Foreign Relations of the United States, 1946, The Far East: China, Volume X

893.24/1–2546: Telegram

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

Chungking, January 25, 1946—9 a.m.
[Received 5:58 p.m.]

155. From General Marshall: Outstanding financial problems.

1.

• a. concur in the conclusion in your 12a that an overall settlement should be sought with the exception of reservations indicated in your paragraph 10 (Urtel 101 of January 17).
• b. Re your 12b. It appears better not to institute negotiations at present. I will notify you when it appears advisable to initiate negotiations. Your comments are requested as to whether institution of negotiations for an overall settlement should await initiation of discussions on further loans to China.
• c. Re your 12c. It appears preferable to conduct negotiations for overall settlement in Washington in which case it would be desirable to reach agreement between Washington and me on basic principles. Further cable from me on basic principles will follow.⁴⁴

2. Re your paragraph 2. I endorse the offsetting principle but point out that amount of Chinese obligations to US will far exceed our obligations to her.

3. I agree with your 3b.

4. Re your 4. I agree that British precedent should be applied to civilian lend lease inventory in Chinese possession on V–J Day and that same principle of utilizing fair current value in selling price should be applied. As for terms of payment, range of bargaining would appear to be between 3c Lend-Lease terms and terms in this settlement.

5. Re your 5. I agree with present policy in Washington as stated in your 5b.

6. Re your 6. It appears desirable to suspend decision pending further developments both of my mission and of negotiations on overall settlement.

7. Re your 7.

a. With respect to the Calcutta stockpile Johnson originally recommended that we offer it to Chinese at cost plus transportation, amount to be offset against our obligations to China for Yuan advances. I accepted his recommendation and offer was accordingly made to Chinese Govt. Johnson now cables from Shanghai that Soong has made counter-proposal that in view of the need for husbanding China’s foreign exchange resources the greater part of which will have to be reserved for currency stabilization, he is unable to consider any other terms than what would correspond to the West China settlement—that is 20% in cash and the balance over a period of 30 years. Johnson now recommends that if Soong will not make an all cash offer even at 20% discount for cash (which I am sure he won’t) the Calcutta stockpile be sold to the Chinese Govt at 3c terms with down payment of 20 or 25% cash. Johnson adds that Soong’s tentative offer would meet with Treasury approval by addition of suggestion if possible of a clause providing for the offsetting principle against our CN⁴⁵ debt. But I am convinced in the light of the West China surplus property negotiations that if this is only made as a suggestion the Chinese will turn it down.

It is obvious that Soong is doing his best to avoid acceptance of the offsetting principle. In my opinion the Calcutta stockpile is one of the best instances we have on which to insist on its acceptance as there is no military emergency involved and other markets exist. I will make a final offer to him of 75% of cost plus transportation with 3c terms of payment provided that any excess of settlement of United States indebtedness to China for army expenditures in China over China’s indebtedness for Calcutta stockpile be applied to the immediate offsetting of her debt on this stockpile. If he turns it down I will instruct Johnson to dispose of the trucks in the Philippines. I believe this procedure is preferable to FLC proposal to advise Johnson that he may dispose of Calcutta stockpile to Chinese under Lend-Lease Act on payment terms to be negotiated.

b. I concur in FLC (Foreign Liquidation Commission) proposal to declare stockpiles in Sukkur and Chabua surplus to FLC for normal surplus disposition as soon as formal rejection is received from China.

c. I agree with your 7b.

8.

• Re your 8a. I agree that settlement of West China surplus should not be treated as precedent and that disposition of East China surpluses and of such surpluses as China acquires from Pacific should include offset feature. But I doubt the wisdom of trying to induce Chinese to permit the $20,000,000 outstanding to us on the West China surpluses to be offset. The West China agreement has already been signed and was dealt with on military emergency basis. At time of its negotiation General Wedemeyer asked Gimo to accept the offset principle and was turned down. (See Emtel 2116 of December 7⁴⁶). The Chinese would most probably take the attitude that it is water over the dam and reopening the question would not serve any useful purpose.
• b. Surpluses physically in East China are small according to Johnson but Navy and Army surpluses in Pacific which could be shipped to China from Pacific are very substantial and constitute a useful bargaining weapon to us.

9. Re your 9. I agree with your view as stated in first sentence of your 9b, pending my obtaining any further relevant information from Admiral Murray⁴⁷ who is making study and recommendations on Chinese naval requirements. [Marshall.]

Smyth

44. See telegram No. 320, February 18, 10 a.m., from the Counselor of Embassy in China, p. 943.
45. Chinese national currency.
46. Foreign Relations, 1945, vol. vii, p. 1191.
47. Rear Adm. Stuart S. Murray, U. S. Navy.