893.50 Recovery/7–1248

Memorandum of Conversation, by the Assistant Chief of the Division of Chinese Affairs (Freeman)

Participants: Dr. Tan Shao-hua, Chinese Minister
Mr. Butterworth, FE
Mr. Freeman, CA

Dr. Tan opened the conversation by referring to the $125 million grants under Section 404 (b) of the China Aid Act and stated that there were several contracts with the FLC which had been completed or were nearing completion and which the Chinese Embassy would submit to the Department shortly. He stated, however, that the Chinese military personnel, including representatives of the army, air force, signal corps and navy, had expressed dissatisfaction over the methods of procurement as envisaged under the President’s terms. In the first place, he said, priorities had not been established for China as in the case of Greece and Turkey and the representatives of the U. S. Army with whom the Chinese had been dealing did not know in what category China should be put. In the second place, Dr. Tan continued, there apparently was almost no surplus matériel available for purchase.

Mr. Butterworth explained that the Congress had attached a rider to the Independent Agencies Appropriation Act72 prohibiting the declaration of additional surplus stocks within the zone of the interior which included the continental United States and Hawaii. He pointed out that this in effect left only the Pacific area and that the majority of the surplus in this area had already been turned over to China.

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Dr. Tan indicated his understanding of this situation but emphasized that China was particularly concerned with the time factor in procuring military supplies. He stated that orders placed with commercial firms required a period of 4 to 5 months for completion to which had to be added shipping time to China. In certain cases, he added, commercial firms would have to retool completely before beginning production which would add additional time. In order to solve these problems, Dr. Tan continued, the question had been broached informally to the U. S. Army of requesting the latter to undertake all procurement of military supplies and equipment in China’s behalf. He stated that the Army representatives had tentatively and informally indicated their willingness to assume this function if the legality of such a procedure under the President’s terms could be assured and if the State Department gave its approval. The Army had mentioned, he said, that “certain items” of matériel would, however, have to be purchased by the Chinese under direct contract with commercial firms. In this connection Dr. Tan stated that Ambassador Koo was particularly anxious to do a good job in the carrying out of the procurement program under the $125 million grants and was therefore desirous of exploring every possible avenue in an attempt to jump the priority and surplus hurdles.

Mr. Butterworth stated that the Department was anxious to assist the Chinese in every way possible in their procurement problems, but he queried if, as he had indicated previously, there were very little surplus stocks available, whether the great majority of supplies required by the Chinese would not fall under the category of “certain items” to be purchased direct from commercial firms; and, in this event, what the function of the Army would be in undertaking procurement for the Chinese. In reply Dr. Tan suggested that the Army might possibly “lend” the Chinese matériel from available stocks to be replaced as soon as production could be completed, the procedure to be similar to that followed in the purchase of 6 million rounds of ammunition through Olin Industries. Dr. Tan added that whether the Chinese would pay original procurement cost or replacement cost could be determined by discussion.

Mr. Butterworth pointed out that contacts between the Chinese and our armed services had been established for the specific purpose of working out such arrangements and that similar procedures could undoubtedly be established in the future. Dr. Tan indicated that this type of arrangement still meant that the Chinese must deal directly with the commercial firms involved, which he stated they were reluctant to do, with the matériel being loaned by the Army to the firms. He explained that it was extremely desirable that the Chinese avoid [Page 113]concluding contracts direct with commercial firms as the unit cost to the Chinese would undoubtedly be greater in this way than if the Army were acting for the Chinese.

Mr. Butterworth suggested that the Army might include the Chinese requirements in its own orders by ordering, for example, 1,100,000 of a certain item with 100,000 earmarked for the Chinese. Dr. Tan indicated that this procedure would still not solve the time factor and would still require several months before production could be completed and delivery to China effected.

Mr. Butterworth assured Dr. Tan that he would discuss the problem with the Army at the earliest opportunity, with particular reference to the possibility of the Army’s undertaking the procurement function for the Chinese, and that he would inform Dr. Tan of the results.

  1. Approved June 30, 1948; 62 Stat. 1187.