894A.50/4–2347
Memorandum by the Chief of the Division of Investment and Economic Development (Havlik) to the Director of the Office of Departmental Administration (Humelsine)47
Problem:
On April 12 the Embassy at Nanking informed the Department48 of the intention of the Chinese Government shortly to address a formal communication to the United States requesting financial assistance. It was not made clear to the Embassy whether this request would be in a form requiring approach to Congress for a grant-in-aid, or whether it would request extension of loans under the Export-Import Bank “earmarked” credit of $500 million. On the basis of its review of China’s present economic-financial situation, the Embassy expressed itself in favor of a moderate Export-Import Bank cotton loan to assist Chinese authorities in combating inflationary pressures.
[Page 1106]Action Taken:
The Embassy at Nanking has been instructed49 informally to advise the Chinese authorities that they would be well advised to delay a request for assistance until after reorganization of the Chinese Government, and to endeavor discreetly to ascertain whether the Chinese Government is contemplating a request which would require Congressional action or whether they have in mind utilization of funds earmarked by the Eximbank for possible future credits to China.
Present Status:
Department does not believe that U. S. objectives in China can best be promoted at this time by a comprehensive grant-in-aid program through Congress, or by an extension of credits for projects aggregating the total of the earmarked $500 million Export-Import Bank loan. Aid of this character, or in this magnitude, it is believed, can only jeopardize attainment of the reforms within China which are essential for widespread support of the National Government, and as a basis so far as that is possible for peaceful solution of civil strife and for economic reconstruction. Currency stabilization does not appear a practical possibility until China improves its fiscal system and reduces military expenditures. It is accordingly believed premature to undertake any large credit directed specifically for “currency stabilization.”
It is regarded as essential, however, that as China takes sincere steps toward reorganization and reform to give some positive, selective support. It may be possible under post-UNRRA relief to give assistance in 1947 in meeting essential foodstuff imports, perhaps as much as $35 million. Such assistance, together with a cotton import credit of $40 million available later this year, could permit China to go through 1947 without much diminution of its existing foreign exchange reserves, and would have important psychological benefits. It is believed that selective financial assistance should, so far as that is possible, prevent a runaway inflation or currency collapse; that it should strengthen the participation of liberal elements in the Chinese Government; that it should not be of such magnitude or character as to remove economic pressure for reform and peaceful solution of China’s internal conflicts.
Representatives of American business have recently brought to the attention of officials of the Department and of the Export-Import Bank two projects now under consideration in China: the first for development of airports at Shanghai and Canton, and the second for an electric power generating plant at Shanghai. These projects appear noteworthy in that they contemplate management contracts with [Page 1107] American firms during the life of any loans which may be sought; and because in their formulation concern is being paid to providing specific assurances for repayment of such loans. With respect to a possible Export-Import Bank cotton credit, it has also been indicated that the Chinese Government might be willing to rescind its embargo on export of cotton textiles. Such exports to the Philippines and other areas could provide dollar exchange and offer the Export-Import Bank “reasonable assurances” of repayment of its loan.
Recommendation for further action:
It is recommended that the closest continuing attention be given to China’s developing political and economic situation. That following the recent reorganization of the Government in China50 the Department undertake to give positive selective financial support to the Chinese Government in a way which will best promote attainment of U. S. objectives.
To this end, it is recommended that the Department’s support be given the Embassy’s recommendation of an Export-Import Bank cotton credit; and it is further recommended that favorable consideration be given to credits for reconstruction projects which are basic to China’s needs and offer opportunities for American trade, with suitable safeguards for efficient management and the services of qualified technicians, and which provide reasonable assurances of repayment.