840.50 Recovery/5–1148: Telegram

The Ambassador in China (Stuart) to the Secretary of State

846. For ECA. In connection impending negotiation bilateral aid agreement and on basis general developments and observation and accumulated CRM experience, Embassy submits following recommendations regarding policies to govern aid program operations. (RefDeptel 694, May 7, 7 p.m. and Embtel 843, May 10).

Every effort should be made to keep program as simple as possible. Time is short and available qualified US personnel limited. To help remedy the latter, the American business community in China should be freely drawn on for advice.
Commodities supplied under aid program should be pumped through commercial channels to maximum extent feasible. Governments are fickle bankers and an important segment of thinking Chinese recognizes that the massive capital investment required to industrialize and develop China will come, if it comes at all, from US private sources. In creating a climate which will invite such investment the first step is to enable entrepreneurs already established here to live. Furthermore, it can be generally accepted that commercial channels will function more efficiently than Chinese bureaucracy.
Assistance to the people of China should be emphasized, particularly in the case of consumable commodities supplied under the program. Rice and flour rationing in the 5 cities55 is really working. It should be extended both in number of localities served and in type of goods rationed. Automotive gasoline, cotton yarn and cloth, among other items, should be definitely added to the ration list.
A corollary of 3 above is that control of the aid commodities should not end at delivery. The distribution must be supervised. Furthermore, in the case of goods to be processed here, it is the use of the end product, such as cotton cloth, that we are interested in.
We should be tough on cutting off individual categories of aid in individual areas if abuses are discovered. For example, if a scandal develops in flour rationing in Peiping, American aid flour should be cut off from that city until the situation is rectified. Such [Page 518] willingness to act and ability to do without prior reference of each case to Washington appears essential to the provision of effective aid to the Chinese people. The fact should not be overlooked that the best elements at all levels in the Chinese Government hope that we will be prepared to act with a certain toughness. Such an attitude on our part will constitute the most effective method of upholding their hands in their efforts to get things done.
We should seek to minimize the potential inflationary impact on the Chinese economy which will arise from the accrual of CNC proceeds from sales of aid commodities. Embassy believes that the proportion of such proceeds which are to be spent on projects should be relatively small and in general confined to carefully screened projects more rehabilitory than relief in character. However, there are many CRM projects such as grants to voluntary agencies, refugee relief in key spots, etc., etc., which it would be a grave mistake to discontinue.
The uncommitted CNC proceeds should be held in suspense, possibly as a book credit, until the close of the program with the intention of then having the credit cancelled. Embassy now believes that US share in control of these CNC funds affords little true bargaining power for accomplishing fiscal or budgetary reform and that to attempt to use such psychological leverage as may exist would involve the US in undesirable semi-responsibilities. To hold them rather than immediately release them for general expenditures, however, might serve as a mild deterrent to any Chinese temptation to treat them as a windfall justifying a spending spree.

Gilpatric unavailable in Nanking for discussion this telegram but believed to be in general agreement first 5 points. It is expected he will telegraph separately his views56 in detail particularly regarding points 6 and 7.

Sent Department 846, repeated Shanghai 367.

  1. Nanking, Shanghai, Canton, Peiping, and Tientsin.
  2. Not found in Department files.