The British Embassy to the Department of State 1

Continuation of paper on China attached to Sir Oliver Franks’s2 letter of 5th January 19493 to Mr. Lovett.4

Economic Effects

The main economic effects of a Chinese Communist advance depend again on whether the advance is stopped at the Yangtze or continues over South China. The main fields in which our economic interests might be affected (depending on the extent of the advance) would be—

British Commercial property and investments in China;
China–United Kingdom trade;
The economy of Hong Kong;
The economy of South-East Asia;
Overseas Chinese remittances.

In general it might be assumed that, wherever the Communists might get to, there would be an initial period before any stable administration could get going there, when foreign commerce and business generally would be at a low ebb. This could not, however, be a very much worse state of affairs than that existing in China at present, with the lack of easy and safe internal communications, extremely inflated prices, the restrictive attitude of the present National Government towards foreign trade, shipping and business, and the prevalent corruption. During this period the economies of Hong Kong and South-East Asian countries generally would probably be affected mainly (and in the case of Hong Kong, seriously) by labour disturbances and refugees, but only to any great extent if the advance continued beyond the Yangtze. There is, too, a possibility that the Communists might decide to by-pass Shanghai, isolating it from its hinterland. In this [Page 818] event the city would be faced with starvation, and not only would the danger to British life and property be increased, but we and the Americans would be under considerable pressure to supply it by sea.

In the longer term much depends on the attitude the Communists adopt towards foreign commercial and shipping interests, and towards Hong Kong as a foreign enclave on the one hand and as a well-run and well-organised entrepôt on the other hand. If one assumes a period of Communist opportunist policy, foreign trade and business with and in the Communist-dominated area will probably not vary greatly in quantity but should at least be less precarious—unless and until the threat of expropriation begins to be felt. Undoubtedly the maintenance or creation of a balance of visible trade using existing facilities (Hong Kong entrepôt, foreign shipping, foreign-owned insurance and commercial houses) would be a vital prop to a new Government, at least until it felt in a position to provide the facilities itself. And any Chinese Government would have to maintain facilities to provide for essential imports (rice, raw materials, etc.) which in 1936, a good year, amounted to 17 per cent of her imports. As against this, however, it must be assumed that a general tightening up of controls would occur with resultant restrictions on remittances and general trade.

The final stage of expropriation or expulsion of foreign commercial and shipping interests and investments, and the undermining of Hong Hong’s economic prosperity, may not materialise for some time in view of the extent and essential nature of these interests compared for instance with those in Eastern European countries.

A more detailed consideration of these possible economic effects is given under the several heads below.

(i) Chinese visible imports from Sterling Area

United Kingdom exports to China, which amounted in 1947 to nearly £13 million, will probably be slightly less in 1948.

(ii) United Kingdom visible imports from China

United Kingdom imports from China, which amounted in 1947 to about £7 million, will probably be more in 1948. They consist chiefly of bristles (an important raw material, and China is the main source of supply), vegetable seeds etc., dairy produce (mainly eggs), tung oil and tea. Given financial and political stability and improved transport China could contribute far more than this insignificant amount to our requirements of agricultural produce and raw materials, but she could scarcely become a major source of supply for basic commodities. Most of this trade passes through Shanghai, and many of the areas from which the imports are drawn lie to the North of the Yangtze (the two chief exceptions being the southern province of Kwangtung and the island of Formosa). The effect of domination of China down to the Yangtze by a Communist government would therefore differ only in degree from that of domination of all China by such a government.

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Unless it is prepared to face widespread suffering and discontent, any Chinese Government must foster at least enough foreign trade to pay for essential imports, of which rice, food-stuffs and raw materials form a high percentage. This need for essential imports would mean that a Communist administration would be under stronger pressure than the Nationalist Government to take active steps to increase the volume of exports, since it would probably be without any credits from foreign countries, and unable to draw upon such resources as the sterling credits acquired in this country by Chinese industrialists and financiers during the war, which have paid for a proportion of the capital goods sent to China in the last three years. We might therefore be in a better bargaining position than in present circumstances to obtain the sort of commodities we want from China, but the Chinese would undoubtedly want scarce and high priority goods in return.


