102.1/1–2547: Telegram

The Consul General at Shanghai (Davis) to the Secretary of State

196. From Adler and Casaday to Treasury.

In an interview with Pei yesterday he made following offer with respect to Army and Navy expenditures (reference your 54, January 14 to Nanking31 and our telegram 174, January 22, repeated Nanking 120). Central Bank willing to make no-rate CN dollar advances to Army and Navy, settlement to be made at special rate to be determined on basis of cross-rate between Hong Kong open market rate for CN dollar and Hong Kong open market rate for US dollar as of date on which advance is made. Pei said in defense of this proposal that Central Bank could not very well transact business at Shanghai open market rate for US currency, a rate he added it had declared illegal and for private transactions in which arrests are intermittently made.
As you know, Pei and Rogers32 recently visited Hong Kong in order to persuade Hong Kong authorities to curb smuggling into China and restrict open market currency operations. While degree of success attained by Pei and Rogers in their negotiations with Hong Kong authorities not yet known, Adler nevertheless asked Pei whether his offer would include the provision “for the time being” in order to [Page 1042] safeguard us against any sharp break in Hong Kong open market. Pei readily agreed. We would, of course, be kept posted daily of Hong Kong open market rates to ensure scheme’s working economically. Adler proposes to visit Hong Kong for a few days in next 2 weeks if possible to study situation at first hand.
Pei was notified that his offer would be transmitted to Treasury. We recommend acceptance of this offer, as (a) remedial action most urgently required, (b) in light [of] course of negotiations Chinese unlikely to improve on this offer, at this time, (c) market in Hong Kong does not appear to be thin, and (d) above cross-rate fluctuates in range of 10 percent below the Shanghai open market. Analysis reveals that the range is usually less than 10 percent, though when Shanghai open market rate takes a sudden upward spurt, Hong Kong open market cross-rate may lag behind at between 10 and 15 percent less than Shanghai rate for a day or two, generally not longer.
For your information Chinese authorities have made offer for similar basis of settlement with respect to United States Government acquisitions of and improvements to real estate under FLC33 agreement of August 3034 which Embassy finds acceptable, Adler concurring.
Your urgent flash reply addressed to Shanghai would be appreciated, as both Army and Navy are short of CN dollar funds. Army in any case anxious to procure no-rate advance immediately on basis of Soong’s agreement in principle reported in our telegram 174 of January 22. Adler will be in Shanghai for a few more days until matters connected with exchange arrangements for Army and Navy expenditures and real estate acquisitions under FLC agreement are cleared up.

Sent Department 196; repeated Nanking 133. [Adler and Casaday.]

  1. Not printed.
  2. Cyril Rogers, British adviser to the Central Bank of China.
  3. Office of the Foreign Liquidation Commissioner.
  4. See footnote 6, p. 1031.