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

No. 2659

Sir: I have the honor to refer to the Department’s third person instruction no. 620, April 28, 1944, transmitting a copy of a paper prepared by a committee of the National Foreign Trade Council on the subject of foreign banks in China, and to enclose a memorandum prepared by the Commercial Attaché under date of May 25, 1944,24 outlining views expressed on the subject by a number of bankers and financial experts in Chungking.

Summary of Memorandum: The points suggested for consideration in the NFTC paper appear to be based partly on existing legislation intended to meet the emergency conditions and partly on legislation that is reported to have been under consideration by a subcommittee of the Supreme National Defence Council. In the former category are the exchange control provisions and a requirement that prior approval be obtained from the Ministry of Finance before secured loans in excess of CN$200,000, or unsecured loans in excess of CN$2,000, may be made. These provisions apply equally to foreign and domestic banks and appear to be justifiable, in the circumstances; though the existing official exchange rate is extremely unrealistic, and should be changed, it will probably be impossible to do away entirely with exchange control for some time after the war; the requirement of prior approval on large loans is intended to check hoarding, though [Page 1053]it has not been very effective. There is a feeling in some quarters that this legislation may be retained with the passing of the emergency and used to squeeze out all private commercial banks, leaving a monopoly of banking to the Government banks; the Central Bank, some bankers believe, will be reluctant to relinquish its control of foreign exchange; other bankers express the opinion that the emergency legislation will be repealed as soon as practicable; all consider it difficult to prophesy as to the ultimate fate of this legislation in view of the uncertainty in regard to the post-war political situation. End of Summary.

A sub-committee of the Supreme National Defence Council is reported to have considered at the beginning of this year a set of proposals for banking legislation which would have made it quite impossible for foreign banks to operate in China; the origin of the proposals is uncertain, but some observers believe they emanated from an extreme nationalist group in the Legislative Yuan. As a result of the testimony of liberal bankers, it is understood that all of these anti-foreign proposals were dropped by the sub–committee, with the exception of one which would prohibit foreign banks from accepting fixed or savings deposits; according to an informed observer, however, the sub–committee is again considering a proposal to prohibit acceptance by foreign banks of any kind of deposits, except deposits from their own nationals.

So far as can be learned, there has been no proposal to restrict loans to any one customer to 10% of a bank’s capital. There has been promulgated a regulation limiting loans to any one customer to 5% of a bank’s total loans. This has apparently been superseded by a more recent measure requiring banks to report to the Ministry of Finance all secured loans to any one customer which exceed 10% of total loans; unsecured loans may not exceed 50% of a bank’s total loans and unsecured loans to any one customer may not exceed 5% of a bank’s total loans. There are attached excerpts from three measures governing the control of bank loans in China.

The present status of Chinese Government plans for the operation of foreign banks in China is one of complete uncertainty and it is difficult to predict whether the ultimate decisions will reflect the point of view of the extreme nationalists or that of the liberals. There seems some reason to expect, however, that the banking laws finally adopted will be fairly liberal, as China is too much interested in obtaining American capital and credits to run the risk of excluding American banks by unduly restrictive legislation. It is questionable whether adequate provision for the protection of American banks in China could be included in the commercial treaty, as the NFTC paper makes it clear that something more than reciprocal treatment is needed.

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Some Chinese Government officials have expressed interest in the possibility of obtaining the assistance of American experts in drafting legislation, and it is possible that the Chinese Government might be persuaded to seek such experts. Any suggestion that they do so, however, must be handled with some care so that it will not appear that the American Government is attempting to insinuate American experts into Chinese Government service for the purpose of influencing legislation. The Commercial Attaché reported to me the reaction of the Minister of Economic Affairs, Dr. Wong Wen-hao, on this subject, as reported in the enclosed memorandum. I did not feel that it was desirable at the time that the Embassy take any initiative in the matter; nor do I feel that legal experts should be sent to China under the cultural relations program25 to assist in drafting Chinese legislation.

I have understood from Dr. Arthur N. Young, American adviser to the Ministry of Finance, that he has in mind suggesting to the Minister of Finance that several American experts be employed to work on various financial and economic problems which must be met in the post-war period. I do not know that he has made his suggestion to the Finance Minister up to this time. It is possible that if Dr. Kung, the Minister of Finance, visits the United States for the forthcoming monetary conference, Dr. Young may accompany him, and while in the United States the Minister may look into the question of obtaining the services of American financial, legal and other experts.

On the general subject of China’s post-war activities and the treatment to be accorded to foreign interests, the situation remains much as I have previously reported it. As stated by Dr. Soong, the Foreign Minister, the Chinese attitude on these problems has not yet “crystallized”.

Respectfully yours,

C. E. Gauss
  1. None printed.
  2. For correspondence on this subject, see pp. 1111 ff.