There is as yet no indication of what Communist policy towards foreign shipping will be. Independence of foreign vessels and the closing of the Yangtze to foreign shipping have long been objectives of Chinese nationalist feeling, but the Communists will certainly need shipping for coastal and river traffic, and their policy may well be determined by the amount of the present Chinese merchant tonnage which falls into their hands. British shipowners in the China trade are prepared to trade wherever trade offers.

(i) Coastal shipping between China, Hong Kong and South-East Asia

It is impossible to assess how much of the existing Chinese flag coastal tonnage, which now has the monopoly of the coastal trade and amounts to some half million tons gross, will become available to the Communists.

(ii) Ocean shipping

The ocean companies are concerned chiefly with Shanghai. Ocean shipping would not be affected if the Communists allowed foreign flag vessels to trade there, but would cease if they did not. If the Communists captured Shanghai’s hinterland but not Shanghai itself ocean companies would probably continue their present trade in an attenuated form.

The extent of Chinese overseas tonnage is negligible. Therefore, if the Communists were obliged by economic necessity to use overseas vessels, British tonnage should obtain a share.

(iii) River shipping

The Yangtze, which is navigable by ocean going vessels and is China’s main waterway, is at present closed to foreign shipping.

(iv) Assets of British shipping firms in China

The shipping firms trading in China and those trading with China, as well as the oil companies, all have extensive shore properties in every [Page 820] port and in addition they own harbour craft such as the tugs and lighters in Tientsin, practically the whole of the dock and repair facilities in Shanghai and a considerable proportion of the harbour craft there as well. The value of these properties was valued in 1941 at £18 million.

The economy of Hong Kong

Subject to what has been said above, Communist domination of China down to the Yangtze would probably not affect Hong Kong’s economic position if a strong resistance line could be formed at the Yangtze; it might even be benefited, more especially if the use of Shanghai as a port became more difficult and increased imports of essential food, petrol, oil, etc., for China were to be diverted, in whole or in part, through Hong Kong.

If the Communists dominated all China, they might provisionally wish for their own purposes to keep Hong Kong as a going concern in British hands. They might, however, take ruthless steps to acquire all Hong Kong dollar notes held in South China; this could only be partly successful unless the Chinese economy were prosperous and the Hong Kong dollar definitely on the decline—there would be no inducement to surrender Hong Kong dollars voluntarily except for a stronger currency. Hong Kong notes requisitioned by the Communist Government might be used indirectly to obtain sterling credits for purchases for the Chinese Communists or for the U.S.S.R. Shares of Hong Kong public utility and dockyard Companies would probably fall substantially, but it is considered unlikely that there would be an actual flight of British capital. If the Communists chose to carry on a cold war against Hong Kong on the economic front, they might be able, temporarily at any rate, to paralyse the economic life of the Colony by fomenting strikes.

Economy of South-East Asia

The most serious economic effects of a Communist-controlled China are likely to be—

the probable increase in Communist-inspired labour disturbances in South-East Asia;
a serious refugee problem, particularly in Hong Kong, whose food resources will consequently be strained to the utmost;
further disturbances in the rice-producing countries (Burma, Siam, Indo-China) leading to a decrease in the production of rice, on which we, India, and Ceylon rely to feed the increasing populations of our respective territories. Already rice production is lagging well behind pre-war and any decreases in the present inadequate production will have the greatest repercussions on our colonial territories and on the Asian Commonwealth countries. A decrease in rice consumption will provide fertile ground for Communist agitation. This—together [Page 821] with general disturbances in other South-East Asia industries—would cause further disruption of the economy of the area with consequent adverse effects on the production of such vital commodities as rubber, tin, edible oils, etc., which are of such importance to world economic recovery.

  1. Handed on January 11 to the Chief of the Division of Chinese Affairs (Sprouse) by the Counselor of the British Embassy (Graves).
  2. British Ambassador.
  3. Ante, p. 2.
  4. Robert A. Lovett, Under Secretary of State.