The Ambassador in China (Stuart) to the Secretary of State
[Received February 6—7:20 a.m.]
207. From Adler to Secretary of Treasury. ReEmbtel 179 of January 31, 8 p.m. Was asked by Soong to attend a conference at his house at 11 p.m. February 4. Pei and Rogers had just arrived from Shanghai. Blandford, the Secretary [General] of Executive Yuan,50 and C. T. Chu51 of Soong’s staff were also present. Pei stated that in view of the rise in the price of gold to around CN dollars 470,000 per oz. and of U. S. currency to 8,500–9,000 in Shanghai in anticipation by the market of an adjustment in official rate, the contemplated introduction of an export subsidy of 50 percent and import surcharge of 35 percent were not out of date. The alternatives were (a) to make a drastic adjustment in official rate, (b) a more moderate adjustment in official rate to 5,000 or 6,000 plus a moderate export subsidy and import surcharge, or (c) substantial export subsidy and import surcharge of the order of 100 percent and 50 percent respectively. It was obvious that the consensus of the meeting, including Soong, was in favor of (c). When Soong asked me for my opinion, I replied that I could only give an informal and unofficial one and that it appeared to me personally that the events of the last few days gave further evidence that (c) was at best a stopgap and that as adjustment was inevitable it was best to get it over with. I was in a minority of one.[Page 1051]
(Incidentally I would appreciate your advice and instructions on how to respond to Chinese invitation for expression of my opinion on immediately current technical policy questions, when there is no time for consultation with Treasury. I take great pains to emphasize informality and unofficial character of such opinion and refer all matters of high policy to Embassy, of course, keeping Embassy fully informed. Situation is delicate, as on one hand Chinese would like to implicate us, however remotely, in technical policy decisions, which it is desirable for us to avoid, especially as they sometimes run counter as in this case to our declared international economic policy, and on other hand it is in accord with American policy towards China to help with constructive advice when it is possible to do so without embarrassment. In my opinion it is best to pursue a cautious middle ground, avoiding either completely negative response or vague identification with Chinese decisions, and I propose, with Embassy’s approval, to continue on this course unless you instruct me to the contrary.)
The final decision was to introduce an export subsidy of 100 percent and import surcharge of 50 percent in next 24 hours and a bonus of 100 percent on inward remittances in near future. The Chinese are nervous of the inflationary impact of an exchange adjustment in the present tense situation, and they emphasized the dangers of rapid upward movement of prices with further pressure on budgetary disequilibrium. They are also sensitive to reaction of Shanghai where rise in cost of living index was 25 percent in January and shows no sign of abating.
There was also considerable discussion of gold sales policy. Soong and Pei have decided not to continue sales on same scale as in past, and yet they are fearful of too drastic a cut in sales. Rogers claimed that gold sales were govt’s main instrument in holding Shanghai economic situation together, and that their cessation might precipitate collapse. General atmosphere was one of deep pessimism. Thus it was stated that Chinese foreign exchange assets would last only 6 months or so and that anything could happen then. I ventured to express the opinion that the root of China’s economic financial problem, which of course is immediately tied up with her military-political problems, was her inability to control expenditure and function within the limits of a planned budget, that the general inflationary upsurge would render nugatory and swallow up any temporary palliatives and that the careful husbanding of foreign exchange assets whether in the shape of gold or foreign balances was wisest policy to pursue in these circumstances. Chinese and their advisers insisted on need for buying [Page 1052] time even if it meant nothing more than deferring evil day when bottom of barrel was empty.
Soong informed me privately after meeting that major factor in his decision not to make exchange adjustment was inevitability of military demand for increased appropriations in case of general mark-up of prices. It is to be feared that such a demand will ensue in any case. [Adler.]