Foreign Relations of the United States, 1951, Korea and China, Volume VII, Part 2

893.00/11–151: Telegram

The Consul General at Hong Kong (McConaughy) to the Secretary of State

secret
priority

Hong Kong, November 1, 1951—9 p. m. and 11 p. m.

1612. Deptel 1754, Oct 26.

1. Fol introduction US Dec 3 [1950] controls, Hong Kong’s export trade with Chi declined from Hong Kong dols 234.8 millions in Jan to Hong Kong dols 141.3 millions in June (40 percent drop). Hong Kong export controls introduced June 25 caused drop to Hong Kong dols 88.8 millions in Sept (drop 62 percent since Jan). Hong Kong export to Macao (of which over 90 percent re-exported Chi) decreased from Hong Kong dols 28.2 millions in Jan to 20.5 millions in Sept (drop 27 percent). No tonnage figs available. US FEC agree controls denied Chi US material with exception items smuggled from Hong Kong and Macao (at very high cost) and small amounts diverted via Europe and India. Too soon to evaluate effects Hong Kong June 25 controls on Chi, especially as Commies obtained considerable supplies essential items in and through Hong Kong during winter and spring 1951 perhaps for stockpiling. Commie purchasing agencies Hong Kong and elsewhere endeavored develop alternative sources, especially for steel and other materials, chemicals, scientific instruments, pharmaceuticals etc, with some initial success, but known current operations are confined to direct shipments from Sov bloc countries through Gdynia, rubber from Ceylon, raw cotton from Pak. Commies now hope further develop route Port to Macao for items collected in Europe. Several successful shipments already accomplished.

2. Chi seemingly rapidly adjusted itself to anticipated all-out US controls and subsequent less severe UN controls. Accurate info difficult obtain but consensus no especially adverse effect as yet developed China’s urban economy. Need to maintain its part Korean war effort has perhaps imposed greater strain. There have been many instances of planned industrial expansion having to be postponed for lack of materials which may or may not have come from the west, but also there are many reports of claimed successes in mfg items hitherto imported from the US or UK. Reports from travelers describe increased service and efficiency of many utilities, some of which depended very largely on imported machinery; spareparts, fuel and other items. One never reads in Chi mainland press of any hardship resulting from China’s inability to obtain imported items. On contrary, press delights in describing how shortages of certain items have stimulated local inventive genius to design comparable substitutes. There is no indication, of course, of the adequacy of substitution. Interchange of goods between areas in Chi said to be another means designed to meet shortages as well as to publicize and encourage trade in each province’s products.

Effect on administration has been to cause it to promote patriotic drive by one means or another to encourage people work harder, contribute more, accept personal sacrifices, and exploit resources to make China’s economy more self-sufficient. Controls have also served strengthen economic ties with Sov and Eastern Europe. Also important is abundant evidence Commies expect obtain further relief by trade with Japan, with latter justifying expansion on grounds natural trade ties.

Reports are Commies dissatisfied with trade relations with Sov and satellites because of excessive cost of items, slow deliveries, and gen inferior quality.

3. As far as can be ascertained rural economy said to be the least affected by controls. Chemical fertilizers, burlap and gunnybags, small hand tools are permitted export to Chi. Where farm machinery came from the west, slack is reported to be taken up by imports from Russia, Czecho and by increased local manufactures. There appears to have been no interference with sowing and harvesting of crops by cutting off of any farmers supplies.

4. Fol from US mil liaison off. Impossible provide any specific info ways in which trade restrictions affected mil operations Korea, because lack info here on Chi Commie mil operations Korea. In any case, it can be assumed any shortage actual munitions or implements of war cld not be ascribed to trade restrictions, since they were unavailable from western countries even before the UN acted to restrict trade. Shortages in these lines can only be ascribed to inability of Chi produce them themselves or failure of Soviets provide them in sufficient quantity.

There is evidence that arsenals may be running short of materials. A C–2 report last week stated Kwangtung arsenals placed on shortened working week due shortages supply.

Aside from munitions, fields in which Chi Commies probably most vulnerable are transport and communications equipment.

Their urgent need trucks obvious from heavy demand for cars Hong Kong, the cannibalizing old trucks and searching junkyards for spare parts which is carried on intensively Chi. There is however, no indication whether the mil have, as yet, been hampered by lack of transport. Need for electronic supplies graphically demonstrated by lengths people go smuggle few radio tubes out Hong Kong. With respect trucks recent report on equipping Chi armored force by Russians stated Chi given mixture Russ and US trucks, (the latter presumably lend-lease).

May be assumed civilian economy will be compelled absorb fullest possible extent impact any shortage supplies needed mil operations Korea.

