Foreign Relations of the United States, 1949, The Far East: China, Volume IX

893.50 Recovery/11–2549: Telegram

The Consul General at Shanghai (McConaughy) to the Secretary of State

Shanghai, November 25, 1949—4 p. m.
[Received November 25—9:44 a. m.]

4933. Re last sentence paragraph 3, Ecato 1496, November 21.⁵⁰ ConGen recommends that ECA immediately suspend negotiations along lines described paragraph 2 (a) as prejudicial to entire ECA disposal program in which St. Louis had made significant progress in recent weeks.

ConGen observes Wu Yang’s offer predicated on approval by local Shanghai authorities. In ConGen’s view, which St. Louis shares, inconceivable that Shanghai authorities or highest Commie authorities Peiping would agree, as must assume Commie authorities will decide ECA disposal issue Shanghai exclusively in terms their own self interest which WuYang obviously would not serve, inasmuch as it would deprive Commie regime of the proceeds of ECA cotton (urgently needed for relief purposes) and would cause an unnecessary loss of scarce foreign exchange.

ConGen feels it imperative at this time avoid giving Commies slightest pretext for charging duplicity in handling of this matter. See Toeca 2195,⁵¹ paragraph 5 restated Toeca 2296 [2196]⁵² paragraph 5, and Toeca 2233, Nov. 22.⁵³ Believed that slightest intimation to Shanghai authorities that ECA seriously considering Wu Yang’s offer while overall settlement under negotiation would be interpreted by Shanghai and Peiping Commies as prima facie evidence of “bad faith” which would jeopardize not merely status of SRO and its disposal program, but would likewise lead to further general deterioration of relations with Commie regime. This problem has been discussed with Von der Crone, Volkart agent, who concurs fully and is unwilling accept personal risks to which he would be exposed by participation as middlemen between ECA, WuYang and Commie authorities. Position Von der Crone on Shanghai Board Trustees, Allocation Comite, further complication.

ConGen believes implications of Wu Yang offer would appear to Commie authorities as follows:

1. ECA seeking to obtain indirectly from North China Foreign Trade Bureau payment of about US $3.7 million for raw cotton in order to avoid delivery to Shanghai Board Trustees which under SRO disposal program would receive and disburse JMP proceeds for benefit Chinese people. This connection, both Peiping and Shanghai authorities fully appreciate that original SRO disposal plan included ECA raw cotton Shanghai. However, reasonable to suppose North China Foreign Trade Bureau unfamiliar with SRO disposal plans. When deal came to light, would be interpreted as US attempt to “play on Commie ignorance”.

2. Offer further presupposes Shanghai authorities would willingly permit ECA raw cotton Shanghai to be shipped to North China where larger domestic supplies are available than Shanghai, and from which area Shanghai mills desperately attempting procure raw cotton.

Shanghai still under jurisdiction SMCC⁵⁴ which evidently still enjoys large degree autonomy. It is equal from administrative standpoint of North China military control COMM [commission], at least for purposes transactions this nature. Reasonable assumption Shanghai Commies would immediately report any developments such as Wu Yang offer to Peiping in light most unfavorable to ECA.

Comment authorities Shanghai now pressing SRO for detailed specific information re exact amounts location ECA raw cotton, cotton cloth, yarn (which in any case they can obtain from JMB). Note also date December 1 set as time-limit for consummation Wu Yang offer.

Any tentative agreement made with Wu Yang would in all likelihood be promptly repudiated along with remainder ECA disposal program when full facts came to attention highest Commie levels with consequences prejudicial to larger interests US Government. ConGen’s recommendation influenced by strong hopes for early consummation SRO disposal program along lines originally presented if we do not depart from announced basis.

Finally, there remains possibility that Wu Yang offer may be deliberately designed by Shanghai Commies to trick ECA into action which could be exploited by Commies as basis for propaganda exposure of American duplicity and justification of Commie seizure of all stocks without payment.

In view above, ConGen trusts Wu Yang offer will be dropped immediately to avoid any inkling this offer reaching ears SMCC at present delicate stage.

This telegram has been shown to St. Louis, although not drafted at his instance. Neither he nor ConGen critical of ECA Washington which we realize is animated by praiseworthy motive of salvaging as much as possible for benefit our taxpayers. However, highly commendable job was done by ECA last spring in diverting aid, evacuating all possible ECA commodities prior Commie take-over. We believe we must abandon all idea of recovering for US Treasury anything from relatively small balance raw cotton remaining here which has become important pawn in accomplishing successful liquidation ECA effort here with benefit to worthy Chinese charities, without accrual any direct political or military benefit to Commie regime.

Taipei please pass Nason, ECA, urgently, now either Taiwan or due shortly.

Hong Kong please pass Meiklejohn, ECA. Sent Department 4933, repeated Taipei 511, Hong Kong 491.

McConaughy

50. Not printed; it requested comments on whether ECA’s cotton disposal plans might endanger ECA personnel or residual assets. Paragraph 2 (a) indicated that ECA was contemplating cash sale of its Shanghai cotton to the Wu Yang Trading Corporation, Hong Kong branch, Volkart Bros, of New York to act as seller. (893.50 Recovery/11–1749)
51. October 5, not printed; paragraph 5 suggested the desirability of obtaining from the buyer substantial assurances that Communists approved the proposed purchase lest it increase their hostility to the ECA and complicate relations with the Consulate General and the American community in Shanghai.
52. Copy not found in Department of State files.
53. Not printed.
54. Shanghai Military Control Commission (Communist).