102.1/1–3147: Telegram

The Ambassador in China (Stuart) to the Secretary of State

179. From Adler to Secretary of Treasury. ReEmbtel 48 of January 10, 1 p.m.37 Returned Nanking Jan 30.

[Page 1044]
Was informed by T. V. Soong yesterday evening that after protracted discussions he had decided to maintain official rate of exchange for time being but to introduce (a) export subsidy of 50 percent of official rate, (b) import surcharge duty of 35 percent on all goods except those on schedule I (capital goods), raw cotton, foodstuffs, and fertilizers, (c) a bonus of approximately CN dollars 3,000 per US$1 for inward remittances.
He said he had discussed the scheme with the Generalissimo38 and that it was to go before the Supreme National Defense Council on February 3 for approval. If approval is granted, his plan is to introduce (a) and (b) immediately—probably around February 5—and (c) a little later. He asked me to give you advance notice of this scheme.
As you know, Soong’s original intention was to make sharp adjustment in official rate of exchange and his instincts still lean in that direction. I have distinct impression that Rogers influenced Pei and Soong to reject exchange adjustment in favor of new piecemeal plan, which is admittedly a stop gap. Arguments in favor of new plan rest largely on: (a) fear of further immediate rapid mark-up and upswing in prices with exchange adjustment, (b) fear that further adjustments in exchange rate will have to be made at increasingly shorter intervals, (c) fear of rapid undermining of what little confidence (such as it is) there is left in CN currency in event of (a) and (b), (d) Micawber39 like hope that something will turn up.
In my opinion Soong’s original intention sounder than plan to be adopted for following reasons: (a) exchange adjustment has been expected for some time and has therefore to some extent been discounted by traders and merchants, (b) in so far as it is effective it will also have an inflationary impact, (c) it will give at most a purely temporary fillip if any to exports, (d) it will add administrative complications to an administratively already overburdened and creaking setup, (e) it merely defers the evil day.

In general, new plan, which is partly postulated on continued heavy sales of gold in Shanghai, shows to my mind an excessive preoccupation with the nuances of Shanghai market psychology, which in present critical balance of payments situation would appear to be a luxury Chinese can ill afford to indulge in. [Adler.]

  1. See footnote 7, p. 1032.
  2. Generalissimo Chiang Kai-shek, President of the National Government of the Republic of China.
  3. Character in novel “David Copperfield” by Charles Dickens.