893.50 Recovery/6–348
The Ambassador in China (Stuart) to
the Secretary of State
No. 258
Nanking, June 3, 1948.
[Received June
14.]
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.
[Enclosure]
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.
- 1.
- 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.
- 2.
- 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.
- 3.
- 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.
- 4.
- 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.
- 5.
- 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.
- 6.
- 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.
- 7.
- 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.
- 8.
- 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.
- 9.
- 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.
- 10.
- 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.
