regulations reportedly under consideration by the Chinese Government to “govern the encouragement of foreign capital”, and to the Embassy’s telegrams nos. 551 and 552, March 29, 194417 in reply thereto, and to transmit herewith a memorandum prepared by an officer of the Embassy regarding the document under reference, including a translation and interpretation17 of the document. The substance of the memorandum was given in the Embassy’s telegram no. 551, March 29, 1944.

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.

Respectfully yours,

C. E. Gauss
[Page 1047]

Memorandum by the Commercial Attaché in China (Richards) to the Ambassador in China (Gauss)

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.

J. Bartlett Richards
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  4. Foreign Relations, 1943, China, p. 867.
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