893.51/3–2349: Telegram

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

637. Following are our comments (concurred in by Merchant and Parker) promised by Embtel 629 to Department, March 23, repeated Embassy Canton 182 and Shanghai 288.

Although we agree financial situation growing increasingly perilous, we can find no support on economic grounds for currency stabilization loan. Intensifying currency crisis essentially arises from internal budget deficit and not shortage foreign exchange. ECA commodity import program has substantially answered latter phase problem.

Any “stabilization” loan at this time would be merely budget deficit assistance. Deficit is internal Chinese problem and Government has consistently proved unable or unwilling to act either to increase Government revenues or reduce expenses. Fact of deficit alone is not cause but symptom of fundamental imbalance between tremendous demand arising from weight of Government’s military structure, administration [administrative] incompetence and corruption upon increasingly limited goods and services. No fiscal program involving quantitative monetary manipulations of the type monotonously recurring in past as “financial reforms” can significantly affect this imbalance. We know of no Chinese Government fiscal program proposed or in prospect [Page 747]which offers any possibility effective results in meeting monetary difficulties.

Only constructive suggestion which can be made is through more effective internal use of commodity import program of type handled by ECA. Through increasing value of commodities imported to China by applying remaining uncommitted balances in ECA account to commodity program and simultaneously eliminating or reducing all local currency expenditures from special account the Government would be enabled to finance substantial portion its deficit by commodity sales. This would have effect of increasing available goods and at same time, in quantitative terms, permit some stabilization in volume of note issue. While this action would not be adequate under present conditions to achieve any real stabilization, it should be sufficient to extend effective life economic basis of Nationalist China and retard centrifugal disintegration toward regionalism until peace talks advance to more conclusive stage.

On political grounds alone we feel this suggestion should be adopted. Although we believe that controlling factor in peace negotiations is relative weight respective effective military forces and recognize that any economic assistance cannot affect this ratio, it is obvious that complete economic collapse of South China would insure immediate surrender to Communists. It would appear in our interest to take some action which would preserve Nationalist Government in a tolerable bargaining position, even if for no other reason than to prevent sudden dramatic Communist seizure all remainder China with attendant disastrous effects on southeast Asia.

Please pass to Treasury and ECA.

Sent Department; repeated Canton 186, Shanghai 292.