Memorandum Prepared in the Department of State 60
Economic Assistance Program for China
It is proposed that economic assistance to China be authorized and funds be appropriated by the Congress in the amount of $570 million for the period ending June 30, 1949. Of this amount, $510 million is necessary to supply essential imports of cereals, cotton, petroleum and petroleum products, fertilizer, tobacco, metals, pharmaceuticals, coal and replacement articles for existing capital equipment, and $60 million is required for highest priority reconstruction projects. The object is to help China to arrest the rate of deterioration in her economy. While United States assistance cannot, by itself, bring about economic recovery for China, it can provide a respite during which the Chinese Government itself can initiate the measures of self-help necessary to rebuild the basis for her own economic recovery.
China’s economy has deteriorated steadily since the defeat of Japan. This deterioration has been due to the devastation which civil warfare has added to the disorganization and destruction brought about by the war against Japan, and to the difficulties faced by China, in the circumstances, in mobilizing effectively its available resources. It has taken place despite large amounts of foreign aid extended or available to China since V–J Day. The United States alone has extended aid to China amounting to somewhat over $1.4 billion since V–J Day. (See Appendix A61 for a detailed statement on aid extended by the United States to China since V–J Day.) In addition, the Chinese Government has expended more than $700 million of its own foreign exchange holdings.
The civil warfare in China has seriously dislocated economic activity in two major respects. First, its physical impact has been felt through the destruction and dislocation of transportation and industrial facilities, and in the isolation of raw material, fuel, and food sources from centers of consumption and ports of export. Second, the monetary and financial impact of civil war is felt throughout the entire economy in the disruptive consequences of inflation resulting [Page 480] from the issuance of paper currency in order to finance mounting government deficits caused mainly by military expenditures. Inflation impedes the production and movement of goods for domestic consumption and export, and stimulates speculation and hoarding. It thus intensifies existing scarcities, and requires ever larger government appropriation.
Note issues and prices have continued to increase at tremendous rates. Note issue increased more than eight times during 1947; the price of rice in Shanghai increased more than fifteen times during the same period. The official exchange value of the yuan was CN62 $3350 to the US$1 as of January 1, 1947 and has been raised to a current rate of CN$140,000 to the US$1. Black market quotations are currently around CN$200,000 to the US$1.
Government expenditures for the year 1947 were originally estimated at CN$9.4 trillion, against estimated revenue of CN$7.4 trillion. By May 7, 1947 a new budget of CN$18 trillion for 1947 was approved, and later, as prices further increased, new revisions brought total government expenditures for 1947 to about CN$40 trillion. Of this amount, not less than 70 percent has been required for military purposes. Revenue from taxes and government-operated enterprises has covered less than one-third of the total government expenditures.
The rate of increase in note issue in 1946 was about 10 percent per month; in the first half of 1947 it rose to 15 percent per month; currently it is 25 percent per month. Prices have moved unevenly with periods of very sharp upward fluctuation alternating with periods of quiescence. Intervals between the periods of sharp increases are becoming shorter, and the increases tend to become steeper.
The continued low level of Chinese exports and official receipts from overseas remittances caused by civil war and inflation, has made it necessary for the Chinese Government to draw down its official Chinese foreign exchange holdings to finance the major portion of Chinese imports. Chinese Government holdings of gold and dollar exchange have fallen from about US$900 million on December 31, 1945 to about US$234 million as of January 1, 1948, of which $96.5 million represents gold ($86 million being held in China) and $137.8 million consists of official dollar balances in the United States. In addition, holdings of sterling area currencies as of January 1, 1948 are estimated at approximately $40 million; and official holdings of silver are valued at around $30 million, almost all of which is held in China. (See Appendix B for data on official gold and exchange holdings of the Chinese Government.63)
Private Chinese holdings of gold, foreign exchange, and long-term [Page 481] assets in all foreign currencies are not known but may be estimated to be at least US$500 million. Such holdings have increased since the end of 1945, through private accumulation of gold in China, through flight of capital via Hong Kong, and other means. The ability of the Chinese Government to mobilize these privately-held assets is, however, decreasing with continued deterioration in the financial and economic situation.
