893.50/11–1545: Telegram
The Consul General at Shanghai (Josselyn) to the Secretary of State
[Received November 16—4:20 p.m.]
208. 1. Outlook for economic recovery in Shanghai region, fairly buoyant in early October, has changed in succeeding weeks to one of pessimism, at least with regard to the immediate future.
2. The overhanging political shadow in the north has dampened prospects for drawing at any early date upon the resources of Manchuria for improvement of China’s general economy. The growing seriousness of the civil war situation and shortage of shipping prevents the orderly opening up of transportation routes and ports and the resumption of internal trade; besides making the outlook for the adequate and steady supply of Kailan Puar [Kailan coal] to Shanghai decidedly doubtful and problematic.
3. The suspicion under which many local Chinese industrialists have been regarded by the Chungking authorities, hence their doubtful status, plus the actual indictment of some of them as wartime collaborationists with the enemy, constitute a situation and atmosphere which has thrown considerable damper upon the resumption of local industrial activity.
4. Uncertainties as to supplies of raw materials, labor unrest which resulted in numbers of strikes in October in utility [companies?] and labor’s pressure for higher wages to offset rising living costs, together with the problematic electrical power supply outlook, make it almost impossible for industrial plant owners to figure either costs or selling prices. These situations also tend to hold up resumption of industrial plant operation.
5. Apprehension with regard to what appears to be a rather stiff direct tax program to be locally applied by the Central Government authorities through a direct tax office opened in Shanghai November 1 added another disconcerting element tending to make industrial operators hesitate. Whereas there were possibly 300 factories operating in Shanghai prior to V–J Day, very few are now functioning.
6. These several factors, together with uncertainty as to the exchange value and future purchasing power of the Chinese national dollar or yuan and the absence of promise for an early resumption of foreign trade, have caused local sentiment virtually to nose dive. Whereas, a month ago, merchants and hoarders were putting their goods on sale at fairly reasonable prices, a complete reversal has occurred. The general public in face of the array of adverse factors resumed a commodity and U. S. dollar note hoarding spree. By the first week in November most food prices had increased 2½ to 3 [Page 1180] times over those prevailing in September and early October. Prices continue to rise daily, some meats now selling at 6 times previous price. A considerable range of consumer goods advances as much as seven or more fold in price, with merchants changing prices daily or oftener and some hiding their best quality goods not wishing to exchange same for local currency at any price until replacements are in sight and better ideas of replacement costs can be visualized.
7. The considerable influx of American military personnel, the gradual return of numbers of Chinese to Shanghai from interior or coastal points to which they evacuated during war years, plus outport buying from Shanghai stocks of merchandise, are further factors which have added to skyrocketing prices and sharply advancing living costs.
8. There has been some flight both from gold bars and Chinese national yuan currency into U. S. dollar notes, the public fearing that restrictions might be placed upon gold bar trading, the movement prompted also by the considerable influx of Chinese national currency from West China. The result has been that the prevailing rate of around CN dollars 600 to 700 in early October dropped rapidly to around 2000 in late October but seems now to have reached a temporary stability around 1500 to 1600 CN dollars to 1 U. S. dollar on the local exchange market. U. S. dollar note expenditures by American military and others are estimated at between U. S. dollars 45 million per month. Thus the influx has been patently below demand.
9. The failure of the Chinese authorities thus far to make a realistic approach to the exchange problem and to make provisions for resumption of export trade at a rate which would make business possible and the fact that so far foreign banks have not been able to work out a basis for operations, has so dampened the prospects for early resumption of foreign trade as to contribute to the general air of pessimism. One American businessman, after arriving and looking over the situation remarked he felt he had returned to China probably nine months too soon, so slowly is the situation shaping itself to permit of business operations.
