893.60/5–2145: Telegram

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

814. Following is extract from Central News English service of May 19:

“Chungking, May 19 (Central): Following is a summary of the resolution on the program for industrial reconstruction adopted by the sixth Kuomintang Congress at this morning’s general meeting:

The industrial reconstruction of China will be based on an overall plan drawn up by the Government.

The underlying idea is to develop on industrial base first in order to ensure it an independent growth and to realize the dual objective of national defense and people’s livelihood. Briefly stated, the principle of people’s livelihood seeks to effect the most equitable distribution so that society as a whole may be benefited and this postulated the socialization of capital.

Speed is important and this implies the completion of industrial projects according to schedule with the large scale adoption of modern technique. The scale of development will be obviously limited by the capital made available by the people’s saving and foreign investment, especially at the earlier stages of the plan.

To promote state capital, it is necessary to institute a state capital, it is necessary to a state-owned enterprise system, but private enterprise will also be encouraged within the framework of the overall plan so long as such enterprises do not exploit the masses.

The Government sector of industry will be confined largely to heavy industries such as iron and steel, coal, copper, lead, zinc, electrical, chemical (basic) and cement, and also other industries that have a direct bearing on the people’s livelihood such as textile[s], flour and leather. Government may also participate in the development of agricultural raw materials such as raw silk, tea, tung oil and vegetable oil both to meet the needs of domestic industries and for export.

The state sector will also take care of the two basic services essential to industrialization power and communications. These must be accorded the highest priority and developed in accordance with the needs of the industrial plan.

As China is deficient in certain natural resources such as copper, sulphur, rubber, and iron ore, a definite plan must be formulated to encourage their import and stockpiling. For instance, iron and steel scrap may be imported from other countries and iron ore from the South Seas. With its rich reserves of bauxite and alunite China should develop a gigantic aluminum industry as a partial substitute [Page 1344] for copper and as raw material for the aircraft industry. Conservation of certain scarce resources should also he instituted for strategic reasons, such as coking coal and petroleum. In the case of the latter mineral, the alcohol industry may be developed as a partial substitute. As a further measure to conserve mineral resources, agricultural industrial raw materials may be used where possible. Attention should also be directed to the organization of each industry as a whole with a view to achieving the highest efficiency and this may be supplemented by a planned distribution of labor. Last but not least, there should be a plan for intensive geological prospection and the gathering of other economic data necessary for the industrial development of the country.

The industrial plan must be carried out according to schedule, relative to time and place, and the various industries must be brought into harmony with the overall plan. This applies to the speed of production as well as to the planned output. It may not be easy to have all details realized exactly according to plan but the broad outline of it should be rigidly adhered to. For this reason there will be a central controlling organization to ensure a harmonious development. Where industries fall short of the planned quota in production, the state must be in a position to make good the deficiencies.

The industrial regions will be fixed by the Government according to the distribution of natural resources and other economic factors, as communications, necessary to industrial development. For the development of the basic industries, strategic considerations are important.

Standardization of products is vital. The Government must fix standards which have to be rigidly adhered to even for imported products. This applies equally to measures. The metric system is to be the one only standard.

To carry out the planned production and the harmonious development of the various industries, the state and private sectors of industry must have proper division of work and coordination. The controlling organizations will check the quota in accordance with the prescribed schedule and thus ensure the paid [full?] development of private industry. The state may further help private industry by the organization of trade associations of related industries so as to promote the closest cooperation.

It is the object of both the state and private [industry?] to achieve the highest efficiency by the application of the most advanced technology, scientific management, standardization, and rationalization. This will also achieve the lowest cost. Mechanization and electrolysis will help mass production of standard products. Modern chemical engineering, smelting and related industries will avail of domestic [Page 1345] raw materials to achieve the highest efficiency. The training of personnel will be along scientific lines. At the outset certain important industries may be found to be high cost and the state will have to subsidize them for some time but this will be only a temporary measure to put the industries on their feet. The state will assist industry to obtain the necessary equipment and raw material.

Private industries conforming to the state industrial plan will receive the utmost assistance such as foreign exchange, transportation, equipment, raw materials, and labor. This protection will encourage investment in the industries necessary to the development of the state plan. Private and state enterprises of the same category will have equal treatment, that is, no discriminatory treatment against private industries, which, wherever needed, will receive technical assistance from the state.

The Government will also encourage handicraft industries and cooperative [apparent omission] the leisure of the people. Where the handicraft industry has an international market, the state will help technically to better the grade of the products. Where the products may serve as the raw material of industry, the state will coordinate the industries. The new industries may accelerate the development of village and handicraft industries. Such small-scale industries and handicraft industries [are] best developed by the cooperative methods.

During the transition from an agricultural country to an industrialized economy, exports will have to be greatly developed. Labor may be added to convert the raw materials to a state suitable for the world market in view of China’s cheap labor. The state should exercise leadership in promoting both the quality and quantity of the products. This applies particularly to the South Sea market for Chinese cotton textiles as it will help to replenish its foreign exchange. The state will also perform a regulatory and inspection function to ensure correctness of grade.

The state should encourage savings and channel the investments to industry. Profits from industry should also be ploughed back to industry. To achieve this, the complete profit must be attractive.

The country’s financial policy should be in line with the requirement of industry. This applies also to taxation policy and the customs tariff. At the outlet [outset?] when certain industries are in their [infancy?] some form of protection may be necessary. More vital, however, is the stabilization of the currency without which little economic activity will be possible. Additionally, the Central Bank must be strengthened as to exercise an effective control over the financial policy with a view to extending the greatest possible lead to industry. A securities and bond market should also be developed.

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The dictational policy should also help industrialization. This refers particularly to the technical and vocational education program. This may be supplemented by the training of personnel by each factory. The state may send out experts to study the problem of rapid personnel training.

Invention and scientific research should be encouraged by suitable awards or subsidy. There should be legal protection to patents and they should be strictly enforced. Exchange or polling of processes of related industries should be regulated and encouraged so as to derive the greatest benefits. Foreign investment should be welcomed. There are four forms of investment—loans, joint enterprise, extension of credit, and special investment. Loans floated [would be?] designated by the Government. Such loans should be invested in enterprises vital to the industrial program and will be self-liquidating. There will be no restrictions to the investment of foreign capital except in the munitions industry. Where the joint enterprise requires large capital, it is best for the state to participate so as to realize Dr. Sun’s industrial program. If private enterprise participates in joint capitalization with foreign interest, the sanction of the state is necessary. Where the foreign corporation enters into technical assistance contract with Chinese enterprise, it has to obtain the approval of the controlling organization. The direct investment by foreign corporations will have to be approved by the Chinese Government and will have to conform to Chinese law. Foreign corporations investing in China should endeavor to utilize Chinese materials as far as possible. [”]