Memorandum by the Assistant Commercial Attaché in China (Boehringer)37

Memorandum on Economic Situation in China

In his March 1 speech before the Legislative Yuan Dr. T. V. Soong, who then announced his resignation as President of the Legislative [Executive] Yuan, said in part:

“The present economic crisis is the cumulative result of heavily unbalanced budgets carried through eight years of war and one year of illusory peace, accentuated to some degree by speculative activities.”

President Chiang two weeks earlier, when he announced the promulgation of a series of emergency economic measures, used almost the same terms to describe China’s economic situation. He said:

“The economic crisis we are facing today is the cumulative effect of devastation and dislocation of eight years of war and one year of destructive peace.”

The sweeping emergency measures made effective February 16 were designed primarily to reduce the budget deficit, to control speculation in order to stabilize the currency, to expand trade, to adjust commodity prices and wages, and to provide daily necessities to selected categories of the population in certain key cities. Included were measures to check speculation and buying and selling of gold; measures prohibiting the circulation of foreign currency notes; measures governing Chinese foreign exchange assets abroad; and regulations for the tightening of control over financial institutions.

Many similar measures had been enacted before, even during the early war years, but had never been enforced. The new measures were supposed to be different, for heavy fines and terms of imprisonment were to be meted out to those found guilty of violation and enforcement was to be ensured to a large degree by “strong-arm” methods of secret service and police surveillance.

As freely predicted, these measures were effective for a period of from six to eight weeks, after which the forces of inflation again made themselves felt. The public realized that the much-acclaimed new measures were being enforced only sporadically and that loopholes could be found to evade them, either because of faulty drafting of the [Page 662] legislation or by means of connivance with corrupt officials, including the secret service and police.

Since mid-April, when the effects of this legislative “shot in the arm” began to wear off, China’s economy suffered from increasing paralysis; public confidence in the Government rapidly declined; speculators openly renewed their activities although warily at first; rising commodity prices were largely responsible for rice riots, student demonstrations, and labor disputes. The export trade continued in the doldrums and the budget imbalance was not narrowed. Meanwhile, the Government and the press saw salvation almost entirely in the form of loans from the United States, the arguments put forth to justify the need for these loans carrying the threat that, if the loans were not granted, China’s economy would disintegrate completely.

One cynical American correspondent wrote a short time ago that it was no longer possible to speak of a Chinese economic collapse. He said that the economy had already collapsed and about all that could happen in the future would be decay here and there. This appears to be a somewhat glib attempt at oversimplification. That China’s economy has not fallen apart thus far is due, of course, to the agrarian type of economy with the masses of the population rooted, somewhat unhappily, to the soil. As stated yesterday, crop prospects this year are moderately encouraging and, although some bad spots are to be found in certain key provinces, the general picture today would be much worse if overall crop prospects were gloomy.

Outside of the relatively favorable position with regard to crops, few other favorable factors may be cited. On the other hand, the list of unfavorable factors which may be drawn up is impressive, including the following:

Official indecision and ineptness in the face of the continued economic deterioration;
Continued heavy unfavorable trade balance, which during the first four months of 1947 amounted to about US $105,800,000 or almost 6 times the adverse balance during the same period of 1937;
Shortage of coal from North China which seriously affects power production in Shanghai and other industrial areas and which has tended to increase the already fantastically high industrial production and transportation costs;
Steady increases in wages which cripple the export trade and industrial production;
Multiplicity of taxes, with discrimination in collection of taxes from foreign concerns, which discourages trade and industrial development;
Chinese insistence on sovereign rights, which is used by them as the main argument to explain their refusal to permit foreign vessels to engage in coastal and inland water transportation;
Jockeying for power in Kuomintang with CC-Clique emerging as potentially dominant group in economic field and with Political Science Group, with China’s ablest administrators, in eclipse;
Hope for panacea to cure economic ills, especially loans from the United States, with no real positive action taken by the Government to revive industry and transportation with notable exceptions of cotton mills and Canton-Hankow Railway; and
Badly administered import trade controls which have given cause for complaint by Chinese as well as by foreigners as to favoritism and discrimination.

With from 70 to 80 percent of the national budget being devoted to war purposes, it is obvious that many capable ministers and other Chinese officials are unable to carry out policies for economic reform and development. A case in point involves the recommendations for agricultural development and rural reform made by the China-United States Agricultural Mission38 last November; although these recommendations are fully appreciated and genuine desire to implement them exists, it is doubtful whether the ministries concerned will be in position to carry out even a minor part of them under present circumstances of slashed ministerial budgets.

