The Consul General at Shanghai (Cabot) to the Secretary of State
[Received February 26—3:39 a. m.]
682. For State, Treasury and ECA from Parker. Financial reform plan as announced morning February 25 contains only general outlines new measures. No implementing administrative procedures formulated and Finance Minister and Central Bank officials Shanghai have vague and conflicting ideas plan.
As announced provides:
- Currency. Transactions gold, silver but not foreign currencies authorized; possession foreign currency not illegal. Government will mint and circulate silver dollars. Exchange certificates will continue, may circulate freely, will be bought and sold at “realistic rates”. Government retains authority administration [administrative] determination rates all circulating media (i.e. gold, silver, gold yuan, certificates) but in practice will set only cross rates between gold, silver, certificates and allow free market conditions to determine relationship gold yuan and dollar currency. All proceeds exports and inward remittances must be surrendered Central Bank for certificates. Central Bank retains control export all foreign exchange assets. Persons leaving or entering China may carry limited gold, silver and up to $500 in foreign currency notes.
- Government finance. All military expenditures and payment civilian government workers in silver dollars. Industrial taxes must be [Page 743]paid in merchandise, silver dollars or in currency equivalent value of merchandise at time actual payment.
- Import-export. Quota system abolished. Prohibited list remains, will be modified from time to time. Import permits required only for cotton, POL,27 tobacco, fertilizers. Private foreign exchange holdings may be used freely to finance imports.
While still some discussion Central Bank open market operations gold and silver, which was heart proposal presented last week by S. Y. Liu, this feature not mentioned in today’s announcement and Central Bank officials ambiguous as to present intentions. Modification proposal originally presented resulted discussion Canton. Finance Minister and Liu after set-back in Cabinet discussion rushed to see T. V. Soong28 in Hong Kong. Believe, but without confirmation, President Li and Central Bank may have lost control gold stock.
Local financial market fluctuated violently. On 24th dollar notes to gold yuan went from 2400 to 2740. Opened 25th after announcement financial measures at 3000, hit high of 3100 and closed at 2870. Opened 26th 2730. Certificates went briefly on 25th to 3200 in heavy demand since imports possible with certificates but without license. Central Bank, lacking sufficient foreign exchange cover, forced to compete in market to buy certificates.
Although press has featured activity local mint re silver coins, none of stamping presses will be in operable condition for 3 weeks. Local financial people, including H. J. Shen, manager Central Trust and secretary CUSA,29 openly agree introduction silver dooms popular acceptance gold yuan notes. Use of government stocks gold and silver only method financing deficit operations which now estimated $20–30 [million?] per month. Most press comment negative.
Afternoon February 25 Parker and Griffin informed H. J. Shen (most responsible finance official in Shanghai) of substance State-Treasury attitude silver loan. He will inform President Li today. Re-action one of great discouragement. Asked for comment as to conditions under which US would consider assistance to China in any form. He stressed that request was political appeal and admitted loan feature was sugar-coating.
Probable all prices henceforth expressed in silver dollars so long as stable. Wage payments government workers in silver will generate demand other wages paid similarly. Doubtful many enterprises can afford resulting increase wage rates. Will be forced close unless government subsidy forthcoming. Prices jumped sharply afternoon 25th. Rice [Page 744]up 30 percent to gold yuan 15,000 picul despite continuation rice rationing at controlled prices.
Sent Department; pouched Nanking 444, Canton 98, [Parker.]