893.50 Recovery/6–348

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

No. 258

The Ambassador has the honor to refer to the Embassy’s telegram No. 979 of May 31, 4:00 p.m. and in connection therewith to enclose [Page 538] a copy of the memorandum which, in Chinese translation, was handed to President Chiang Kai-shek by the Ambassador in their conversation of May 22. It was not described as an official document but was represented as the Ambassador’s informal effort to reflect his own and the Department’s thinking in connection with the broad areas within which much in the way of basic reform still had to be done. The President gave no indication of his immediate reaction to the paper.

It will be noted that the memorandum draws heavily on the views contained in the Department’s telegram No. 738 of May 15, 1:00 p.m. but that by subject matter it is rearranged to conform to the ten points of Premier Chang Chun’s statement of January 28, 1948.85 This same memorandum will be used discreetly as a basis for discussion with the new Prime Minister, the new Minister of Foreign Affairs,86 the new Minister of Finance,87 O. K. Yui,88 Chang Kai-ngau and others with whom officials of the Embassy will be holding informal discussions on this general subject.


The American Ambassador in China (Stuart) to President Chiang Kai-shek

The American people noted with deep interest the statement issued on January 28, 1948 by the President of the Executive Yuan which comprised ten financial and economic reform measures which the Chinese Government intended to undertake. The United States Government, including the Congress during its debate of the Aid to China Act, accepted this statement as a program which the Chinese Government would vigorously pursue in order to insure by its own actions that financial assistance from the United States Government would provide the maximum results for the Chinese people.

The Premier’s statement represented a coherent and promising framework for individual measures and actions of the Chinese Government. A number of measures in execution of this program have been taken with respect to these objectives but they have often appeared as isolated acts, unnoted and even unrelated to the program as a whole. And in some important areas it has seemed that no appreciable [Page 539] progress can be measured in the past four months. Some of these areas, apparently vacant insofar as effective action and visible results are concerned, are noted below. The numbering of the paragraphs below follows the numbering of the Premier’s ten points.

