893.51/2–1247: Telegram

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

265. Section II.64 Herewith Embassy’s comments on Soong’s memorandum of Chinese economic situation.

Data in Soong’s memorandum are substantially correct as to facts but are presented as part of thesis that China is on verge of economic collapse. Undoubtedly, financial and economic crisis and process of economic and political disintegration have already set in and will gather pace with continuation of hyperinflation. Most spectacular manifestations will be in large cities, particularly Shanghai—witness events of last few days. But the gravest political aspect of the situation will remain not financial and economic crisis in cities, serious as it is, but the attrition of power of Central Government which will find it increasingly difficult to command allegiance of generals, troops and Government personnel. As responsibility for economic crisis is not divided, Communists are bound to gain in strength, both through their increasing activities and through Government loss of popular support. Some Government leaders—not, Embassy believes, the Generalissimo—are already showing signs of panic, and Embassy is being besieged with appeals for financial aid.
It should also be noted that:
Budgetary situation is actually worse than indicated in first three paragraphs of Soong memorandum, owing to fact that Chinese budgetary estimates are generally exercises in wishful thinking and not based on systematic and realistic planning. On basis of previous experience, 1947 expenditures are likely to be several times the official estimates of 9.3 trillion with revenues yielding only a small fraction of expenditures. NB: Foreign exchange assistance will not make a significant dent on budgetary gap or expansion in note issue in absence of effective budgetary controls, which are impossible with continuance of civil war. In this connection, experience with 1942 half-billion dollar loan65 and with assistance in various forms since V–J Day conclusive.
Cumulative nature and inflationary process renders economic situation, especially in cities, more precarious with each advance on inflationary incline even in absence of sharp increases in rate of increase in prices.
Last paragraph of Soong memorandum strikes a note of forced optimism. Visible signs of expanding exports are not yet to be seen. Nor are the prospects bright for increasing Chinese self-dependence in such commodities as cotton and tobacco, heavy post-war imports of which have taxed and are taxing her foreign exchange resources.
With respect to China’s gold and foreign exchange assets and policy:
Desperate nature of China’s long-term balance of payments, position and prospects have been apparent for some time. (Embassy suggests that Department check with Treasury as to data on China’s foreign exchange assets referred to in Embtel 2149, December 22, 1946.66) She has been living off assets received during the war (1942 half-billion dollar loan and US dollar receipts for yuan advances to US armed forces), and now that it is clear that they may well be exhausted by if not before end of year, she is appealing to US to bail her out. This balance of payments position is a long as well as a short-term problem, and therefore continued further appeals to U. S. to bail her out are to be expected.
It is significant that Soong in his request for immediate assistance asked not for reconstruction and rehabilitation loans which it is understood half-billion dollar ExImBank would primarily consist of but for loan to relieve immediate pressure on Chinese foreign exchange assets and to meet current import needs. Blandford also indicated that Soong is not very interested in Canton–Hankow railroad loan now but is desirous of immediate relief rather than long-term reconstruction loans.
The immediate short-term balance of payments problem is partly a product of China’s past errors, and her refusal to cut her suit to the size of her cloth. She simply could not and cannot afford both to import goods and to sell gold domestically on the scale she has done and is doing. The heavy sale of gold was and is an inexcusable luxury, a fact which was pointed out to China both by State and Treasury as long ago as May 1945;67 the main argument for such sales, namely, their anti-inflationary effect, is invalid in view of the general inflationary upsurge and of China’s critical balance of payments position. China’s management of her official foreign exchange assets and her inability to mobilize sizable private foreign exchange assets stand in pathetic contrast, for example, to record of England where an austerity program has been effectively pursued since 1939 and in a country with much higher living standards than China’s.
Errors of Chinese economic-financial policy and execution of policy as well as over-all situation make it doubtful that even large-scale assistance would in the first place be effectively utilized and in the second be more than a temporary palliative while hyperinflation is running its course.
When all of this has been said, it must also be added that the Communists have it in their power by continuing guerrilla warfare to produce through disruption of communications and excessive expenditure on military insoluble economic situation for Government whose authority in these circumstances will continue to decline.
  1. Section I printed supra.
  2. For correspondence regarding this subject, see Foreign Relations, 1942, China, pp. 419 ff.
  3. Not printed.
  4. See memorandum of May 8, 1945, by the Secretary of the Treasury to the Chinese Minister for Foreign Affairs. Foreign Relations. 1945, vol. vii, p. 1081.