794A.5 MSP/1–1053: Telegram

No. 67
The Chargé in the Republic of China (Rankin) to the Department of State

top secret

701. Re Deptcirtel 722, January 7.1 In my view principal goals of MSP in Formosa are: (1) creation military force capable of defending island and constituting significant factor in Pacific power balance, (2) stabilization of economy as necessary condition to maintenance of internal security and fullest use of island’s productive resources, and (3) development of economy to point where purely economic aid no longer required.

Progress toward military goal accelerated during fourth quarter by increased deliveries matériel. 30 percent of FY 1951 and 1952 programs now delivered and additional 45 percent FY 1951 and 1952 programs allocated and delivery expected by May 1953. These receipts materially increase combat effectiveness army and navy: Air Force potential high but aircraft deliveries far behind schedule. Reorganization Chinese army according TO and E recommended by MAAG from 10 armies and 31 badly under strength divisions to 10 armies and 21 divisions completed. All units undergoing battalion combat team phase of training will be ready for divisional manoeuvers by February 1. No adverse political developments are anticipated to hinder achievement strength goals set by JCS since Chinese Government publicly committed give priority to military with return mainland ultimate objective.

However, financial limitations urged by US missions to achieve balanced budget will prevent Ministry National Defense from increasing size US-supported divisions which now 10–15 percent under strength. Chinese armed forces fully able utilize military aid programmed. Arsenals producing less than half capacity because of budget limitations but should be brought close full capacity by US $6,000,000 OSP program now under negotiation for purchase 30 calibre 81 mm. mortar ammunition and 75 mm. recoilless rifles.

Substantial economic programs achieved during fourth quarter. As in preceding two quarters internal price level remained stable. Chinese Government satisfactorily adhered to commitment adopt sound budget policy and grant broad major powers to Economic Stability [Stabilization] Board, in which US observers play important [Page 128]role (see Embtel 230 September 5, 1952). Central and Provincial Governments both have prepared sound 1953 budgets with which counterpart fund aid provided for approximate balancing expenditures and receipts and should avoid necessity resorting previous practice of calling on Bank of Taiwan to finance government with consequent inflationary effects. This accomplished with 14 percent less counterpart budget assistance than provided in 1952. Final legislative action on budgets not yet completed but President and Premier have agreed the ESB recommendations will be followed in requesting further needed budget legislation. 1953 budgets include for first time adequate payments to government enterprises for services rendered government. Revision and simplification of complicated system of foreign exchange settlements, planned by government in December and partially placed in effect January 5, constitutes further step toward sounder fiscal management.

Chinese Government submitted to MSA Mission in December, summary development plan contemplating utilization US aid to increase substantially output of power, fertilizers, food and other products. Attainment of planned goals would make Formosa independent of US economic aid (but not military aid) 1957.

Other significant economic developments included completion Exec Yuan plans for returning six to eight government enterprises to private hands as part of land reform program, Chinese Government measures to encourage import investment capital, and increased commercial procurement MSA supplies. While these developments encouraging, support of private enterprise and mobilization private domestic and foreign capital require much further study and emphasis.

Material and psychological effects of economic and military programs important factors in creating conditions of internal security and political stability which compare favorably with other areas of Far East. Chinese Government cooperation with US agencies fully satisfactory.

  1. Circular telegram 722, sent to 55 missions, requested a summary report concerning the goals and operations of the Mutual Security Program in each host country, for use in a report to be submitted to the President. (700.5 MSP/1–753)