102.1/7–1847: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received July 18—8:25 a.m.]
1550. To State and Treasury from Adler. ReDeptel 874 of July 16. Saw Shao July 10 and he said Governor had informed him that agreement in its present form was unsatisfactory and required renegotiation as Hong Kong cross-rate was too high. I replied that our complaint was precisely the reverse; whereas previously Hong Kong cross-rate was between 80 and 95 percent of Shanghai open market rate it had for most of period since May 15 been only between 60 and 70 percent. Shao at first took position that last two purchases by Army and Navy earlier in the week should not be settled on basis of Hong Kong cross-rate, but when I pointed out this would constitute retroactive as well as unilateral termination of agreement, he abandoned his position. However, he insisted that new basis was now required. I [Page 1166] asked him what basis he proposed and he made quite unrealistic and unacceptable offers. When I saw Governor later in the day and on July 11 he was vague and asked me to keep on negotiating. Shao was inaccessible on July 12 and when I saw him again on July 14 he at first maintained unreasonable attitude and then confessed what I had already observed, namely, that while Governor might have been pliant in his conversations with me Governor’s instructions to him were firm and rigid. He gave me distinct impression that Central Bank, being highly embarrassed by having to carry on transactions at other than official rate, would prefer us to go into open market without asking Central Bank’s sanction.
For your information, on afternoon of July 14 Central Bank tried unsuccessfully to perpetrate a crude deception on Navy. Governor of Central Bank will be away in North China until early next week and Shao will be in Hong Kong for another 10 days.
In view of Central Bank’s intransigent uncooperativeness, of Governor’s evasiveness which was manifested in May as well as in current negotiations, and of fact that Marine CNC proceeds will be slow in becoming available, it is recommended that I inform Governor on his return from North China that unless we are given a reasonable arrangement we will be forced to adopt appropriate alternative financial measures. Only drawback is that without arrangement with Central Bank we would probably have no working formula for acquisition of real estate under FLC agreement. But if Central Bank remains unwilling to accept reasonable arrangement, there would appear to be no alternative. Attitude of Central Bank is the more inexplicable in view of numerous requests China is making for assistance from the United States.
Should Central Bank continue to be unreasonable, and should we be forced into open market, there are a number of alternatives:
- (a)
- Army, Navy and Embassy can pay alien staff in U. S. currency.
- (b)
- Army, Navy and Embassy can cover CN requirements, excluding alien staff salaries, by sale of U. S. currency.
- (c)
- Army, Navy and Embassy can cover CN dollar requirements by sale of checks or drafts to reputable American firms or by transfers to their accounts in New York.
- (d)
- Same as (b) and (c) except that alien staff salaries would be paid in CN dollars. Their payment in local currency would on whole appear preferable for time being.
Advantages of (c) over (b) are that it would yield a better rate and would be easier to operate, but disadvantage is that it would render U. S. Government liable to accusation of favoritism by firms not included. In any case, whichever arrangement were adopted, it would [Page 1167] be advisable to require Army and Navy to consult Treasury and Assistant Treasury Attachés on their purchases.
In view of urgent need for CN dollars by Army, Navy and Embassy, speedy reply would be appreciated.
Have consulted Ambassador who concurs in above, [Adler.]