893.50 Recovery/10–2648: Telegram

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

1995. For ECA, Gordon50 and Houston,51 from ECA, Griffin.52 Following is statement by Cleveland to be issued at press conference Shanghai 10:45 Thursday morning Shanghai time. Suggest simultaneous release Washington presumably hitting Thursday morning papers:

Statement by Harlan Cleveland, Director, China Program, ECA, Washington

I have been in China for about 4 weeks for the purpose of reviewing a number of problems affecting the operation of the ECA program in China.

The ECA program for China is off to an excellent start, so far as planning, ordering, procuring and delivering US aid are concerned. At the 6-month point, when the 1-year program is half over, we are actually farther along than had originally been predicted. Out of the 275 million, for economic aid, 204 million has been earmarked for commodities—food, cotton, petroleum and fertilizer. More than half of this has already been programmed, and about 100 million has actually arrived in China. On the industrial side, 60 million has been programmed out of the 70 million earmarked for replacement and reconstruction projects, plus 2.5 million in US dollars for the Rural Reconstruction Program.53 A little more than 1 million has been set aside for administrative purposes.

Roger Lapham was the first Mission chief appointed by ECA, and both the US and China have been most fortunate to have Mr. Lapham in this important post. His indefatigable efforts, and those of his associates, in organizing the mission and pressing the program forward have been the major factors in the progress made so far. Mr. [Page 642] Lapham, as you know, has been in Washington for policy conferences, and will be back in China next week.

We have been engaged particularly in reviewing here the important question of distribution and end-use of materials and equipment bought with ECA funds. Using American dollars to buy materials and ship them to China does not mean anything in terms of helping Chinese people until and unless the supplies are actually put to their intended use here in China. Materials in a warehouse in Shanghai are just as useless as materials which have never been bought in the first place. So, we and our Chinese colleagues have spent a lot of time and effort, during the last 5 or 6 months, in making sure that every dollar of ECA China funds is really put to work, [at] the ultimate point of use, for the most effective possible purpose.

We think that the distribution and end-use systems which have been set up in cooperation with the Chinese Government represent the best possible utilization of ECA aid under present conditions in China. The food is distributed through controlled rationing systems in major cities of China, and a careful record is kept of individual recipients of this aid. A system has been set up for following raw cotton through conversion into yarn, the conversion of yarn into cloth, and the subsequent export or domestic use of the resulting textiles. Petroleum is distributed primarily by major oil companies who themselves help to make sure that ECA financed oil goes only to the uses for which it is allocated. While final arrangements have not been made yet for distributing the fertilizer, the ECA Mission and the Chinese Government are working on this complicated problem to insure that fertilizer goes where it will have the maximum effect in increasing food production.

In arranging for procurement of all commodities, maximum reliance has been placed on the use of private channels for importing the goods. Thus only wheat, flour and rice are still brought in by direct action of the US Government; on everything else we function as a financing institution, and try to keep the US Government out of things that ought to be done by private business. We hope that arrangements can be worked out before long for shifting wheat and flour into private procurement channels as well.

From previous meetings with Mr. Stillman, you are familiar with the special formula set up for handling the Industrial Replacement and Reconstruction Program. A great deal of preparatory work has gone forward during the last few months on this program. Approved projects have been announced, project engineers are being selected by the successful applicants, and engineering work is proceeding on a number of projects. With the arrival of representatives of the J. G. [Page 643] White Engineering Corporation in about a week the scheme so carefully set up will get fully under way.

The Replacement and Reconstruction Program represents a unique way of spending aid funds. It has not been tried in China before; it is different from the systems used in Europe or elsewhere. It puts a premium on careful planning and controlled use of equipment brought into China. We can think of ways to spend money faster, but we know of no way to spend money more effectively for the benefit of the Chinese people.

Since the appointment of the American members of the Rural Reconstruction Commission a month ago,54 that Joint Commission has been engaged in exhaustive discussions of the program which it will undertake in tackling the gigantic problem of improving the lot of China’s farm people. Again in this case, special emphasis is being placed on careful programming—foregoing apparently quick results in favor of careful preparation and modest, practical schemes. The purposes and objectives of this Commission, as released in its public statement a few days ago, have the full support of the US Government.