Mention was made of the unfavorable position of foreign, including American, business enterprises in China. I am sure that American businessmen in Shanghai and Tientsin, for example, are anxious to discuss their problems with the Economic Advisor on the Mission. I feel quite certain that they will make the strongest possible recommendations that their plight be taken into consideration in the event that any proposals to assist China economically are considered. Briefly, they feel they are being discriminated against in such matters as taxation; import allocations, with the so-called “favored families” and Government trading companies being permitted to import goods which they cannot import; and in numerous other ways.

Because the Chinese are jealous of their newly-regained sovereign rights they prevent foreign companies to assist in economic revival. At Hankow, for instance, where foreign ocean steamers once lined the Bund to carry away the products from the flourishing industries, many of which had been built up by foreign enterprise, there may now be seen a few small river boats of the China Merchants Steam Navigation Company, a monopolistic, official concern which charges freight rates on cargo from Hankow to Shanghai which are in excess of those charged by foreign ships for the same cargo moved from Shanghai to New York. Industry is largely at a standstill; foreign firms hesitate to rebuild their bombed out plants or otherwise to reinvest in [Page 664] their businesses. The same situation largely obtains at Tientsin, where Consul General Smyth reports that conditions are so bad that even influential Chinese businessmen have expressed to him the viewpoint that, while business is practically impossible under the present Government, it might be possible to do business under the Chinese Communists. Hope in the Nanking Government is at an especially low ebb at Tientsin, where business men feel that their wishes and views receive scant attention and that Shanghai has been favored in such matters as the granting of import allocations by ports.

Mention has been made of the struggle for power in the economic field which is being waged in the Kuomintang between the CC-Clique and the Political Science Group. There seems to be good reason to believe that Dr. Chen Li-fu was among those responsible for Dr. Soong’s resignation from the Government on March 1 on the charge that his economic policies had failed. Shortly thereafter Dr. Chen presented to the Central Executive Committee of the Kuomintang his proposals for economic reform; these proposals, somewhat modified, were adopted by the Central Executive Committee on March 23 as an economic reform plan which, since May 25, has been under study by the National Economic Council. According to information from Dr. Chen, the “Economic Plan, after a series of discussions and conferences, has been revised and passed by the plenary meeting of the National Economic Council on July 21 …39 There are no major changes either in contents or in spirit of the original proposals.” He added that the Plan will now be referred to the State Council for ratification.

Full details of Dr. Chen’s original proposals and of the Plan as presented to the National Economic Council have been reported to the Department of State.40 As you will no doubt be hearing of the Plan during your visit in Nanking and elsewhere in China, I would like to make a few brief remarks regarding it. The Plan is actually an “omnibus” of plans, and many of the recommendations therein are covered by laws already enacted but not enforced. Divided into two parts, Part I of the Plan refers to the deteriorating economic situation and the failure of the economic measures thus far enacted to improve conditions; Part II is much more lengthy and contains an outline of the suggested policies and plans for economic reconstruction. The Plan contains recommendations under 15 headings covering the following: [Page 665]

Full utilization of manpower to boost production;
Increased production of goods to stabilize commodity prices;
Stabilization of the value of the currency;
Reform of the banking system;
Rural reforms;
Development of industries with recommendation that the Government should map out an over-all economic plan and specify the scope of state, provincial, municipal and private enterprises and fix annual production quotas;
Development of commerce with a view to encouraging exports and restricting imports so as to attain a favorable trade balance;
Development of communications by joint efforts of the Government and private enterprise;
Financial measures aimed to increase production, to increase the Government’s revenue and to prevent corruption, and to reduce expenditure;
Reforms in food administration calling for abolition of compulsory borrowing of foodstuffs in 1947, more reasonable collection of land tax in kind, and adoption of a granary system to stabilize grain prices;
Diversion of idle capital from speculation to productive channels;
Encouragement of foreign capital, including measures to expedite remittances from overseas Chinese;
Rational adjustment of treatment accorded public employees, school teachers and Army personnel;
Severe punishment for persons who utilize political influence to benefit private enterprises; and
Strengthening of the economic organization with over-all planning of the nation’s finance and economy.

Study of the Plan reveals that many of the proposals therein are reasonable and, if carried out, would prove beneficial. However, question arises as to the motives which prompted the reactionary CC-Clique to sponsor seemingly liberal and much-needed reforms. The suggestion has been made that Dr. Chen cynically sponsored the drafting of the Plan as a move to enlist the support of unwary liberal elements in the Party and outside, and with no real desire to be called upon to implement the Plan. I do not think that that suggestion is now valid, as Dr. Chen has given every evidence that he fully intends to see that the Plan is implemented; he is Vice Chairman of the National Economic Council and has asserted that the Council will be charged with the duty to see that the ministries and other agencies concerned carry out the recommendations in the Plan.