10. Some hopes are entertained that the Chinese financial authorities may soon announce an exchange rate which will make export business possible, but it seems virtually certain that when this is done, regulations will be instituted requiring the surrender to the Government banks of all foreign currency exchange derived from exports. It is also to be assumed that foreign currency so acquired will be released only on a highly restricted and controlled basis for the financing of what will be regarded as “erdential” imposts [essential imports?]. This prospect dampens enthusiasm for export business as exporters will be reluctant to exchange their commodities for local [Page 1181] currency unless there is a good prospect for reasonable freedom in exchanging same for foreign and domestic industrial products.
11. There is some encouragement for exporters in the recent announcement from Chungking that official monopoly controls over bristles, tea, and other export commodities are being abolished, but exporters are still apprehensive over their chances for securing something more tangible than local currency in exchange for their goods. There are considerable accumulations of export goods in West and Central China, particularly goat skins, bristles, tung oil, nut galls, etc., and more goods will be prepared for export whenever the proper incentive is created. Transportation down river. Little traffic due to shortage of water craft and possible interference by Communist forces but past experience has shown that Chinese traders usually find ways of surmounting these difficulties. Hence some goods are bound to move when conditions otherwise make it possible. Exporters want trucks, petroleum products, motor cars, and numerous kinds of imported consumer goods in return for their products, but are apprehensive that restrictions will be such for a time as to make their wishes unrealizable.
12. Cotton milling, in the past the most highly developed industry in Shanghai, is now operating an estimated 100,000 spindles, using local supplies of Chinese short staple cotton. However, operations are not steady as supplies of raw materials are uncertain as is the outlook for adequate fuel for electrical power supply. An additional 800,000 spindles, partly Jap owned but now taken over by the Chinese authorities, could operate after undergoing some repairs and replacement of missing units of equipment. All British owned cotton mills in Shanghai were stripped of their equipment by the Japs.
13. Some Chinese industrialists would like to reestablish their destroyed or partly destroyed cotton mills but they are uninformed as to whether they will be permitted to participate in American credits for China’s rehabilitation, or whether such credits will be employed only for setting up the categories of enterprises reserved by the Chinese Government as its special field. They learn on inquiry from British suppliers that British cotton milling machinery cannot be delivered under 18 months. They would like to know what the outlook in this respect is in the U. S. and what prospects there may be for financing the recovery of this industry.
14. Chemicals and dyes are needed for sizing, bleaching, dyeing, printing and finishing cotton textiles as stocks are low or non-existent.
15. There is reported to be some small tonnage of foodstuffs including canned goods and powdered milk, some paper and roofing materials, also petroleum products in drums (not in bulk as installations are not yet able to handle bulk oils) en route to Shanghai shipped by [Page 1182] U. S. suppliers to their branches here in an effort to supply dealers and recommence business. The problem of payment for these goods is not settled. There appears to be no assured ability to pick up on the local market U. S. dollar notes and remit these to the U. S. due to presumed regulations still in force against such procedure, so branches here will apparently accept, for collection, various credit instruments held by Chinese customers, such as old drafts, checks, et cetera. Until collections of these items are actually made, these transactions will represent extension of credit to dealers and distributors here. The procedure represents a somewhat realistic approach in efforts to resume business but the risks are considered warranted in efforts to hold old customers and resume trade. Those launching business anew in this way are hopeful that China accounts frozen in 194172 can be freed for financing such import business as many Chinese would thus have free funds, already on deposit in the U. S. which could be used.
16. Foregoing summary of conditions is submitted by Commercial Attaché for information of interested divisions of Dept of State and Commerce, but in light of the world political situation and the depressing tone of this news, it is deemed scarcely suitable for publication. It is suggested, therefore, that the sense of this message be given guarded dissemination among those business interests who are interested and concerned, and be used particularly for the guidance of American businessmen who may feel they may be losing out by inability quickly to return to China. It would seem advisable to acquaint such persons with the facts. When more encouraging developments occur they will be duly reported.
Sent to Department, repeated to Chungking.
- See telegram No. 165, July 25, 1941, 7 p.m., to the Ambassador in China, Foreign Relations, 1941, vol. v, p. 685.↩