5. Effects on commodities. Rubber—Chi recd so much rubber from Malaya for its own use and for re-export to Russ before restrictions were seriously imposed that adequate supplies have been available to meet mfg programs. Exports of rubber from Ceylon to Canton, if continued, supplemented by small quantities available from Hainan and smuggled cargoes from Indonesia will permit some rubber manufactures to continue. Unless synthetic rubber is manufactured or becomes available from satellite countries, the country’s plans for making motor tires will probably bog down. Shanghai and Canton rubber shoe factories, important to outfit troops in Korea, will undoubtedly receive major allocation of available rubber.

Cotton—termination of UK exports of raw cotton to Chi resulted in large orders being placed in Pak. Most of these deliveries have been made, at high costs; but they have been essential to continue China’s weaving and spinning industries after 6 weeks suspension due disappointing 1950 local cotton crop. If Pak and Russia are able continue to deliver cotton to Chi, country’s basic needs of textiles can be provided. China’s short supply of certain textiles such as sheetings and shirtings has been partially relieved by recent shipments from Japan direct and through Hong Kong.

Petroleum—effect of restrictions on petroleum exports into Chi were serious shortages and rationing throughout the country. The Commies gave this item top priority and instructed agents to develop sources regardless of cost. Macao has appeared large in this trade, resulting in many thousands of drums of lubricating oil, gasoline and kerosene reaching Canton. However, recent reports show Russ tankers arriving Dairen with gasoline and that civilian allowances appear once again adequate at least in coastal cities. Lubricating oil remains very tight everywhere, while kerosene is priced out of reach of the average user.

Steel—steel reported to be increasingly short despite effort stimulate production Manchuria. Commies acquired very large tonnages in and through Hong Kong before June 25 and have endeavored to develop shipments from Poland. Steel rails, structural steel, tin plate, high-speed steel are items urgent and constant need.

Transportation—Commies have buying orders out for 25,000 trucks of three one-half-five-ton types with little likelihood of receiving more than 500 from Czechoslovakia via sea route and possibly another 500 from US [USSR] by rail. Chi interior said be short most types trucks, but essential transportation appears be cared for in main centers. Russ trucks seen in several areas. Tires and auto parts in critical short supply despite huge shipments from Hong Kong before June 25 controls. Shipping controls—obvious that lack tonnage to lift cargoes from areas still prepared to trade with Chi seriously retarding deliveries. Commies bank heavily on the use of (registered) vessels, but Panama’s recent restrictions (decree 631) likely interfere. Polish, Pak, Port, Greek and occasional Italian steamers are delivering cargoes. Brit vessels cater for most of the trade between Hong Kong and Chi, with occasional deep-sea Brit ship bringing Brit and European cargo directly Whampoa.

Overseas exchange—US foreign assets control regs of Treas appear have increasing adverse effect on China’s foreign exchange notwithstanding relative ease of fund remittance through medium Hong Kong dol. US restrictions are import of goods of Chi origin, freezing dol accts held by residents of Chi, and prohibition remittances from US. Chi have cut off possibly 80 percent Chi normal supply US dols and about 30 percent China’s overall supply foreign exchange.

Some specific pressures on econ and polit systems possibly aggravated by US and UN controls are:

(a) Inflationary pressure from rising prices and revived black-market dealings US dols which forced auths introduce unpopular heavier taxes and funds—drive for armaments;

(b) Tendency for govt take over more econ functions—latest example notification merchants Canton Shanghai, govt will “nationalize” 18 lines next three years including import/export houses;

(c) Greater interference private businesses. Latter not done by direct police power but by creating atmosphere of fear through campaign against counter-revolutionaries to point where businessmen consider it unwise oppose too strongly any new govt suggestions. Govt’s gradual encroachment on private banks done by making it evident banks in which govt does not participate have operating difficulties and by impressing on bank officials unwise refuse govt request take over portion assets and bank direction.

This inclination to attempt solution of econ problems by continual extension area of govt control and operation means steadily growing bureaucracy and probable decrease in efficiency of production and distribution due no lack of experienced administrators.

In conclusion, since Chi able import almost unrestrictedly until US imposed controls Dec 3, and as substantial quantities many strategic items obtained up to time nations applied UN controls, conceivable stockpiles have acted so far as buffer against effects of cumulative controls. While no info available as to condition stockpiles of frequently used essentials, believe next six months will show full effects controls unless exporting countries not cooperating UN can supply adequate replacements.

Further details will be airpouched Nov 6.²

McConaughy

2. Further details were contained in despatch 885, November 7, from Hong Kong, not printed (893.00/11–751).