893.5151/11–2448: Airgram
The Consul General at Shanghai (Cabot) to the Secretary of State
[Received December 2—10:53 a.m.]
A–1038. The new Finance Minister, Hsu Kan, has reversed the precious metals provisions of the August 19 Currency and Economic Reform Program. Effective November 11, it is no longer illegal to possess gold and silver coins and bullion. Beginning November 22, the public is permitted to buy gold from the Government at a price of GY 1,000 per ounce (995.5 pure), but the buyer must also deposit an additional GY 1,000 with the Central Bank for 1 year, drawing interest at the rate of 2% per annum. Government sale of gold bullion will accordingly sterilize, for the time being at least, GY 2,000 for each ounce of gold sold. Anticipated effectiveness of the gold selling program is further increased by expectation that gold bars will be hoarded rather than circulated as currency. Gold bullion is being sold as bars in denominations of ½, 1, 3, 5 and 10 ounces.
Silver dollars are being sold at GY 10 apiece, plus a deposit of additional GY 10 by the buyer; thus sterilizing GY 20 for each silver dollar purchased.
The sale of gold and silver by the Government is one of the most drastic changes inaugurated by the new economic policy in an attempt to restore public confidence in the GY by absorbing redundant purchasing power and permitting the Chinese public again to use precious metals as a means of protecting their current savings.
It is now generally agreed that the August 19 Currency and Economic Reform Program stimulated the inflationary pressure by forcing the public to exchange their accumulated savings in gold, silver and foreign currency for GY. Since China does not have a sound investment market, the unwilling seller was accordingly forced to buy real estate, precious stones, jewelry, silks, and durable commodities generally for his GY in a desperate attempt to protect his savings in the face of rapidly rising GY prices. The present Finance Minister is apparently attempting to reverse this entire process by selling the precious metals back to the public.
[Page 437]It should be added, however, that while the current program is designed to absorb redundant purchasing power it also has the corollary effect of wiping out a large percentage of the original savings of the Chinese public, because those who were forced to sell their gold to the Government during the August 19 Reform Program received only GY 200 for each ounce of gold; but they must now relinquish GY 2,000 when repurchasing the same ounce of gold.