893.5034 Registration/2–1546: Telegram

The Counselor of Embassy in China (Smyth) to the Secretary of State

301. On February 12, Legislative Yuan committees, to which Supreme National Defense Council recommendations of January 14 re deletion of “doing business” provisions of articles 7 and 292 of company law had been referred, voted not to accept such recommendations and to return the matter to the Council for its reconsideration. As reported in Embtel 107, January 15, 3 p.m., Dr. Wang Chung-hui, Secretary General, Supreme National Defense Council, previously assured us that only procedural action in the Legislative Yuan remained to carry out the decision of the Defense Council. It should also be mentioned that on January 30, the Chinese Government spokesman, P. H. Chang, stated that the revised company law would be enforced from March 1 with deletion of “doing business” requirements from articles 7 and 292 and a public statement to same effect was subsequently made in Shanghai by O. K. Yui, Minister of Finance.

According to the Embassy’s translation of a Chinese language article which appeared in the Shang [Wu Jih] Pao on February 13, reasons for their action were stated by the legislative committees as follows:

(Begin translation) (a) Formerly when unequal treaties were in force, most foreign countries enacted special laws enabling their merchants in China to incorporate companies which had unusual privileges such as not being required to do business in the country of their origin. Friendly nations have now adopted the principle of equality and reciprocity. The special laws, therefore, should be repealed so that all traces of special rights will be eradicated. The Americans object to the two characters “ying yeh” (business) because there is a law known as the China Trade Act9 which is a hindrance to Americans doing business in China. The United States therefore should devise means to eliminate this hindrance.

(b) Companies which do business in their country of origin and establish branch offices in China should be permitted to do business as foreign companies. The corporations which do not do business in their country of origin and operate industrial and/or commercial enterprises only in China should be incorporated in accordance with local law and treated in the same way as Chinese companies. This is in accordance with the usual practice enforced by other nations in conforming with the principles of equality. China needs foreign capital to assist commercial and industrial reconstruction. Liberal conditions have been granted in the stipulations of item 4 of the [Page 1299] principles for the first stage of economic reconstruction. The new company law imposes no restrictions on the joint establishment of corporations by foreigners and Chinese except to require that the Chairman of the Board of Directors must be Chinese. Foreigners and Chinese, therefore, may jointly and without hindrance incorporate companies.

(c) It now appears that negotiations are in progress for the signing of a Sino-American commercial treaty.10 Since the time the US forwarded a draft treaty to China, China has been negotiating on the basis of the provisions of the revised company law. It seems, therefore, that it is not advisable at this time to make any amendments to the original text. It is resolved that it is not necessary to delete the two characters “ying yeh” (business) which follow the two characters “ting chi” (register) which appear in articles 7 and 292. (End of translation.)

To assist in evaluation, it should be pointed out that the apparent, although perhaps the nominal, leader in the opposition within the Legislative Yuan is Professor Ma Yin-chu. Additionally to his linking of the present issue to the themes of nationalism and correction of abuses which are associated in the Chinese mind with the period of “unequal treaties”, Professor Ma has made as his main point in public discussions and in the Legislative Yuan that the change in articles 7 and 292 was being sponsored by bureaucratic capitalists, i. e., Chinese Government officials grown rich on “squeezes” or encroachment on state-owned enterprises. Dr. Ma regards the provisions of article 7 and 292 as passed by the Legislative Yuan as necessary in order to prevent Chinese capital from entrenching itself in foreign-named corporations. A fuller account of the views expressed by Professor Ma, especially in his speech at the National Central University on February 4, together with a summary of subsequent press comment, is being forwarded in a separate message.11

In our commercial treaty discussions on February 14, we expressed concern that this matter had been linked with treaty negotiations in a public statement. Dr. Wang Hua-cheng, Director, Treaty Dept, Foreign Affairs Ministry, expressed his similar regret at this development. He explained that Dr. Chang Chao-yuen, principal drafter of the revised company law, was consulted by representatives of his dept during its study of American draft and preparation of its counter-proposals with respect to rights of foreign corporations. Dr. Chang Chao-yuen has also been designated as the representative of Legislative Yuan who is to be kept informed by Foreign Ministry as to progress of treaty negotiations and to assist in securing approval of treaty by Legislative Yuan.

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On February 13, we called upon Dr. Wang Chung-hui, Secretary General, Supreme National Defense Council, who confirmed action taken by Legislative Yuan, although stating that an official notice thereof had not yet been received by the Council. He indicated surprise at this development and said that Professor Ma appeared as the leader of the opposition. He stated that he agreed with those who favor deletion of the “doing business” provisions of articles 7 and 292, that he would discuss the matter fully with Dr. Sun Fo, and that he would also survey the attitude of other members of Supreme National Defense Council to ascertain probable result of its reconsideration of point in question. He pointed out that if Council were to recommend a second time deletion of objectionable words, Legislative Yuan would have no further recourse.

On February 14, Dr. Wang Chung-hui informed us that Dr. Sun Fo, President of Legislative Yuan, would support Council’s recommendation for deletion of words “doing business”. He said the matter would probably come up for reconsideration at next fortnightly meeting of Supreme National Defense Council on February 25; he hoped that Dr. Sun Fo would return to Chungking by that time, but, if not, would urge latter to put his views in writing for presentation at this meeting.

It is possible that highly placed members of Chinese Government, both in Supreme National Defense Council and in Legislative Yuan, while not wishing to appear publicly in opposition to views expressed by our Government, have nevertheless privately given free rein to their subordinates on this matter. Some phases of this development are difficult to explain in other terms.

We shall keep closely in touch with Dr. Wang Chung-hui and other Chinese officials and report promptly to the Dept concerning course of developments. It is possible that we may receive prior assurance that on February 25, the Council will instruct Legislative Yuan to delete objectionable provisions or that we shall know that consideration of the matter will be postponed and the former would resolve our immediate difficulties; the latter would be preferable if representations are to be made by General Marshall12 to the Gimo. Not to mention the latter’s present absence from Chungking and preoccupation with pressing problems of military reorganization, it would be preferable if the urgency of the situation does not require earlier action to delay these representations until the whole issues involved in concluding a mutually satisfactory commercial treaty are clarified. In thus linking our further action with respect to articles 7 and 292 to other points involved in the commercial treaty, Gen. Marshall would not be in the [Page 1301] position of interfering in an internal public legislative dispute. He could bring the whole weight of American influence to bear on these larger issues and could, if necessary, refer to the National Advisory Council’s resolution on January 15 as quoted in Deptel 103, January 17, 7 p.m.,13 that reasonable progress toward a mutually satisfactory commercial treaty is regarded as an essential condition precedent to our Government’s consideration of measures for financial assistance to China.

The issues and problems we are facing on the company law are closely connected with those which are appearing in negotiation of related sections of treaty concerning rights of corporations, finance, mining, land laws, travel, etc. (See Embtel 318, February 18, 9 a.m.,14 for our fuller evaluation of points raised in commercial treaty discussions.) (A basic question is emerging as to how far and how fast it is appropriate and desirable for our Government to go in attempting to encourage the modernization of Chinese legal structure and the administration of its laws.) Please inform Commerce.

The Embassy will appreciate the Dept’s urgent instructions.

  1. Approved September 19, 1922; 42 Stat. 849.
  2. Regarding the treaty of Friendship, Commerce and Navigation of November 4, 1946, see the bracketed note, p. 1227.
  3. Not found in Department files.
  4. General of the Army George C. Marshall, Special Representative of President Truman in China.
  5. Ante, p. 920.
  6. Not printed.