893.515/9–1348: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received September 14—3:24 a.m.]
1672. Pass to Treasury and ECA. Currency and complementary economic reforms going better than originally anticipated, particularly in northern cities owing competent technical operations Government and Central Bank and unexpectedly strict enforcement by economic police particularly in Shanghai. However, inflationary pressures continue and being suppressed only by enforcement tactics. Accordingly Embassy finds [no] basis to modify its original pessimistic evaluation chances success currency reform (see Embtel 1557, August 23, repeated Shanghai 739). Until end August bank credit almost completely suspended and now being granted only for “productive purposes”. Restrictions created temporary money shortage forcing coverage spot positions by gold yuan conversion of hoarded US currency and gold. Simultaneously holders large stocks foreign exchange converted small percentage to obtain evidence of having converted. Initial receipt of gold, silver and foreign currency reached about 2.5 million US dollars per day, but has declined since first week or 10 days. No evidence conversion by large holders and apparently little or no response to requirement registration foreign holdings.
Business community Shanghai reports credit restrictions plus operations economic police generally disrupting business activity and normal commercial operations are at extremely low level. American bank officials particularly critical effect new regulations their functions. In connection with new measures, police announced intention impose penalties ranging to execution on illegal activity prior August 19. Since most businessmen, including US, felt such practices necessary in past for survival, possible arrests could be wide-spread in business community. Considered threat penalties such practices being used to compel surrender foreign exchange assets and registration those held abroad. Shanghai enforcement considered by far most [Page 402] stringent so far. Canton only today announcing that such enforcement will be undertaken.
Financial black markets developing for dollars and gold in coastal cities. Markets not broad and operate under great difficulty owing activity police. Shanghai rate around 4.40 with 90-day future exchange at 5.0 to 5.5. Central Bank dumping commodities freely but anti-hoarding measures limit effectiveness as monetary device. Tientsin, after holding between 4.20 and 4.30 until September 5, on 11th report 5.35 with a 3 percent premium for TT’s71 on Shanghai. Nanking steady past week at 4.33. Peiping reports no BM until September 8. Rate September 10 4.70 with limited activity. Prices spiral but money market tight. Canton after initial week of selling GY at a premium showing slight increase in rate reported 4.13 on September 9. Market for HK72 dollars very erratic, has peaked at .998 and now at .85 (par is .75). Dumping of gold by speculators in Hong Kong reported depressing Canton market for gold and US dollars.
In western China and Mukden almost no dollar market, but rising demand for gold. Chungking gold price rose steadily to GY 260 per ounce September 9, dropping to 220 on 11th as result of police measures. Mukden gold price rising steadily to buy 105 million, sell 130 on September 11, figures NEC par is 60 million. Also limited dollar BM at GY 5.
Prices in northern cities have been held by enforcement August 19 prices and anti-hoarding regulations. In Shanghai Gimo’s son has been arresting prominent business men right and left. Prices of hard goods have successfully held, but merchants refusing to sell. Prices other goods, particularly food brought daily from country, have continued increase, but unevenly. Average ranges between 20 to 50 percent through development extensive black market. Wage rates have increased only slightly and effective decline real wages causing discontent. Shanghai commercial banks forced by political pressure register holdings. Also refer Shanghai’s 1992, September 10.73
Tsingtao with US Navy cooperation has returned to block [local] currency basis. Communists appear dumping old CNC currency at outer perimeter points where premium for dollars [and?] gold reported 50 percent. Prices estimated up 16 percent over August 19 with local committee authorizing specific increases. Trade almost at standstill with many commodities unavailable. Hankow reports enforcement very effective but merchants reluctant sell at old levels. No arrests big operators.
[Page 403]Chungking also reports initiation active enforcement, but price level has doubled since August 19.
In south Peiping on [prior] August 19 BM rate US [and?] HK dollars was about 50 percent under Shanghai. Canton BM rate August 19 was 6.5 million. Overnight increase of official rate to 12 was reflected in immediate general price increase of about 120 percent, although only slight increase wages. Enforcement this area did not become energetic until after 1 September when directed principally currency transactions. Mayor authorized food price and wage increase up to 80 percent but this type selective administrative adjustment very uneven. Rice price remains low and prospective rice shortage developing as result refusal farmers sell and interruption Chinese Government rice procurement [from] Burma by civil disturbances.
Throughout China great pressure on commercial importers through authorized channels, particularly petroleum, as result devaluation official rate from about 8 to 12. Now requesting 100 percent price increase which will have far-reaching effect on general price structure. For petroleum 100 percent increase price automotive gasoline authorized. Prices other POL74 products to remain for time being at present levels. Companies to receive non-interest bearing loan from Central Bank equivalent 100 percent present returns to be repaid when eventual price adjustment authorized. General overall adjustment prices and wages expected September 23 may have serious psychological effect as indication official recognition extent to which prices have slipped.
No evidence of progress reduction budgetary deficit. Note issue continues increase same rate as previous months. Prime Minister and Finance Minister have indicated no reduction possible this time military budget75 although acknowledge some military expenditures not essential [to] military operations and substantial portion gasoline BM from military stock.
Old pattern of flow idle funds from North China to Shanghai–Canton has reappeared. Canton banks estimate remittances to Canton September 5 and 6 total GY 1.6 million. Selective remittance rates highest for north to south movements reestablished by Central Bank.
Sent Department 1672, repeated Shanghai 800.
- Telegraphic transfers.↩
- Hong Kong.↩
- Not printed.↩
- Petroleum, oil, lubricants.↩
- In telegram No. 1691, September 15, 5 p.m., the Ambassador in China reported information from the Chinese Foreign Minister that Generalissimo Chiang had agreed to the formation of a commission, including prominent civilians, to study the military budget with a view to its reduction and the removal of abuses (893.5151/9–1548).↩