Marshall Mission Files, Lot 54–D270

Memorandum by the Chargé in China (Robertson) to General Marshall

General Marshall:

1. The dominant feature of the Chinese economic situation is the continuance of the wartime currency hyperinflation in a country in which the process of unification, economic as well as political, is proceeding quite slowly. All the phenomena concomitant upon hyperinflation—including rapid expansion of note issue, sustained and severe rise in prices, exorbitant interest rates (8 to 10 percent a month), flight from the currency, etc.—are present in China, Note issue continues to expand at an alarmingly rapid rate; it was CN $900 billion in November and will be a trillion by the end of the year, an increase of five times since December, 1944.

The main cause of the hyperinflation is the inability of the Government to finance expenditures from current receipts from taxation, etc., which compels it to resort to the printing press. The budgetary deficit shows no signs of decreasing. It will be over CN $1 trillion this year and there is still little evidence forthcoming to show that the budgetary situation will undergo any pronounced improvement in 1946. This will remain the case as long as the Government’s military responsibilities and expenditures continue to be as heavy as they are.

Prices in the interior have fallen very slightly since the end of the war and are still over 2,000 times 1937 levels. However, prices in the coastal areas have risen sharply since the cessation of hostilities, and it is to be feared that the general upward swing of prices will be maintained as long as the budgetary situation continues so unfavorable.

2. China’s Internation[al] Financial Position. While China has considerable foreign exchange assets—approximately US $1 billion including Government gold and foreign exchange and private foreign exchange assets—she is bound to make very heavy foreign exchange expenditures for some time before she receives substantial amounts of foreign exchange on current account from exports and from overseas remittances. Moreover, she will need a very large sum of foreign exchange for eventual currency stabilization, probably around US $ half a billion. Thus, China’s foreign exchange assets are small in relation to her needs, and she is likely to be a borrower for some time.

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The Export-Import Bank is already negotiating a loan of US $560 million to China, and China will certainly need more to facilitate the process of economic recovery. China will not only borrow from the Export-Import Bank, but will also undoubtedly avail itself of member privileges in the International Monetary Fund and International Bank for Reconstruction and Development to obtain access to more foreign exchange.

The resumption of normal international financial relations by China is severely retarded by the existence of the fictitious official exchange rate of 20 to 1. The final stabilization of China’s currency must await her putting her financial and economic house in order which in turn must await her putting her political house in order.