893.5151/9–3048: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received October 1—2:38 a.m.]
1809. For State, Treasury and ECA. During past 2 weeks enforcement program has strengthened throughout China with black market rates for dollars holding steady or declining, particularly Canton, Tientsin and Peiping. Police measures over prices less effective. Commodity prices roughly doubled since August 19 in most western and northern cities.
Generally reported from all cities that utility rates so low that revenues considerably less than costs. Authorization for upward adjustment expected shortly, although Government proposing payment subsidies to companies to meet increased expenses. Such measures obviously intensify mounting inflationary pressures. Government plans for announcement September 23 general upward adjustment utility rates, key commodity prices, and wage rates postponed until October 1. Prime Minister yesterday advised that Government not completed studies on which to base adjustments and date of announcement postponed indefinitely. Believed that Chinese Government too fearful of inflationary pressures take positive action and will continue rely on enforcement.
Director National Tax Administration88 reports Government does not contemplate readjustment direct and commodity taxes. States that increased rates would only increase evasion. Some revision income tax under consideration. No indication significant increase [Page 415] Government revenues past month. Expenditures probably at higher rate than June–August owing increase temporary military operations. Monthly deficit August 19–September 20 reliably estimated GY 200 to 250 million. Since this financed almost entirely expansion note issue, currency circulation now exceeds GY 925 million, although actual figures not presently available. (Re Shanghai’s 2048, repeated Nanking 5570 [1570], September 17.89)
Black market US currency remains steady under strong police pressure except for North China and Mukden where rises reported Septemper 25–29. Controls continue most effective Shanghai. Money market extremely loose, particularly Shanghai and Canton where gold yuan payments for foreign exchange and liquidation commodity boards [hoards?] heaviest. Considerable movement GY currency from outports to Canton and Shanghai despite restrictions such movement and heavy remittance charges. Bank deposits these cities reported by press to have increased approximately 10 times in past month. Banks complain demand for loans negligible and no outlets available for investment. Shanghai black market interest rate dropping steadily last 10 days to 5 percent per month on September 26. Stock markets remain closed although substantial volume extra-legal transactions reported, particularly Tientsin. Sale of stock in government-owned enterprises continues slow with every indication businessmen prefer hold even GY currency to stocks these enterprises. No other outlet for idle money available. Central Bank and Central Trust ceased dumping commodities end of last week.
[Here follows summary of the black market situation in leading Chinese cities.]