893.24 FLC/12–147

The Consul at Shanghai (Pilcher) to the Secretary of State

No. 1904

The American Consul at Shanghai has the honor to refer to Airgram A–858 of November 26, 1947,56 and to previous communications dealing with the disposal of surplus property located on certain Pacific islands, title to which was transferred to China under the Bulk Sale Agreement of August 1946.

The Consulate General has reported periodically that little progress was being made by the Board of Supplies of the Executive Yuan in [Page 1261] concluding sales of surplus property for foreign exchange. Eventually the Central Bank interested itself in the whole proceeding and, as reported in the Airgram under reference, concluded a contract with Bosey on November 25, 1947, wherein it undertook responsibility for the sale of the bulk of the surplus property declared available and not yet removed to the China mainland. It is felt the injection of the Central Bank into the picture of surprop sales may conceivably have been a roundabout, face-saving method of taking the matter out of Bosey’s hands and placing it in those of a foreign organization better equipped technically, and with a knowledge of world markets, to conduct an effective sales program.

A translation copy of the agreement entitled “Contract between the Central Bank of China and the Board of Supplies for the Purchase of Surplus Property on the Pacific Islands” is appended as Enclosure No. I.57 It will be noted (Article 1) that the original “nine-island” program has been expanded to include all such property, wherever situated with the exception of Okinawa, and it is reported that, should further declarations of availability be made by the U. S. military, they will also fall within the scope of the subject agreement. Purchase price (Article 2) to be “paid” by the Central Bank to Bosey is stipulated as 31% of original U. S. procurement cost. In commenting on this phase of the agreement, General P. Kiang, Chief of Bosey, states that his policy throughout has been to sell for not less than 50% of U. S. procurement cost, terming the latter figure as reasonable and necessary to secure an adequate return to China, in view of the heavy expenses incurred administratively and otherwise. General Kiang reports that the 31% figure represents a compromise reached between the Central Bank and the Ministry of Finance, and he estimates that the difference between it and the previous Bosey selling average of 50% will reach US$15 million in actual value when extended over the amount of surprop still to be sold.

E. A. Bayne, adviser to the Central Bank, has consistently advocated the appointment of a qualified [foreign]58 sales agency to handle the Bank’s sales program on a commission basis, thus reducing to a minimum the administrative burden of the Bank in respect to such sales. Certain qualified companies were suggested and considered, and on November 27th a “Memorandum of Agreement” was signed between the Central Bank of China and the Vinnell Corporation of California. Copy of the Agreement appears herewith as Enclosure No. 2, in which it will be noted the Vinnell Corporation is nominated as exclusive selling agent for the Central Bank of all surplus [Page 1262] property within the scope of the Central Bank’s agreement with Bosey. The agreement is to remain in force for an initial period of ninety days from date of signature, with the option of extension provided certain conditions of performance are met.

As previously reported, General Kiang has repeatedly referred to preemptive procurement by the military and other Chinese government agencies as the principal reason why foreign sales could not be realized to any appreciable extent. It now appears, in light of the inauguration of the Central Bank’s foreign sales program, that such procurement will come to an end, or at best be accorded only secondary consideration. Asked to comment on this phase, General Kiang’s rejoinder was that much of the surplus property obtained by the government agencies in the past was found to be in bad condition and hence of little immediate value, for which reason less opposition has now been voiced by such agencies to the foreign sales program than would otherwise be expected. It is at least conjecturable, 1) that procurement for government account may have already overreached itself quantitatively, and 2) that many of the items so acquired cannot be put to immediate practical use.

It appears the way is now cleared for Mr. Bayne to proceed to the Islands for the purpose of negotiating sales (in conjunction with the Vinnell Corporation) for the account of the Central Bank. He will in all probability be accompanied by Mr. Li Fa-tuan as Chinese counterpart and direct representative of the Central Bank, deputized to conclude sales agreements on its behalf.

It may be reasonably anticipated that sales for foreign exchange will receive additional impetus in the hands of the Central Bank’s representatives, and the Department and the Embassy will be kept informed of the progress that is made.59

  1. Not printed.
  2. Enclosures not printed.
  3. Brackets appear in the original.
  4. In despatch No. 1971, December 22, the Consul at Shanghai (Pilcher) reported that Mr. Bayne had proceeded to various Pacific islands accompanied by a Central Bank representative and Major Ivy and that they were laying “the groundwork for bulk sales of surplus property to certain American interests”. (893.24 FLC/12–2247)