124.935: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received October 2—5:43 a.m.]
1817. For State and Treasury. Embassy opinion that sudden and sharp break in Chinese currency may occur in near future (reEmbtel 1738 [1748], September 22, repeated Shanghai 838) strengthened rather than weakened by events past 2 weeks (Embassy and Parker send reDeptel 1371, September 29, repeated Shanghai 1676). Embassy feels urgent necessity of obtaining authority from State and Treasury for negotiating special diplomatic rate (which would also apply Army and Navy expenditures).
[Here follow estimates of local currency requirements of Embassy, Consulates, and military and naval establishments in China.]
Previous cables from Embassy and Consulate General Shanghai have indicated expectation that break in currency will result in disorderly market situation. Embassy therefore reluctant commit itself to any particular rate formula and accordingly reiterates its request for authority to use discretion in negotiating best possible agreement under circumstances which prevail at time. ECA China mission has been informed of this request and supports it with view to protecting special account, although jurisdiction NAC in this connection is recognized and recommendations rate and maintenance of value arrangements will of course be referred Washington for approval. Army, Navy finance officers here have already stated they will look to Embassy and Treasury Attaché for assistance in rate difficulties.
Major difficulty with December 8 formula arose from fact substantial differential prevailing in black market between various Chinese cities. On August 19 rates for Canton, Shanghai, Peiping [Page 417] as follows: (millions CNC per US dollars) 6.5, 11.8, 14.0. At present time Hong Kong rate extremely sensitive to peculiar situation prevailing Hong Kong, Canton area. Black market rate on September 29 for Hong Kong cross rate Canton and Shanghai as follows: 4.03, 3.96, 4.70. Treasury Attaché suggests, assuming circumstances prevailing at time broad spread between black market and official rate occurs would permit, that negotiations be conducted with Finance Minister to obtain separate rate for each city based on single formula. Following suggestions under consideration as general type of formula which would meet requirements presently anticipated although specific approach to Chinese Govt cannot be determined until actual market situation known: Official rate plus 95% difference between official rate and average Hong Kong cross rate and local open market rate for dollar drafts (the use and circulation of which now permitted by inadvertent omission Chinese Govt currency regulations). Hong Kong cross rate plus 90% of difference between Hong Kong rate and open market rate for dollar drafts. Official rate plus 95% of difference between official rate and open market dollar rate derived as a cross rate based on gold price obtained by dividing local open market price of gold per ounce by 50. This particularly appropriate for west China posts.
Suggested formulae are purposely complex for purpose of negotiating with Chinese Govt. Experience during informal discussions with representatives Central Bank in July–August has indicated greater psychological acceptance rate indirectly based on open market when relationship expressed indirectly.
Embassy also expects request provision rate determination for each individual transaction to be reached Shanghai, with certification by Treasury Attaché but at separate rate for and in amount necessary to meet requirements of each outpost separately. Local currency funds would then be remitted by TT to Central bank branch in outpost for payment to Consulate.
Sent Dept, repeated Shanghai 888.