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

No. 1572

The Consul in charge has the honor to bring to the Department’s notice a situation which has developed in connection with the Chinese Government’s efforts to stimulate exports by engaging itself in the export business. It buys goods either in Shanghai or up country and exports them to Universal Trading Corporation,22 New York, for sale in the U. S. market. It whites off a Chinese National Currency loss representing the difference between the low official rate of exchange and the rate at which exchange would have to be settled to make business possible at prevailing prices abroad. The Chinese Government is thus in a highly advantageous position, since in most cases it is the only agency which can afford to carry on export business at a loss. In some cases and with a few firms it has apparently written off the loss for the firms in order to effect some export business, thus to create foreign exchange. The private firms, it is understood, [Page 1377] are obliged to turn over their foreign exchange to the Government for addition to its reserves. For a time after February 17 when the official rate of exchange was suddenly raised from CN$3350 to CN$12000 (to US$1)23 and before prices had generally reacted upward to the same degree, it was possible for private firms to move a few shipments. Soon, however, the domestic prices of goods in general again became too high to meet offers from foreign markets and the export business slumped, leaving the Government as the leading exporter, particularly in such lines as tung oil and bristles. The Government then expanded its purchases and export shipments in an effort to create a greater amount of foreign exchange through exports. The degree to which the Central Trust of China, as the exporter, and the Universal Trading Corporation, New York, as the consignee, figured in Shanghai exports to the United States, in the first six months of 1947, was set forth in this Consulate General’s telegram No. 1657 of July 10, 1947.24

The activities of the Chinese Government’s purchasing commission (which functions under the Central Trust) thus continue, but are meeting some criticism in Chinese business circles. An article in the Shanghai Ta Kung Pao, July 25, 1947, by Yang Yu-chuan, holds: (1) that the Government’s purchases of such commodities as tung oil and bristles are tantamount to a subsidy system for exports (for the reason that the Central Trust or Central Bank is obliged to write off a paper money loss representing the difference between the nominal official rate of around CN$11,800 to US$1 and the rate represented by the actual cost in CN Dollars in relation to the foreign market price;—in the case of tung oil, the price at which the product must be exported in US Dollars—to meet New York prices—converted to the CN Dollar costs must be at a rate around CN$32,000 to US$1, as against the official rate ordinarily allowed private exporters of only CN$11,800; (2) the provision of such a rate of exchange to a private exporter, by the Central Bank or Central Trust, is tantamount to supplying export exchange cover at a black market rate; (3) the Government’s purchases hinder the development of regular export trade in that the direct relationship between supplier and exporter is broken (the Government acting as a middle man in cases where the ultimate export is turned over to a private firm to ship).

With the publication of the Chinese Maritime Customs May, 1947 Import and Export Trade Returns for China, there has been considerable [Page 1378] publicity over the fact that the CN Dollar valuation of total exports to all countries jumped up 96.21 percent (from CN$211 billion in April to CN$415 billion in May). Exports of tung oil and textiles were mainly accountable for the increase according to the press reports. An examination of the returns shows that May tung oil exports amounted to 12,164.9 metric tons, valued at CN$95,085,926,000 (this works out at the official rate of US$.08197 to CN$1,000 at 29.06 cents U. S. Currency per pound, which was probably considerably above the New York market price in May) as compared with 7,573.5 metric tons valued at CN$49,342,880,000 in April, 1947. Thus at least CN$46.2 million of the May export increase appears to be accounted for by tung oil shipments alone. The quantity of tung oil exports in May was up 60 percent, value up nearly 93 percent over April. Bristle exports jumped up to CN$60.9 billion in May over CN$12.5 billion in April. Tung oil and bristles are the principal products in which the Government is dealing. Thus the increased exports seem to be largely due to government trading activity.

It is of interest to observe that shortly after General Wedemeyer’s25 arrival in China (July 21) the Central Trust announced that it would appoint a number of exporters to handle the outward movement of export goods which its purchasing commission is engaged in buying up country. It is difficult to state whether this was intended as a gesture for General Wedemeyer’s benefit to indicate non intent to build up government monopoly trading, or whether it was the result of a rising criticism in business circles over the monopolistic trend of the purchasing policy. It seems that the Government purchasing commission has wider latitude than ordinary traders in that it can pay more than private interests would feel warranted in paying, for merchandise, hence has a preferential position in operations in supplying markets up country, not to mention its advantage in making sales through its New York outlet, Universal Trading Corporation, to which Central Trust ships apparently on consignment, i. e. the goods yet unsold at time of shipment. A private shipper would not want to run the risk of consigning shipments, but would ship only on the basis of closed contracts with specific buyers in the United States. At any rate this surmise as to the possibility that Central Trust consigns its shipments to Universal Trading Corporation is made for the reason that Central Trust appears regularly to be invoicing goods shipped to Universal in New York at prices well above the known New York market level.

This latter fact tends to create a confusing picture in the trade [Page 1379] statistics, since part of the country’s exports are thus valued in the Chinese trade returns at fictitiously high levels when converted to U. S. Dollars at the official rate of exchange, hence cannot be accepted as indicative of actual exchange created. The reason for so invoicing goods may be to divide the paper currency loss on the transaction between Central Trust and Universal Trading Corporation, rather than to show the entire loss on the books of the Central Trust.

In the study of this subject reference may also be made to this Consulate General’s despatch (Restricted) No. 1507 of July 18, 1947,26 entitled “Shipments from China to the Universal Trading Corporation, New York City”.

The official purchasing activities and official or channelized exports (through private firms) are designed to break the jam of exports and start goods moving abroad to augment China’s purchasing power. Effort to do so in harmony with American policy and to avoid sharp criticism in China makes it difficult to create an out and out monopoly, as appears to be the official desire. Indications from trade sources are to the effect that the Central Trust is now actually expanding the list of private firms to which the facilities (of absorbing the loss involved in exports) are extended. It appears that certain British exporters may be so favored, among others.

Exports, despite the official stimulus, will continue to run short of normal in many lines, so long as producers up country are short of consumer goods. Producers do not want to hold money. If they cannot exchange the export goods for consumer goods, they will hoard or fail to produce the former. This fact will tend to hold prices at high levels or encourage their further rise.

P[aul] W. M[eyer]
  1. An official Chinese agency incorporated under the laws of the State of New York, October 18, 1938. UTC’s chief functions were to market tung oil and other Chinese products in the United States and to act as purchasing agent in the United States against Export-Import Bank credits to China.
  2. See telegram No. 299, February 17, from the Ambassador in China, p. 1071.
  3. Not printed; it reported that 49 consular invoices had been issued during this period showing Universal as consignee. Their total value amounted to $6,292,337, or 33.78% of China’s exports to the United States. The Central Trust was shown as shipper on 16 of the invoices and accounted for 55% of the value of shipments to Universal. (893.51/7–1047)
  4. Lt. Gen. Albert C. Wedemeyer; for correspondence on his Mission to China, see pp. 635 ff.
  5. Not printed.