893.50/10–1548: Telegram
The Ambassador in China (Stuart) to the Secretary of State
[Received October 15—9:27 a.m.]
1920. China August 19 economic reform appears now to be hastening to its denouement. Efforts and gestures of last 2 months may well soon be forgotten and will be back on basis of the open printing press and all but open hedging and speculation in foreign exchanges and commodities. (Black-market trading now out of hand). With few exceptions, as public utilities fixed, prices are fictions. In Shanghai, where enforcement started off spectacularly and where control has been most stringent, there is now a noticeable lack of zeal and decreasing effectiveness on part of police. The several really big names who were early arrested are still in confinement but their trials are dragging on through protracted adjournments and appeals. Chiang Ching-kuo’s heralded plans for an industrial resurgence, the “second phase” of the August 19 program, have just been announced; they are uninspiring and follow same old pattern of “conservation of foreign exchange” and concentration of authority in Central Trust and trade guilds. Accompanying registration of industrial commodities and inspection of warehouses tapering off with no apparent results.
China note issue now probably in neighborhood of GY 1.25 billion which represents a quantity of money say 5 times as great as that in circulation on August 19. This money is not going back to the Government in taxes nor into production enterprise but rather is accumulating and idle in the cities building up the inflationary pressure which has recently been evidenced by:
(1) Shanghai’s last week retail buying spree which has now spread to other cities stripping shops of their exposed goods; (2) Increasing unavailability in all cities of daily necessities except under the counter and at prices far above fixed levels; (3) Short-term interest rates so low as to be practically negligible by Chinese standards (i. e., 4 percent per month); (4) Reestablishment of “organized” black markets in gold bullion and US currency.
In Peiping and Tientsin where police surveillance has been only nominal, gold is selling for GY 1000 per ounce and US dollars at GY 16 compared to the respective official quotations of GY 200 and [Page 421] GY 4. In Canton the HK dollar is up in past week to GY 1.25 compared to the official .75. In Shanghai where to date operators have been most circumspect, there is now a good volume of business in currency at GY 6 to 7 with TTs bringing about 20 percent premium; shopkeepers are beginning to again quote and surreptitiously to accept US dollars; volume of telephone calls is this week picking up showing resumption of black-market transactions pretty much on “normal” basis.
With the concurrent discouraging military developments, it seems to us impossible that the Government much longer can continue to imitate Canute before the economic tide. It appears equally unlikely that it can publicly abandon the program on which so much was staked. What is more likely is that we are seeing the slackening of the pretence of enforcement and a yielding full rein to economic forces which at the moment are so precariously held in check.
Sent Department 1920, repeated Shanghai 946.