As a result of the continued drains on her foreign exchange holdings, China soon will be unable to meet external costs for procurement of essential imports needed for the continuation of her basic civilian economy. The official proceeds of exports and remittances would be grossly inadequate to meet minimum requirements, and such proceeds could be expected to decline. If imports were contracted much further, industrial activity would diminish rapidly, minimum consumption needs in Shanghai and other vital areas would not be met, Government revenues would fall off sharply, and prices would soar in a situation of panic psychology and uncontrolled inflation. Accordingly there is immediate necessity for an economic assistance program for China which will afford the Chinese Government an opportunity to take steps which only that Government itself can take to arrest the trend of economic deterioration, and to begin effective steps toward more stable economic conditions.
III. Financing Essential Commodity Imports
The U. S. assistance program is designed to finance selected essential imports until June 30, 1949 in the amount of $510 million. On the basis of present information concerning China’s needs, and data from U. S. Government agencies concerning availabilities, a probable list of such imports would consist of the following, with values expressed on a c. i. f. basis and calculated at prices as of January 1, 1948.
|1. Cereals (wheat and rice)||$130||Million|
|3. Petroleum and Petroleum products||110||“|
|9. Replacement articles for existing capital equipment||30||“|
Detailed justification of the essentiality, minimum quantities required, and supply availabilities of the above imports is presented in Appendix C.64 Any projection of requirements over the period until [Page 482] June 30, 1949, is necessarily subject to a margin of error, and provision must be made in the administration of these programs for flexibility both as to the items to be included, and the respective amounts. The commodity imports indicated above are believed to represent minimum quantities and are within the limits of current Chinese import quotas, as well as supply availabilities, including cereals and fertilizers subject to international allocation.
IV. China’s Other Payments and Receipts
The proposed assistance program would cover the major portion of China’s necessary commodity imports. In addition to these imports, China would need other essential commodities from abroad, such as chemicals, dyes, timber, paper and woodpulp, to help maintain her domestic economy. For the period covered by the program, payments for such imports are roughly estimated at $55 millions. The probable amounts of such essential imports are listed in Appendix D.65
In addition the Chinese Government has to make certain governmental expenses and payments abroad, which will amount to at least $75 millions before June 30, 1949. These items are listed and explained in Appendix E.65
The Chinese Government will have available certain foreign exchange receipts, principally from the proceeds of exports and emigrant remittances, the amount of which can only be estimated very roughly because of the disturbed conditions of China’s trade and the uncertainty of production conditions and the relationship of prices to foreign exchange rates. It is estimated that the total official receipts would range between $125 million and $185 million during the period April 1, 1948 to June 30, 1949 (as indicated in Appendix F65). Such receipts could be used by the Chinese Government to cover China’s various foreign obligations, other essential civilian imports, as well as purchases abroad of military supplies and equipment. To the extent that conditions improved and China’s foreign exchange receipts were increased, China would be able to apply the resulting exchange to an improvement in monetary reserves, or to such essential purchases as it might require.
V. Reconstruction Projects
China urgently needs to take steps in areas sheltered from military operations to restore essential transportation facilities, sources of fuel and power, and export industries. Projects such as those for the expansion of electric power capacity, particularly in the Shanghai area, for the rehabilitation of railroad transportation in South China, [Page 483] for the development of coal mining in Central and South China, and for other projects mentioned in Appendix G,66 all are necessary to enhance China’s productive capacity and improve her foreign exchange position.
Loans for certain of these and other projects totaling nearly $300 million have been requested by the Chinese Government from the Export-Import Bank. It is unlikely that these applications will be approved by the Bank, under present conditions in China, although it is possible that in the future some projects might qualify for Export-Import Bank loans. In view of the urgent need for reconstructing essential facilities the economic assistance program for China includes the sum of $60 million for assistance in initiating key reconstruction projects prior to June 30, 1949. Projects initiated are to be capable of completion in their entirety within the $60 million of total cost. A program of this magnitude would not unduly accelerate inflationary pressures, and could be effective in increasing exports and in improving production and distribution of essential commodities.
