893.51/9–2848
Memorandum of Conversation, by the Under Secretary of State (Lovett)
| Participants: | U–Mr. Lovett |
| CA–Mr. Freeman83 | |
| FN–Mr. Spiegel84 | |
| FN–Mr. Doherty | |
| Mr. Wang Yun-Wu, Chinese Finance Minister | |
| Mr. Wellington Koo, Chinese Ambassador |
The Ambassador, calling to present Mr. Wang, who is in Washington to attend the annual meetings of the Boards of Governors of the International Monetary Fund and the International Bank, remarked that the occasion was doubly significant, i. e., to the significance of annual meetings of the Fund and Bank was added the importance of the new financial measures recently introduced in China of which Mr. Wang was the principal architect.
I inquired how things were going with the new currency. Mr. Wang replied that so far everything had worked out very well: prices were holding steady (in fact had declined in Peiping and Tientsin), gold, silver and foreign exchange was being turned in at a satisfactory rate, the effect on exports had been very gratifying, and Mr. Wang anticipated that Government expenditures and the note issue would be held under strict control.
I asked whether the stringent price controls had not interfered with the flow of goods from the countryside to the cities. Mr. Wang replied this was not the case. He emphasized the importance of price controls and said that the success of the new currency depended on three things: (1) price controls, (2) the surrender of foreign assets and (3) control of the note issue.
[Page 412]Mr. Wang said the surrender of foreign assets in exchange for the new gold yuan had amounted in the first twenty-two days after the introduction of the new currency to the equivalent of US$100 million in gold, silver, foreign exchange and foreign currency notes. In addition, private banks have turned in some US$40 million of foreign exchange and were expected to surrender US$10 million more. By September 30, the deadline for the surrender of foreign assets, Mr. Wang said he anticipated that the total amount of foreign assets surrendered would amount to US$250 million. Mr. Wang admitted that the assets so far surrendered had come largely from the middle classes and that the Government was still considering measures to bring about the surrender of foreign assets by the “well-to-do”.
In reply to a question about exports, Mr. Wang said that after the introduction of the new currency, the excess of exports over imports was at the rate of about US$12 million monthly. This, he said, was the reverse of the visible trade balance before the introduction of the exchange certificate system (now abandoned85) in June. With respect to the note issue, Mr. Wang said that 200 million gold yuan had been required to redeem outstanding fapi (CN currency) including the Northeast currency. By the end of August the note issue had risen to 290 million gold yuan, largely reflecting additional gold yuan issued in exchange for foreign assets surrendered. By the end of September, he anticipated that the note issue will have increased to around 500 million gold yuan, about ⅘ of the increase over the end of August to be accounted for by the surrender of additional foreign assets.
Mr. Doherty remarked that this calculation of the increase in the note issue would imply a remarkable reduction in the amount of the budgetary deficit. Mr. Wang replied that he expected to reduce the budgetary deficit to manageable proportions. He pointed out that before the war Chinese Government expenditures averaged approximately the equivalent of US$900 million. Since the end of the war, Chinese Government expenditures had risen to above the equivalent of US$1 billion of which about sixty-five percent represented military and associated expenditures. To absorb part of the increase in military expenditures, the pay of civil servants had been reduced to ⅓ of the pre-war level, while the pay and allowances of soldiers remained the same.
Mr. Wang said that with the new currency and stable prices he expected to be able to reduce total Government expenditures to about the equivalent of US$900 million or 3.6 billion gold yuan. With increased [Page 413] taxes and improved tax collection methods, he hoped to bring revenues up to 2.5 billion gold yuan, leaving a deficit of 1.1 billion gold yuan or about US$275 million.
Mr. Spiegel asked if this meant that the Chinese Government could for the foreseeable future keep the inflation within limits which would enable the Chinese Government to maintain the present value of the gold yuan. Mr. Wang replied that a deficit of 1.1 billion gold yuan was well within the limit of 2 billion gold yuan established for the new currency. He said that the revenue estimate he had given included receipts from the sale of ex-enemy properties, surplus property disposal, and the sale of shares in Government-owned enterprises, but did not include receipts from the sale of ECA goods which would help to cover the remaining deficit. He also indicated that with stable prices, he expected to be able to issue gold yuan bonds in the amount of about 400 million gold yuan.
Mr. Wang pointed out that as head of the Commercial Press, he considered himself a practical businessman who understood figures. He recalled that as Minister of Finance, by combining the Direct Tax and Commodity Tax Bureaus, he has reduced tax personnel from 50 thousand to 21 thousand. As further evidence of his conservatism, he pointed out that although ½ of 3.6 billion gold yuan is 1.8 billion gold yuan, the budget he was bringing to the Legislative Yuan for the first six-month period limited expenditures to 1.6 billion yuan. This indication of efficient budgetary management, however, was qualified by his next remark to the effect that budgeted expenditures did not include expenditures for Northeast China.
I concluded the conversation by thanking Mr. Wang and the Ambassador and remarking that I was doubly glad to have had this news of China because it was such good news. Mr. Koo cautioned, however, that this did not mean that China could get along without further U. S. assistance. He said that the new measures constituted a bold experiment of which Mr. Wang should be justly proud, but that we could not hope that they would immediately solve all of China’s financial problems.
Note: Mr. Wang’s optimistic assurances regarding the success of the new currency almost completely contradict reports received from the Embassy at Nanking. These reports indicate that the note issue has tripled since August 20, that stringent price controls have seriously inhibited the flow of goods, that exports enjoyed only a temporary spurt and that no really effective measures have been taken to control Government expenditures.