893.50 Recovery/7–2648

Memorandum of Conversation, by the Chief of the Division of Chinese Affairs (Sprouse)

Participants: Mr. Pei Tsu-yee, Chief of the Chinese Technical Mission
Mr. Butterworth, Director for Far Eastern Affairs
Mr. McBride, PED92
Mr. Sprouse, CA

Subject: Certain Aspects of Contracts for Petroleum Products Concluded by the Chinese Government on July 12, 1948 and Presented to the Department as a Basis for Withdrawals from the $125 Million Grants under the China Aid Act.

Mr. Pei called this afternoon by appointment to discuss the above-described subject. He stated that, following his discussion of this matter with Mr. Butterworth on July 23, he had asked certain Chinese officials for clarification of various points which seemed to need explanation. [Page 280] Some of the information needed would have to be obtained from China since it was not available in Washington.

Mr. Butterworth explained to Mr. Pei that the Chinese Embassy had withdrawn its request for payment under the $125 million grants to cover the one percent discount to be paid under the contracts to the Central Trust and had substituted another request deleting this amount. He also explained that he and Mr. Sprouse had this morning discussed with Mr. Lovett the matter of the contract concluded between the China Petroleum Company, Limited, as agents in China for Sterns, Incorporated, and the problem of allocations to this Company. He pointed out that the general policy of the Office of International Trade of the Department of Commerce was to grant allocations in accordance with the historical position of suppliers in the various markets of the world and that for this reason the China Petroleum Company would have difficulty in obtaining approval of allocations necessary to enable it to meet its requirements from the United States under the contract. However, in view of the urgency of the needs of the Chinese Air Force for the aviation gasoline under this contract, the Department had decided that it would request the Department of Commerce to approve the necessary allocations under this contract. Mr. Butterworth emphasized that this action was being taken only because of the military emergency and that it should not be taken as a precedent for future contracts which the Chinese Government might conclude for petroleum products. He further suggested that the Chinese Government should bear this circumstance in mind when it placed further contracts for such items and concluded that it could not be assumed that the Department of Commerce would act favorably on this Department’s request but that the Department of State wished to do what it could to assist the Chinese in obtaining approval of the necessary allocation.

Mr. Pei indicated his understanding of the circumstances and emphasized that even though the allocations should be approved the Chinese must clear up any phases of this transaction which appeared to be doubtful.

Mr. McBride then explained to Mr. Pei the status of previous Chinese quotas of petroleum products during 1948 and suggested that it would be helpful if the Chinese Government could furnish the Department data regarding its present holdings of petroleum products and the daily or monthly rate of consumption of the Chinese Air Force. He pointed out that the Department had not known of the Chinese shortage of aviation gasoline since the Chinese had not used its full quota of 160,000 barrels during the second quarter. Mr. Pei explained the Government’s desire to conserve foreign exchange during that period and said that he would endeavor to see that the necessary data were obtained.

  1. John W. McBride, of the Petroleum Division.