893.5151/2–2349: Telegram

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

631. For Treasury, State, ECA from Parker. On February 19 Hsu Kan and S. Y. Liu held further discussion with Ambassador, Merchant, Parker on proposed financial measures. Plan changed from that reported ConGentel 550, February 15, principally in retention of exchange surrender certificate plan. Import licenses will be discontinued although present prohibited list will be retained. Certificates will be sold freely on open market and Government hopes this will become significant source of interest for short term credit. (Other informant reliably reports issuance certificates has exceeded foreign exchange cover for past several months.)

Gold, silver, foreign currency notes, but not foreign exchange will circulate freely but export prohibited. Central Bank will release gold at rate $15 million per month in redemption GY notes. Gold will be sold highest obtainable price with objective maximum contraction note circulation. Bank will also undertake general open market operations, buying, selling gold, silver currencies throughout China and Hong Kong.

Government will go ahead with gold sales plan and release silver coins as troop-civil worker pay without waiting US reaction silver loan. Finance Minister and Central Bank officials still pressing for [Page 741]answer from State and Treasury Departments on prospects negotiations for silver loan. Central Bank now reports total external assets $300 million of which gold just under 3 million ounces and silver 40 million coins and 20 million ounces bars. Unable so far reconcile Central Bank reports with information total gold holdings nearly 6 million ounces.

Officials consider too late in China’s day to place government finances on tax supported basis. Accordingly note issue will be expanded by approximately 60% per month although open market gold operations expected greatly to minimize effect on prices. During past month note issue expanded 200% with Shanghai wholesale price index up 6.8 times. GY circulation February 18 was 40 billion.

S. Y. Liu, Governor Central Bank, apparently determinant influence financial policies in China. He assured President Li that he can hold currency for 3 to 4 months. In addition to attempt avert currency collapse, plan generated by Government [in] alarm [at] tendencies toward assumption by Provincial Government of regional autonomy over financial matters. This includes provincial currencies and retention all tax collections. Reported that peace mission in contact Mao Tse-tung19 emphasizing precarious position currency and urging compromise soonest to permit Communists take over while montetary situation intact. Have reliably learned financial planning, including national currency and Central Bank, undertaken by Communists only within last 2 months. Communists have appealed to number Central Bank people for planning assistance. Reported Chang Kia-ngau20 was asked prepare memo on Central Bank operations. Communists actively seeking foreign financial advisor and have approached people here and with US Government in Washington. Reliably reported inadequate preparation monetary management one of most important reasons delaying further advance.

Request immediate instructions reply to be made regarding silver loan.

Sent Department, pouched Nanking 418, Canton 84. [Parker.]

Cabot
  1. Chairman of the Central Committee of the Chinese Communist Party.
  2. Governor of the Central Bank of China, March 1947–May 1948.