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

No. 2955

Sir: I have the honor to refer to the Department’s air mail instruction no. 748, July 31, 1944 in regard to China’s economic development program; the Embassy’s telegram 1477, August 31, 2 p.m., regarding the question whether the Chinese Government should invite an American economic mission to China, and the Embassy’s despatch no. 2931, September 4, 1944 on the subject of contracts by American and British firms for postwar delivery to China of textile machinery and other equipment.

On the basis of information supplied by a number of key Chinese officials and business men, the following is submitted in response to the questions raised by the Department:

The announcement of May 19, 1944, issued by the Central News Agency, that the Central Planning Board had completed an outline of postwar reconstruction plans is incorrect. Completed at that time was merely an outline for demobilization.
Mr. Peng Hsueh-pei, Deputy Secretary-General of the Central Planning Board, states that no office of foreign advisors has been set up in the Board and that the matter of setting up such an office is not now being seriously considered. Dr. Franklin L. Ho, second Deputy Secretary-General of the Board, states that such office is provided for in the reorganization plan put into effect early in 1944 but that no advisors have yet been selected. He expresses hope that advisors will be obtained from the United States.
Nothing definite appears to have been done with the proposal to organize an overall agency charged with investigating the problems of financing postwar economic reconstruction. Dr. Wong Wen-hao, Minister of Economic Affairs, states that about two years ago the Foreign Minister proposed the organization of such an agency to the Generalissimo but it was dropped when the Minister of Finance opposed it. Subsequently, according to Dr. Wong, Dr. Kung laid before the Generalissimo another plan but it too was shelved. Dr. Ho, Deputy Secretary-General of the Central Planning Board, states that the Board’s Capital Department has made investigations into the matter of organizing an overall agency but little of a concrete nature appears to have been accomplished. Mr. K. P. Chen, Chairman of that Department, states he knows nothing about any plans for an overall agency. Mr. K. K. Kwok, General Manager of the Central Bank of China, states [Page 1074]that no proposals for organization of an overall agency have been submitted to the Joint Office of the Four Government Banks, which presumably would have to be consulted, and that Dr. Kung, now in the United States, is probably the only Chinese official who can give accurate information in regard to it.
Dr. Wong Wen-hao states that the Ministry of Economic Affairs had no intention of calling joint conference with the Ministry of Communications in the summer of 1944 to discuss the integration of industrialization plans with the transportation program. He states that the two ministries regularly exchange views on the subject and will continue to do so, but that the question of calling a joint conference was not considered.
Regarding the training of Chinese technical personnel in the United States, Dr. Ho states that the Ministers of Economic Affairs, Communications and Education recently discussed this matter with General Hsiung Shih-hui, Secretary-General of the Central Planning Board, and it was decided that no comprehensive program for all Chinese Government agencies could be drawn up until after the end of 1944 when it is expected that the integrated economic development plan will be completed by the Board. Dr. Wong states that the matter is still in suspense but that the Generalissimo recently ordered General Hsiung to draw up a concrete plan in conjunction with the ministries, et cetera, concerned as speedily as possible.
Official and private Chinese have varied opinions regarding the possible existence of shortages after the war of textile machinery and other capital goods in the United States and Great Britain. The Minister of Economic Affairs and the two Deputy Secretaries-General of the Central Planning Board state they are well aware of the position and are receiving pertinent information from Chinese officials in the United States and Great Britain. Mr. K. P. Chen, Chairman of the Board’s Economic Planning Commission, states that private Chinese generally have no information on the subject. Mr. K. P. Hu, an influential industrialist, states that many Chinese have erroneous ideas regarding the postwar availability of surplus machinery in the United States. Mr. Kwok, General Manager of the Central Bank of China, states that this point was brought up for discussion during the May 1944 meetings of the Central Executive Committee of the Kuomintang.
With few exceptions, the Chinese interviewed indicated that little thought has been given to the question of inviting an American economic mission to come to China. Mr. K. C. Chen, Manager of the Foreign Department of the Bank of China, states he has heard nothing of any such suggestions and that it is too early to think of inviting an American mission because the war against Japan will probably not be over until the end of 1945. Other private Chinese express similar views. Dr. Wong, Minister of Economic Affairs, states that “some people have thought of inviting some American experts to China” and that the time has arrived when the Chinese Government should consider the matter of inviting an American economic mission to come to this country. Dr. Wong states he will take up with General Hsiung, Secretary-General of the Central Planning Board, the idea of suggesting to the Generalissimo that a formal request for such a mission be made to the United States Government.
In contrast with Dr. Wong’s statements, Dr. Ho, Deputy Secretary-General of the Central Planning Board, states that discussions regarding the question of an American economic mission have already been held between Dr. Wong and General Hsiung. Dr. Ho states he considers the matter to be of very great importance and expresses the hope that something definite in regard to inviting such a mission will be done early in 1945. He states that some of the detailed plans called for under the integrated plan will probably have to be completed in the United States owing to lack of technical personnel and other facilities in China. Mr. Peng, another Deputy Secretary-General of the Board, states he has heard nothing of any suggestions to invite an American economic mission to China and that this matter cannot be considered seriously until after the integrated economic development plan is completed at the end of 1944. He states that upon completion of the plan the Board will undoubtedly decide to invite British and American experts, especially the latter, to assist in working out details for the various plans of the ministries and other organizations.

