893.50 Recovery/6–1948: Telegram

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

900. National Advisory Council on June 3 approved financial provisions draft bilateral agreement with China (Deptel 774 May 24) recognizing necessity for some modifications in the provisions for China as against those previously approved for ERP countries. NAC had also previously approved Art VI (Assets in US) identical with provision for ERP countries.

NAC approved version of Art VII substantially identical with draft already transmitted reftel. Changes in Art VII transmitted Deptel 814 May 29 not considered warrant NAC approval. Following changes appear in NAC-approved draft: In para 2 (a), first sentence, replace “the” by “that” immediately preceding “special account” at end of sentence. In para 2 (c), last sentence replace “may” by “will” immediately after “Government of China”. In para 6 change “paragraph 4a” to “paragraph 4”.

Principal change in Art VII suggested by NAC is in para 5. NAC proposes deletion para 5a and suggests introductory sentence beginning “The Government of China” and ending “including in particular” be changed to read as follows: [Page 555]

“The Government of China shall hold the remaining balance in the Special Account as a measure of monetary and financial stabilization, or shall dispose of it only for such purposes as may be agreed from time to time with the Government of the United States of America, including in particular:”

This language suggested to emphasize desirability limiting disbursements from Special Account and thus minimizing inflationary potential of local currency funds. This change not yet accepted by ECA

Para 6 of Art VII also changed by addition of following sentence “The Government of China will carry out this provision by depositing such additional amounts of Chinese currency as the Government of the United States of America may from time to time determine after consultation with the Government of China.”

Deptel 774 May 24 indicated provisions relating to exchange rates (Art VII [VIII]) might be proposed later. This question referred to NAC which recommended language substantially the same as that of the corresponding provision in master European draft so as to make possible exert pressure, if desirable, for the adoption of at least a relatively more realistic exchange rate policy than has been pursued in the last 6 months. Following is language recommended by NAC:

“The Governments of the United States of America and China recognize the importance of appropriate rates of exchange in increasing international trade and the effect of inappropriate rates in increasing the need of China for assistance from the United States of America. Accordingly, the Government of China will consult with the International Monetary Fund concerning revision of its foreign exchange rate or rates, when and if the Government of the United States of America, after discussion with the Government of China, signifies its opinion that such rate or rates are unnecessarily increasing the need of China for assistance from the United States of America.”

NAC at same time approved language Art II(c) (Deptel 774) pointing out that much more advanced inflation in China requires a more diluted version than in Master Draft if ECA not to be placed in position having to ask China achieve what is patently impossible in near future.

For Lapham: ECA somewhat concerned with restrictive language NAC version Art. 7, para 5, and requests your urgent views this section.

For Embassy: With exception revision Art. 7 para 5, NAC suggested changes are acceptable and should be communicated to Chinese as revisions of the draft.