The Counselor of Embassy in China (Smyth) to the Secretary of State
[Received 10:48 a.m.]
179. For Secretary of the Treasury from Adler. Exchange situation.[Page 931]
1. Re [1?] of Emtel 178 of January 29, National City Bank informed me on my last trip to Shanghai over weekend of January 19 that it did not mind this new regulation at this time. This opinion was not shared by Chase. I understand British and other foreign banks are unhappy about this regulation.
Prior to this regulation Chase was making both inward and outward remittances, paying out and receiving US currency against TTS58 from and to New York. After this regulation was announced Chase ceased accepting US currency for outward remittances but continued meeting inward remittances. National City Bank which had been making neither inward nor outward remittances informed me in a letter of January 24 that Jian Chen59 said on January 23 that it could pay US currency against all inward remittances and also against its travellers’ checks. He was noncommittal, however, on how such US currency could be obtained. Presumably the status of remittances and payments in US currency will be clarified in scheme referred to in 2 below.
2. Re 2 of Emtel 178. I am reliably informed that Soong’s chief financial advisers have been working on a scheme whereby the exchange market would be left relatively free with a modicum of exchange controls and with the Government intervening in the market when it deemed it to be necessary. Presumably this [is?] the scheme O. K. Yui was referring to in his press conference. General belief prevalent in Shanghai is that scheme will be announced around Chinese New Year, i. e. over this weekend.
The possibility of significant flights of capital occurring under such a scheme must be given serious consideration. It is being argued by some of the proponents of this scheme that the flight of capital would not be serious as flight capital might to a large extent be used to finance imports. But this argument would lose much of its force should the Chinese situation [be?] disturbed or unsettled. The impact of a possible large scale flight of capital on China’s foreign exchange position and on the need for future loans from the United States and international monetary organizations needs no emphasis.
3. I understand O. K. Yui plans to take action during his visit to Shanghai to terminate present monopolistic position of Bank of China with respect to Chinese exports. This monopoly was the subject of several informal conversations I had with both O. K. Yui and Soong in which it was pointed out that not only was such monopoly discriminatory against foreign and other Chinese banks but that it was creating a most unfortunate impression in foreign circles as to the future trend of Chinese Government economic policy. [Adler.]