661.9331/8–649: Telegram

The Counselor of Embassy in China (Jones) to the Secretary of State

1727. It seems to us that USSR has placed itself in rather anomalous position by signing recent trade agreement with “Northeast People’s Democratic Government of China”: Either USSR has accorded de facto recognition to most important regional government of Communist China while itself maintaining full diplomatic relations with Nationalist China or it has admitted to world that Manchuria has special status within Soviet orbit similar to that formerly held by Outer Mongolia and Tanna Tuva. If latter is case, this should be bitter pill for Nationalistic elements in Communist China to swallow. This agreement of [“]NE People’s Democratic Government” with a foreign power has no parallel in case of “North China People’s Government” and Central China and other liberated areas, for latter have hitherto limited themselves to trade agreements with each other.

Fact that agreement meets with approbation of CCP hierarchy as well as Soviet-sponsored Chinese Communists in Manchuria is indicated by fact that Kao Kang, who headed Chinese Trade Delegation to Moscow, is member of CCP Politburo. Furthermore. CCP-controlled press is making all-out effort to drum up popular enthusiasm for agreement by quoting laudatory statements of workers, industrialists, students, economists, et cetera, to effect that agreement is based on footing of equality and mutual benefit, that they hope exchange of goods will be extended to include remainder of China as well as new [Page 957] democratic countries in eastern Europe, that agreement is blow at “imperialist” blockade, that USA used to send China nylon stockings whereas USSR sends industrial machinery, et cetera. On humorous side is fact that none of these comments is based on any knowledge of terms of agreement. For all these observers know, ratio of Manchurian exports to imports may be very unfavorable or industrial equipment so desired by CCP may constitute only insignificant fraction of imports from USSR. Obviously intelligent comment is impossible as long as terms of agreement are kept top secret.

As to economic aspects, we assume agreement probably involves heavy exports of soya beans, vegetable oils, maize and rice to USSR at terms very favorable to Soviets. Presumably benefits to Soviets must have been great to induce them thus to deviate from their long-standing policy of “correctness” toward Nationalist Government. Note that these same commodities are vitally needed in other Communist-occupied areas such as North China and Shantung where early severe famine threatens. Not only for humanitarian relief but also to help relieve rampant inflationary conditions, these surplus Manchurian commodities would be most welcome, for instance, in Peiping where price of millet has increased about six times since last April or in Shanghai where during similar period rice prices have increased fivefold.

Sent Department; repeated Shanghai 949, EmbOff Canton 720, Moscow 55; Department pass Peiping 323.