As previously stated, the Central News announcement of May 19, 1944 referred to an outline for demobilization and not an outline for postwar economic reconstruction. Dr. Ho, Deputy Secretary-General of the Central Planning Board, states that the outline for demobilization was agreed upon by the Board in conjunction with the Chinese Government organizations concerned and was submitted to the Generalissimo; that it contains the provision that demobilization be completed within one year after the signing of the armistice ending hostilities with the Japanese; that it indicates policies to be followed and specific subjects to be covered in separate detailed plans to be prepared by the various organizations, and that these plans are expected to be supplied to the Board by the end of 1944. Dr. Ho states that the most important demobilization plans will be those drawn up by the Ministries of War, Economic Affairs, Communications, Finance, Agriculture and Forestry and the Public Health Administration and that typical subjects to be covered include partial demobilization of troops, disposition of industries and railways in areas now occupied by the Japanese, rehabilitation of currencies in all parts of China, emergency construction of highways, railroads, bridges and wharfs, emergency replacement of electric power facilities in the occupied areas, et cetera.

Dr. Ho states that the five-year economic development program will be preceded by the one-year demobilization plan but that adjustments will be made wherever and whenever possible to begin work on economic development before the end of demobilization. According to information supplied by Dr. Ho and other Chinese officials including Dr. Wong Wen-hao, preliminary plans have been submitted to the Central Planning Board by various Chinese Government organizations and the Board is now attempting to coordinate and integrate the plans into a single master plan before the end of December 1944. It [Page 1076]is emphasized that even the integrated master plan will not be final; that it will have to be approved by the Generalissimo and, if approved, will then be used by the respective organizations as a guide for revising their separate plans.

Dr. Ho states that the factors which the Board takes into consideration in attempting to integrate the various plans include financial considerations; availability of resources, technicians and equipment (especially from the United States) and geographic and marketing factors. He states that the broad objectives of the program include the building up of a national defense structure and improvement of the people’s livelihood.

Mr. Peng, Deputy Secretary-General of the Central Planning Board, states that the various plans now being studied by the Board cover communications, transportation, industry, mining, power, public health, water conservancy and irrigation, and agriculture including forestry, fisheries and animal husbandry. He states that practically all plans submitted are too elaborate and call for expenditures far beyond China’s capacity to pay. He says that the Board hopes to reduce the plans to levels reasonably certain of attainment within the five-year period and to eliminate all projects of an “air castle” nature.

Mr. Peng terms “purely tentative” the reported five-year industrialization plan of the Ministry of Economic Affairs which calls for the expenditure of US$2 billion from foreign capital and an equal amount from Chinese capital, and proposed production, inter alia, of 5,000,000 tons of steel a year at the end of five years. He states that the industrialization plan will have to be reduced because of financial limitations and because it is not altogether realistic and that the goal for steel production will probably be fixed at some figure between 3,000,000 and 5,000,000 tons a year for the fifth year of the plan. Dr. Ho states that the industrialization plan is only a preliminary outline and subject to many revisions and that the latest proposals of the Ministry of Economic Affairs call for production of 3,000,000 tons of steel in the fifth year and 5,000,000 tons in the tenth year.

