893.6363/9–1746: Airgram

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

A–98. The conversation to which reference is made in Department’s A–151, August 26, 1946, was held in the home of Dr. Wong Wen-hao. Although the informal memorandum left with him was based on the Department’s 484, July 19, 7 p.m., and therefore was concerned with the Chinese petroleum situation, the discussion dealt mainly with the broader economic issues in controversy. He was clearly given to understand that it was being held with him in his capacity as Vice President of the Executive Yuan.

The Embassy also took action similar to the Department’s and acquainted the British Counselor of Embassy with the general tenor of informal representations made to Dr. Wong.

As requested there is transcribed below the text of the informal memorandum left with Dr. Wong:

“The Embassy and the Department of State have been informed by the representatives of the American oil companies concerning the general course of their discussions with you in recent weeks. It is our understanding that earlier negotiations for establishment of a Sino-foreign company for joint development of the Kansu field were not resumed in these talks, the American (and British) companies desiring a prior clarification of the intended functions of the recently established Chinese Petroleum Corporation and of the implications for them of the apparent intention of the Chinese Government to nationalize a large part of the oil industry.

“A matter of major concern to the oil companies appears to have been the assignment by the Chinese Government of regulatory functions with respect to rationing, price control, and import licenses to the Chinese Petroleum Corporation, which thus is enabled to function in a dual capacity both as competitor and government regulatory body. Its powers to dictate terms of distribution and market participation has potentialities, at least, for discrimination and impairment of American capital investment.

“It is our understanding that American companies have expressed willingness to invest 50 million dollars for new construction and for [Page 1389] rehabilitation of their present facilities only if adequate assurances are given of nondiscrimination in marketing, and that in their view such assurances would necessarily include transfer of regulatory authority from the Chinese Petroleum Corporation as a competing government company to a neutral (impartial) government agency. We are requested to inform the appropriate Chinese authorities that the Department of State considers this position of the American oil companies the only commercially tenable one in the premises.

“Oil companies’ reluctance to invest $50,000,000 in rehabilitation of pre-war marketing facilities and $80,000,000 more for participation in new indigenous producing and refining industry derives solely from uncertainty concerning their future status which is occasioned by the apparent Chinese intention to nationalize a large part of the oil industry. The Department of State points out that their reluctance will probably be shared by other prospective American sources of private capital, particularly in view of reports of establishment of government owned enterprises in a number of fields, such as textiles, marine products, iron and steel, shipyards, electric appliances, et cetera. While recognizing China’s sovereign right to establish government owned industrial units, or to nationalize existing enterprises, the United States Government regrets any Chinese economic policies which discourage a sound inflow of private capital on reasonable terms at a time when total capital Chinese requirements for economic recovery and expanding industrialization exceed available supplies of United States public funds.

“The Department of State informs us of our Government’s view that the purpose of extension of credits to China from the United States public funds is to create a net increment in economic development beyond that which is feasible from private channels. Such funds are not designed (a) to replace or substitute for private capital where such is available and willing to participate on reasonable terms; or (b) to finance projects the purpose or result of which is to acquire or displace existing economically feasible private enterprises. On these grounds and because also our Government believes that high risk enterprises, such as oil development, should be financed by private capital, we are informed that it is unlikely that United States public funds will be available to assist the Chinese Government in development of indigenous or imported crude products.”