The American people are particularly impressed with the great difficulty under which the Chinese farmer labors, and the US Congress accordingly directed that a Joint Commission be formed in order to make sure that adequate attention would be given to helping rural people. America has great hopes for a broad rural reconstruction movement in China.

Our Economic Aid Agreement with China provides for a special account in local currency to be set up, matching the aid given to the Chinese Government by the US in dollars. Charges on this local currency account include our own administration expenses in China, the expenses of the Rural Reconstruction Commission, expenses in connection with importation of relief supplies by US voluntary agencies, and whatever internal costs of the Industrial Reconstruction and Replacement Program have to be met from or guaranteed by the special account. Over and above these expenses, the Chinese Government and the ECA have agreed on certain particularly significant projects in the fields of water conservancy, public health, and welfare, that deserve the special guaranteed support which the Chinese Government and ECA can give through allocations from this joint account. A part of the account will also be sterilized, in order to assist in reducing the Government’s total budget expenditure.

There is one other problem that we have been discussing here. Congress has instructed ECA in its operations both in Europe and Asia [Page 644] to promote the acquisition of materials needed by the US. In China’s case ECA is attempting to secure larger supplies of tin, antimony and tungsten, and thereby, in a limited way, to make a two-way street of US aid. This procurement benefits the US, provides the Chinese Government with one more source of badly needed foreign exchange, and encourages the mine operators to increase production, and employ more Chinese workers.

In summary then, we believe that the plans laid and end-use controls established are securing the best value for the ECA dollar, in helping people and institutions within China, and in supporting the efforts of the Government to increase production and stabilize economic conditions. But present conditions in China do not permit us to assess the progress of the ECA program entirely in terms of its narrow effect in helping the immediate recipients of the aid. And the relative effect—that is, the total contribution of ECA and all other factors to improving the total situation—is much less encouraging.

At best, an aid program can have only a marginal effect on the situation within the country that is being assisted. In recognition of this fact, we have held with particular tenacity to two principles in administering the aid program for China:

Prices and rates affecting the aid program should be realistic. Rationed food should be sold at prices representing substantially market conditions; the same goes for cotton goods and for petroleum products. The same also goes for the price of coal, the rates for electric power, or the level at which any enterprise directly or indirectly assisted by ECA sells its product. The aid program should not be a subsidy program.
ECA’s aid must be a supplement to, and not a substitute for, production and supply efforts by the Chinese Government, if its benefits are to reach the Chinese people. This is the “self-help principle” which has been repeatedly emphasized by Mr. Lapham.

It has become increasingly clear, particularly in the last few weeks, that the situation as it has developed in China, makes it increasingly difficult to administer an aid program based on these principles. The food ECA can bring in is no substitute for the huge quantities of domestic food that seem to be excluded from China’s major cities at a time when this home-grown supply should be most plentiful. It is discouraging to us to see food scarcity at harvest time itself. Moreover, to sell ECA imports at low subsidized prices simply adds to the government’s budget deficit; and it is this deficit which lies at the root of China’s currency inflation.

On the industrial side, our replacement program is not intended as a substitute for the normal imports which China needs and for which China’s own foreign exchange earnings are expected to be used. If, [Page 645] in spite of ECA’s efforts, the total amount of productive equipment imported into China is smaller than before, our contribution to the general situation will obviously be less significant than it otherwise would have been.

The fate of ECA’s China program is, of course, bound up with the final upshot of current developments in China. Our purpose in China has been, and is now, to assist the Chinese people through their Government in every way possible in improving their livelihood, and in enabling them to shape for themselves the conditions under which they are to live and work.”

  1. David L. Gordon, Deputy Director, China Program, ECA.
  2. Bryon Houston, Director, Office of Information, ECA.
  3. Robert A. Griffin, Special Assistant to the Chief, ECA China Mission.
  4. Administered by the Joint Commission on Rural Reconstruction in China, established under an exchange of notes on August 5 by the United States and China, Treaties and Other International Acts Series No. 1848, or 02 Stat. (pt. 3) 3139. For correspondence on negotiations preceding the exchange of notes, see pp. 601 ff.
  5. Raymond T. Moyer and John Earl Baker, appointed by President Truman on September 16.