Dr. Ho states that in the first five years of reconstruction major emphasis will be placed on the development of basic industries and development of transportation facilities coordinated with the needs of those industries. He states that some emphasis will also be placed on development of cash crops for the purpose of obtaining funds for repayment of foreign loans required for reconstruction, and on water conservancy including extensive operations on the Yellow and Yangtze Rivers. Dr. Ho states that the Board has not yet determined what industries are to be classed as basic industries which will largely be state-owned and operated. Dr. Ho’s colleague, Mr. Peng, states that, as a general rule, those industries requiring much capital and which [Page 1077]will not bring immediate financial return or those which might give rise to monopolies, will probably be state-owned and operated.

Mr. Peng states that the Chinese Government will probably permit private interests to establish and operate small industrial plants and power stations but that it may decide to establish and operate large plants engaged in manufacture of iron and steel, machinery and heavy chemicals, and also large mining and public utility enterprises. He states that adoption of this policy will not prevent the Chinese Government from giving favorable consideration to establishment in China of large industrial plants by foreign companies in the early days of reconstruction. Mr. Peng feels, however, that these plants will undoubtedly have to be owned and operated by Sino-foreign concerns, preferably with a majority of Chinese capital, and with the understanding that they will eventually be made purely Chinese enterprises to be owned and operated either by the state or by private interests. Mr. Peng states that the foregoing ideas are merely being considered and the subject of foreign participation in China’s reconstruction is still under discussion. He points out that even if limitations of the type mentioned are placed on foreign companies wishing to establish branches in China, the conditions regarding profits and return of capital would be made as attractive as possible.

Mr. Peng states that great stress is being laid on agricultural development and reform and that agriculture is by no means being neglected in the overall pattern of economic development. He states that no definite figure for new railway construction has been fixed by the Board and that the figure of 12,000 miles to be completed within a 10–year period, mentioned by the Generalissimo in his book China’s Destiny, represents merely a desirable goal. He states that, as in the case of other projects, the extent of railway construction will be determined when the integrated master plan is drawn up.

Both Dr. Ho and Mr. Peng state that no priority schedule has been set up by the Board for various forms of transportation. Dr. Ho states that the Board favors development of transportation facilities in the following order: 1) airways; 2) railroads; 3) waterways; and 4) highways. Mr. Peng states that no agreement has been reached by the Board in this regard and that the Chinese Government hopes to satisfy the most urgent needs for transportation as best it can during the first five years of the program.

Dr. Ho states that the Ministry of Communications has drawn up an overall reconstruction scheme for highways but that it is by no means final and will have to be integrated into the general plan for economic development. Mr. Peng states that not only the Ministry of Communications but also other organizations have drawn up plans for highway construction and that the Board will have to correlate these plans [Page 1078]into one plan with goals reasonably certain of attainment and in the best interests of the country and that this overall plan will in turn have to be integrated into the single economic development program.

The foregoing information indicates that final decisions on many important phases of the economic development program have not yet been made and that none of the plans thus far submitted to the Central Planning Board is considered as being final. In fact, it is frankly admitted by the informants that even the integrated plan scheduled for completion by the end of 1944 will be considered primarily as a guide for more detailed plans to be prepared later.

Although some progress in economic planning for the postwar period appears to have been made, the Embassy believes some doubt is justified regarding the ability of the Board to complete the preparation of a single integrated plan by the end of 1944. The two deputy secretaries-general of the Board admit the difficulty of doing anything definite until some clear indication is given by higher Chinese authorities as to the amount of funds which will be made available for this purpose, both from local and foreign sources, and until concrete plans are adopted for rehabilitation of China’s national currency.

Chinese officials interested in this program appear to be cognizant of China’s dependence upon the United States for funds, technical assistance and equipment, without which no program of the scope contemplated can be made effective. Some of them have expressed interest in calling Upon our Government for assistance but they apparently are beginning to realize that the Chinese Government must first clarify its position with regard to future treatment of foreign business in China, must make clear-cut announcement of policies and objectives, and must devise a program which is realistic and within China’s capacity to finance.

Respectfully yours,

C. E. Gauss