893.00/9–2047: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received September 20—10:30 a.m.]
1967. Political, military and economic position of Central Government has continued to deteriorate within recent months in accordance with previous expectations (reEmbtel 1180, May 29). Currently the cumulative effect of the absence of substantial, financial and military assistance expected from the Wedemeyer Mission and renewed Communist military activity are intensifying the Chinese tendency to panic in times of crisis.
Department will have noted renewal of Chinese efforts to obtain favorable action on ammunition supplies (reEmbtel 1902, September 11 and Embtel 1916, September 1269) and despite Embassy’s statements that ammunition question is one for decision in [Washington], constant inquiries are received with regard to action taken. More recently there has emanated a series of thinly-veiled suggestions from senior officials of the Government obviously intended to convince the Embassy that if aid is not soon forthcoming from the US, it may become necessary for China to seek assistance from the Soviet Union. It has even been suggested to the Ambassador that the Soviet Ambassador to China, whose return is expected shortly, might be asked to mediate in the Civil War and that he would be glad to accept.
Although the Embassy does not overlook the remote possibility of a Sino-Soviet rapprochement and is following the situation closely, it considers that such talk is primarily for effect on the US and secondarily reflects a feeling of desperation among Chinese leaders. Department will realize that under present circumstances, and prior to any action as a result of General Wedemeyer’s report and recommendation, a Chinese paper flirtation with the Soviet Union by the Vice-President and President of the Executive Yuan70 is a maneuver reminiscent of similar Chinese tactics in the past, of Dr. Sun Fo’s letter to New York Times in January 1942. An added element in the overall situation, of course, is the increasing Chinese fear that the [Page 290] US is tending more and more to shift center of gravity of its Far Eastern policy from China to Japan.
At the moment the most serious concern of the Government is the sweeping large-scale raid of Liu Po-cheng into Anhwei and southern Honan which commenced about August 12 (reEmbtel 1823, August 2871) and has been increasing in momentum since that time. There is much speculation with regard to Liu’s ultimate objective which is variously interpreted to be the crossing of the Yangtze River at some point between Wuhu and Hankow and advancing southward to establish Communist bases in Fukien or Kwangtung, or even to make connection with the Communist-led forces of Ho Chi-minh in Indochina. It is more likely [that Liu has] no more concrete objective in view than to harass a wide area, further embarrass the Government and cause it to withdraw troops from critical areas in pursuit.
Three divisions have already been withdrawn from southwestern Shantung and despatched in pursuit of Liu. Concurrently Yeh Chien-ying, alleged by Government to have been contained in Shantung in Yellow River delta area, has moved his troops southeastward and crossed the Yellow River in the vicinity of Tungo, with a force of approximately 40,000 men. The possibility suggested in Embtel 1823 of August 28 appears now to have become fact and recent Government optimism with regard Shantung has been proved largely unwarranted.
In Manchuria the military situation remains quiescent. Arrival of Ch’en Ch’eng and military reforms inaugurated by him have had excellent effect upon overall military and civil morale. However, sixth Communist offensive Manchuria is imminent and seems to be waiting only upon further drying of roads which has been delayed this season by unusually heavy rains. It is doubtful that changes made by Ch’en Ch’eng will be in sufficient time to counteract serious decay which set in under Hsiung Shih-hui and Tu Li-ming regime. Furthermore, as pointed out in Embtel 1760, August 20, it is likely that on-coming Communist offensive will be coordinated with Communist military activity North China to preclude the despatch of adequate replacements or reinforcements outside the Wall. Current activities of Liu Po-cheng in Central China and Yeh Chien-ying in Shantung now tend to confirm this belief. Communist radio broadcasts state that offensive to “liberate” China north of the Yangtze has been launched, but it is unlikely that Communists will be successful in attaining this objective within foreseeable future. Their maneuvers, however, will undoubtedly further shake the economic and political structure of the Central Government throughout China but critically so in the north.
[Page 291]Most disheartening features of present Chinese situation in economic as in other spheres are overt reliance on deus ex machina of American aid to extricate China from its pressing problems and corresponding lack of self-reliance and self-help in tackling them. While introduction of “official” open market rate of exchange on August 17 marked a welcome departure in this respect,72 toying with premature and ill-considered project for introduction of silver coinage, expectation that China’s balance of payments deficit will be partly covered in some form or other by the US, and continued passivity in face of mounting hyper-inflation clearly reflect dominant trend of dependence on outside assistance. While there is a prima facie case for foreign aid, for instance, to cover part of balance of payments deficit, it would be immeasurably strengthened if there were signs of a concerned and aggressive policy on part of Government.
Too early to judge what impact of establishment of “official” open market rate of exchange on China’s balance of payments will be, as much depends on whether political pressures will counteract influence of foreign advisers who rightly wish to hug black market rate for US currency. Nevertheless, its establishment is a healthy if belated step in right direction. Central Bank had been losing foreign exchange at rate of $30 million a month, $20 million for financing gap between commercial imports and receipts from exports, et cetera, and $10 million for Government imports and expenditures abroad. In its first month of operations Exchange Equalization Committee’s receipts have slightly more than covered outgo on commercial imports, but unless this trend can be maintained, China’s existing foreign exchange assets of $260 million, including 45 million ounces of silver, barely sufficient to last another 9 months.
News of appointment of Wedemeyer Mission and its presence in China rekindled hope of American aid and thus functioned as a temporary curb on rising prices in July and August. But since beginning of September, Shanghai wholesale prices have risen over 20 percent and price of rice by over one-third, in spite of fact that summer crops currently being harvested give indication of being at least tolerably fair. Since Embtel 1180 of May 29, they have increased over 85 percent and 50 percent respectively.
Note circulation at the end of August CN $13.7 trillion or 64 percent more than at end of May and 270 percent more than at beginning of year. Thus higher rate of increase of note issue in first 5 months of 1947 has been maintained. Budgetary deficit and expansion of note issue since beginning of year almost identical. Budgetary receipts continue to remain at below 40 percent of expenditures of $16.5 [Page 292] trillion in January–August and it is to be feared that rising prices and current military situation will lead to a further deterioration in this respect.
Overall outlook continues to be one of steady deterioration of Government position and creeping paralysis of administration. Central Government now in position of an extremely sick man whose will to live begins to show signs of weakening.