Regardless of what opinions one may have of Dr. Chen, it seems obvious that he has consolidated his position as a powerful leader in the economic field and that, in that field, he is a force to be reckoned with in future. Meanwhile, however, we cannot wait for Dr. Chen to solve all of China’s economic problems with his schemes. Positive [Page 666] measures are needed now to arrest the disintegration and threatened collapse, with the ever-increasing trend toward the extreme left.

Regarding the forms of economic assistance which the United States might give to China, I should like to mention at first the post-UNRRA program which provides that the sum of $350 million be spent for emergency relief purposes in certain countries of Europe and in China. The Embassy, which has been carrying on negotiations with the Chinese authorities regarding their relief requirements for the post-UNRRA year ending June 30, 1948, believed that the amount that would be allocated to China was to be $60 million. Subsequently, however, the Department of State indicated that the figure probably would be $30 million, a total which the Department stated would be sufficient to conduct only a moderate food relief program and a small medical program. The Embassy therefore recommended that a figure closer to $60 million be fixed, pointing out that the post-UNRRA program was one of the few means whereby the United States could give aid to China. Mr. Butterworth is now discussing that and other points regarding the program in Washington and the Embassy expects to receive soon the necessary information with which to reach an agreement with the Chinese Government.

In the discussions with the Chinese, the Embassy has repeatedly pointed out that the post-UNRRA program is in no manner to be considered a continuation of the UNRRA program; that it will be an American program throughout and will be administered on our terms; and that it will be administered honestly, efficiently and effectively. American and other voluntary agencies will be called upon to participate in the program, principally in regard to use of medical supplies but, in famine areas, possibly also in the distribution of foodstuffs.

Regarding other forms of possible relief to China, there appears to be a choice of two alternatives, the first including credits extended by the ExImBank for purchase of cotton and other raw materials to be used for current production, and the second credits for long-range development plans. While some immediate relief might be given under the first alternative, whereby the National Government would be bolstered financially and some export trade in finished products developed, there arises the question of repayment within a few years. China’s precarious foreign exchange position seemingly would make her a poor risk for ExImBank credits for purchase of cotton and allied products on a short-term basis unless a program could be worked out whereby a portion of the cotton yarn and cloth, for instance, were exported and the proceeds therefrom used to repay the loans.

With regard to long-range credits for economic development, the Chinese have expressed a desire to have access to ExImBank credits for such projects as the rehabilitation of the Canton-Hankow Railway [Page 667] and reconstruction of other railways south of the Yangtze River; the Tangku harbor development; the Yellow River bridge project; erection of fertilizer plants and rehabilitation of existing fertilizer plants: and the like. The Embassy believes that other applications for ExImBank credits may possibly have been made direct to the Bank by the Chinese Embassy in Washington, concerning which it has no details. It seems fairly certain that still other applications and suggested forms of aid will be brought to the attention of the Mission.

As you may know, General Marshall favored the proposal to give ExImBank aid for the rehabilitation of the Canton–Hankow Railway, primarily on the ground that it was distant from the civil war operations and that it would contribute materially to the economic revival of an important section of China. I am sure that Mr. Walker could tell us why this application was rejected; it seems safe to say, however, that the all-important question of repayment could not be answered satisfactorily.

This question is obviously the crux of the problem of how to aid China. I will not attempt to answer it beyond saying that, if the ExImBank should decide to grant sizable loans, provision should be made for the presence in China of representatives of the Bank authorized to check on the Chinese performance and use of the money given them and to see that provision is made for regular and prompt payment of interest and capital. The Embassy’s current files contain copies of correspondence with the Department of State and with the Ministry of Foreign Affairs regarding debts owed American firms incurred for equipment and services supplied China during the past 30 years or more. While the problem of repayment of this money cannot be tied up directly with discussions with the Chinese regarding new ExImBank credits, the Embassy feels that the American citizens concerned would have justifiable cause for complaint were it known that their interests were disregarded.41

  1. Copy transmitted to the Department by the Ambassador in China in his despatch No. 924, August 12; received August 18. The memorandum was presented to General Wedemeyer on July 24.
  2. For correspondence concerning this mission, see Foreign Relations, 1946, vol. x, pp. 1268 ff.
  3. Omission indicated in the original memorandum.
  4. See despatch No. 652, April 21, and telegram No. 1518, July 12, 2 p.m., from the Ambassador in China, pp. 1099 and 1157, respectively; also the Ambassador’s telegram No. 744, April 5, United States Relations With China, p. 735.
  5. For correspondence on the financial relations between the United States and China, see pp. 1030 ff.