Decision as to the individual projects to be undertaken will be the responsibility of the Administrator of the program.
Pending establishment of the Economic Cooperation Administration or other agency set up in connection with the European Recovery Program, it is proposed that administration of economic assistance for China be carried forward under the U. S. Foreign Relief Administrator.67 Upon establishment of the Economic Cooperation Administration, it should be possible for the China program to be transferred to the E. C. A. Administrator, with provision for suitable staff. It is contemplated that provision will be made for appointment of a U. S. representative to administer the program in China. Such a representative should have a staff of economic (including commodity) and financial experts to maintain in the closest liaison and representation with the appropriate ministries and agencies of the Chinese Government, with American Embassy and Consular representatives, and with the business community. This work should be closely coordinated with that of any foreign advisory and specialist personnel engaged by China to assist in implementing undertakings which China will be expected to give in connection with the program.
Implementation of the Economic Assistance Program for China by the Economic Cooperation Administration is recommended mainly in the interests of economy and efficiency in the required operations. [Page 484] Differences in objectives and procedures which are indicated in the Chinese situation as compared with Europe, can be reflected in the separate legislative enactment for the two areas, and in the bilateral agreements reached.
In implementing the Chinese program the Administrator should have powers with respect to procurement, processing, storage and shipment of commodities in order that implementation of the program could proceed through established commercial channels so far as practicable and consistent with economy and efficiency of operation.
VII. Form of Aid
While the commodity import program of $510 million as described above lists specific types and quantities of commodities to be provided to China, it is essential that latitude be permitted the Administrator to change the list of commodities and the quantities indicated. He will thus be able to take full account of changing requirements and availabilities while maintaining adequate control over the effective expenditure of the funds. It is proposed that assistance in the program might be either in the form of grants or loans or both. Determination as to whether assistance should be through grants or upon terms of payment would be the responsibility of the President, with the advice of the National Advisory Council, in accordance with the procedures indicated in the draft legislation.
VIII. Bilateral Agreement
It is contemplated that there will [be] concluded between the United States and the Chinese Governments a bilateral agreement setting forth the principles and procedures under which the economic assistance program will operate, as was done in connection with the U.S. Foreign Relief Program for China,68 and as provided for in the Interim Aid Program and the proposed Economic Cooperation Bill. As indicated in the draft legislation for the China Aid Program, China would be expected to signify her intention to adopt the financial and economic policies and improved procedures of budgetary administration which are needed if U. S. aid is to be most effective. Together with other undertakings relating to the application of the aid program, there would be provision for the deposit of yuan currency in commensurate amount, and for the utilization of such currency in accord with terms and conditions agreed to between the U. S. and China.
The U. S. would retain power to terminate the provision of assistance, as stated in the draft legislation, whenever it was found that [Page 485] China is not adhering to the terms of the bilateral agreement, or whenever it was found that, by reason of changed conditions, the provision of aid was no longer consistent with the national interests of the United States.
In this connection, the Chinese Government has already announced its intention to undertake a series of financial and economic reforms measures as part of a program of self-help. The announcement made by General Chang-Chun, President of the Executive Yuan, is reproduced as Appendix H.69
- Submitted by the Department to the House Committee on Foreign Affairs oh February 20 and incorporated in the Committee print entitled “Text of Proposed China Aid Bill and Background Information on Economic Assistance Program for China”.↩
- Not printed.↩
- Chinese national currency.↩
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- Presumably, Assistant Secretary of State Willard L. Thorp who was designated Coordinator for the European Recovery Program on January 19.↩
- This agreement was signed at Nanking on October 27, 1947; Department of State Treaties and Other International Acts Series No. 1674, or 61 Stat. (pt. 4) 3374.↩
- January 28, p. 462.↩