893.00/5–2947: Telegram
The Ambassador in China ( Stuart ) to the Secretary of State
[Received May 30—3:50 a.m.]
1180. Over-all political scene, which continues to be dominated largely by economic and military situation, is deteriorating at an accelerated pace. Within recent weeks existing bad rice situation, brought about in the main by military requirements and hoarding, has added to spreading unrest. On May 18 the Government issued an edict prohibiting student demonstrations which was immediately disobeyed in major urban centers and has resulted in further loss of prestige by Government. At present time students are actively agitating for nation-wide general strike to commence June 2, but student movement thus far characterized by considerable indecision and has not fallen under control of any single group or party. There are strong indications, however, that student movement will assume larger proportions and eventually come under leadership of anti-Government groups, particularly of Democratic League if not Communists.
The reorganized Executive Yuan under Chang Chun is more strongly based than the previous T. V. Soong regime, but the political maneuvers of the CC clique and the pace of economic and military developments have tied its hands to date. Furthermore, in the race of existing problems, non-Kmt30a participants in the reorganized Government have thus far shown no capacity for initiative. However, outlook for next few months is not, in Emb’s opinion, for any spectacular collapse but in the direction of increasing deterioration in Government authority and control. In the meantime, general Government sentiment will continue to look to American aid as a means of staving off further economic and military deterioration.
As general unrest and disillusionment increases, Communist prestige is enhanced, largely through recent military successes in North China and Manchuria. Although completely reliable information is not yet available, it is reasonably clear that in Manchuria Central Govt has suffered reverses along China Changchun railway and at least a partial Government withdrawal in the northeast may become necessary. Recent Communist military activities in Manchuria have been well coordinated with large-scale raids on north China and Jehol rail lines assisted in large degree by the military blunderings of General Tu Li-ming in Manchuria. An important aspect of the north China situation is the evident Communist capability of disrupting communications between the Kailen mines and the sea which will have continuing effect upon the coal supply situation, especially for Shanghai.
[Page 150]Although anti-civil war sentiment is increasing, largely among student academic and business groups, it has thus far not reached a point where it will be decisive in influencing the Government as evidenced by the character of the two statements issued by Generalissimo this week (Embtel 1176, May 2931). The fact that he felt called upon to issue any statement speaks for itself. One indication that there is growing sentiment among liberal Kuomintang members of the Government for peace negotiations was a resolution presented to the Legislative Yuan recently by some 20 of its members calling for resumption of peace talks and reportedly having the tacit approval of Dr. Sun Fo. On May 27, the PPC31a adopted a resolution to invite Communists to resume peace talks which can be interpreted as largely a Kmt maneuver stemming from recent military reverses and growing anti-civil war sentiment, and designed to pin sole responsibility for continuation of civil war on Communists. In the face of Communist military successes, it seems unlikely that the Communists would be prepared to join in peace talks except on terms much more favorable than the Government is apparently now willing to accept.
Nor is there any basis for believing that Communists do not regard time and the tide as working for them or that they would be willing at this time to accept equitable and feasible proposals.
For the immediate future, gravest danger to Government would result in this atmosphere if disaffection commences among National troops with Government unable to supply adequate rations. There has been fairly steady deterioration morale Government forces, especially in northeast, but for the time being it is believed that Government can hold loyalty of best trained and equipped troops. It may be anticipated that Government efforts will be bent towards supplying these troops adequately and in expectation that civilian unrest can be held in check or quelled by show of force.
The emergency economic regulations promulgated on February 16 gained a temporary respite of about 6 weeks to 2 months, as was generally anticipated. By April their effects had worn off and the signs of economic crisis are again clearly in evidence. Prices which remained stable until 1st of April then sharply resumed their upward spiral. Price of rice, best single index, is now over 6 times above December 31 in Shanghai and over 3 times above February 15 and is continuing to rise. There is considerable nervousness with respect to supply of rice, rice riots having occurred in a number of towns. Government is groping both towards relaxation of controls over movement and price of rice and towards experimental rationing scheme for Shanghai, which has fundamentally sound objectives though there is some uncertainty as to how to achieve them.
[Page 151]The next 3 months which are even normally marked by a seasonal increase in price of foodstuffs will necessarily be difficult from point of view of food supply, as winter crop only beginning to be harvested and major crops are not harvested until Augusts–September, while land tax and military requisitions in various forms further complicate situation. Winter crop prospects around average, according to Agricultural Attaché.32 Minister of Finance33 claims Szechwan prospects exceptionally favorable with fair reports from other provinces, but other sources pessimistic about North China plain, South Hunan, etc. Harvest is always dominant feature of China economy and will not be favorable this year. The industrial situation shows no improvement.
On financial side, note issue by mid-May dollars 7.6 trillion, or more than double note issue at beginning of year; this rate of increase in note issue noticeably sharper than for same period in 1946. General budgetary situation remains in imbalance with receipts covering about 40 percent of expenditures in first 4 months of 1947; Minister of Finance has already revised estimated expenditures for 1947 upwards by 100 percent and no doubt further revision will become necessary before end of year. Combined sales of State and Treasury notes issued on April 1 have reached only about US dollars 25 million or its equivalent at official rate with sales tapering off sharply of late. Rising prices have inevitably brought about recrudescence of black market for US currency, though in a restrained and more subterranean form. Official rate of exchange has again been rendered quite unrealistic with consequent falling off in exports and inward remittances.
Embassy proposes to prepare an analysis of course of action open to the US with their several advantages and disadvantages in the light of probable developments.34