On control of Government expenditures, even granting all the difficulties, little seems to have been accomplished. The first steps would appear to be to establish standardized accounting with firm budgetary controls in the hands of a central fiscal authority possessing the power to determine allocations for all expenditures whether military or civil. Needless to say, this authority would require the unremitting personal support of the President. Another step would be the ruthless elimination of all non-productive expenditures. In both the civilian and military establishments there would appear to be room for the removal of duplicatory or unnecessary services and individuals.
With respect to securing an increase in tax yields and distributing the tax burden more equitably, it is recognized that the severity of the inflation of the currency accentuates the Government’s difficulties. It is a truism, however, that public confidence in the currency can only be recaptured if a drastic reduction in curtailable expenses is accompanied by a massive increase in tax collections. Even to the casual observer the administration of existing tax collection measures can be greatly improved. It is my impression, for instance, that urban real estate taxes are low compared to tax rates in the country districts. Increased reliance on ad valorem taxes and taxes collected at the source should help to compensate for loss of real revenues due to currency depreciation. The projected sale of certain Government assets is surely another step in the right direction which could be effectively followed by further acts of the same sort.
Although superficially increases in wages of civil servants and soldiers will add to the budgetary difficulty, it would seem essential that equitable adjustments must be made if loyalty and efficiency are to be retained. The weeding out of unnecessary personnel should be tied directly to the program of upward salary adjustments.
The rice and flour rationing program seems by general agreement to have been a substantial success, particularly in Shanghai, Canton, Peiping and Tientsin, and to lesser degree in Nanking. It would seem that this experience urgently justifies increasing the number of urban centers in which a rationing system is installed and, equally important, increasing the number of commodities covered. I have particularly in mind the addition of edible oils, cotton cloth, kerosene and automotive gasoline. Accompanying this would be the institution of practical measures to get commodities such as kerosene and cotton yarn flowing into the agricultural areas to provide the incentive for increased production and collection of foodstuffs.
It would appear that the fifth objective of the Prime Minister can only approach achievement if reduction of expenditures and increase in tax collections are vigorously and successfully pursued as a first step.
It would seem that the Central Bank has made some progress in its efforts to check speculation and pursue a deflationary credit policy. Loopholes, however, obviously continue to exist through which capital finds refuge in foreign currency and transfers abroad. The loss, both of Government customs revenues and foreign exchange, appears to be substantial in the two-way smuggling operations which by common report are widespread. The intensification of the present campaign against smuggling would yield returns to the Government on both scores. The Maritime Customs will need support and re-equipping to play their part.
Internal measures can reduce Chinese dependence upon the large imports now needed but only if such measures are accompanied by successful efforts to increase exports from China can the foreign exchange crisis be surmounted. There are many measures which the business community has repeatedly pointed out would contribute to an increase in exports. One such measure would be the directing of incentive goods referred to above into the interior areas of production. Another would be the establishment of realistic exchange rates for foreign currencies. Another would be the reduction in red tape now involved in arranging exports. Finally, the Government could do much by concentrating its encouragements on exporting industries which could increase their exportable surplus if for example, they were given priorities for securing spare parts and raw materials which must be imported.
On import controls, a clear policy of encouraging private enterprise by simplification of procedures would seem to promise the best results. Such acts as the recent issuance of regulation No. 131 by the Central Bank should be considered in these terms in advance of promulgation. The result of this particular regulation has been to bring the import trade to a complete stand-still and to deepen the already deep discouragement.
The recommendations of the joint Sino-American Agricultural Mission, many of which have been only partially acted upon, seem to provide a comprehensive framework for action in this important field. If there is any single area where reform in deeds and not words is most necessary and most sought by the people, it is land reform. The Land Law of April 29, 1946 contains a carefully considered program [Page 541] regarding limitations on land ownership, land redistribution, and of utmost importance, control and reduction of rents and taxes. Subsequent regulations dealing with particular aspects of land reform have been contained in such measures as the Principles Governing the Administration of Areas Aimed at Achieving Social Stability and Believing the People, passed by the Supreme National Defense Council on October 23, 1946 and the “Measures for Disposition of Land Ownership in Pacification Areas”, promulgated by the Executive Yuan on October 26, 1946. One hears on all sides that reforms have not yet been carried out, and the special investigators of the Executive Yuan have reported on various occasions regarding the nonimplementation of these measures. Carefully prepared measures extending land reform to wider areas were strongly recommended by the Ministry of Land Administration to the Conference of Pacification Areas Commanders held in Nanking in March 1948. Successful policies which have related land and agrarian reform to the problem of defense seem to have been applied in the 10th Administrative Area of Hopei Province, which might merit extension to other areas.
Under the difficulties imposed by internal strife and shortage of materials, the restoration of the Chinese railroads has been inspiring. In the broad field of communications and reconstruction of industry important steps have been achieved. There are some related areas where it would seem China’s self-interest would dictate action. For example, the closure of the River ports to foreign flag ocean shipping is contrary to the policy of great nations. This situation damages China’s own interests in that transportation costs are heavily increased on American Aid oil shipments to Hankow, to take one case. The delay in reaching agreement in the long drawn out negotiations on the restoration of pre-war cable facilities is another case in point. Meanwhile certain difficulties which have arisen in connection with the Sino-U. S. Bilateral Air Transport Agreement remain unresolved.

In conclusion, the Premier’s statement seems as cogent and comprehensive today as on the date when it was issued. There would seem to be nothing to add to this statement of objectives but there would seem much still to be done in attaining them. China does not seek a subsidy but it has looked to the United States for help in this difficult period in order that it might the better help itself. It was in this spirit that the United States Government has responded and it is in these terms that the American people and the American Congress in the coming months will follow with acute interest the progress that the Chinese Government makes in solving the broad and pressing problems of economic and financial reform.

  1. For text of note from the Chinese Embassy, see p. 462.
  2. Wang Shih-chieh remained as Foreign Minister in the Wong Wen-hao Cabinet.
  3. Wang Yun-wu.
  4. Mr. Yui succeeded Chang Kai-ngau as Governor of the Central Bank of China on May 21, 1948.