265. Telegram From the Embassy in the Republic of China to the Department of State0

956. Joint Embassy/ICA message. Department’s 559.1 In accordance with instruction transmitted in reference telegram, ICA mission Director and Economic Counselor met February 19 with senior Chinese economic officials to continue discussions of Chinese budgetary prospects and Chinese request for additional economic aid. No new information was developed on former subject which has been gone over intensively by American and Chinese officials several times in past two months. Discussion, however, confirmed previous belief of Embassy and ICA mission that delay in official response to Chinese request inhibits Chinese action to check increasing threat of inflation. In yesterday’s conference, Chinese repeatedly made point “bad answer is better than [Page 536]none,” and specifically stated that economic agencies cannot urge drastic budgetary economy until issue of aid level is resolved. We therefore urgently request immediate authority to inform Chinese additional aid will be no more than US $9 million. Once this issue is cleared away, Embassy and ICA mission can more effectively urge necessary anti-inflationary measures.

Following comments are keyed to numbered paragraphs of reference telegram:

1.
Prospective budget deficit is only in small part inevitable consequence of Quemoy crises. (See D–395, D–335, and D–326.)2 Role of crisis in deficit has been principally to open door to relatively unrestrained military spending not directly related to Quemoy crisis. If inflation is to be checked, it will be incumbent on GRC to scrap less essential proposed new military expenditures, stretch out others or endeavor to increase NT dollar revenues to meet expenditures. Additional infusion of US dollar aid at this juncture would not be effective; indeed it might encourage more local spending. Perhaps our best procedure now is to build up counterpart balances so as to mitigate impact of excessive military spending.
2.
As relayed by Martin Wong3 to CUSA, Department’s statement to him has been interpreted as implying possibility of considerable increase in aid if only Embassy and ICA mission will concur.4 As result, we have been placed in embarrassing position.
3.
Offshore procurement of POL appears preferable to increase in defense support, since it would not only permit Chinese to earn more foreign exchange but would also make use of some presently unused capacity at Kaohsiung refinery. This cost is moreover one which US should help Chinese meet. Offshore procurement of POL would have incidental effect of reducing present GBS for POL.5

Drumright
  1. Source: Department of State, Central Files, 793.5–MSP/2–2159. Confidential.
  2. Telegram 559 to Taipei, February 13, stated that since the current GRC aid request was based primarily upon the additional budget deficit allegedly deriving from the Quemoy crisis, it was necessary to make further efforts to obtain GRC agreement to its reduction. (Ibid., 793.5–MSP/1–1659) Ambassador Yeh had requested a $20 million increase in economic aid on December 19. (Telegram 487 to Taipei, December 20, 1958; ibid., 793.5–MSP/12–2058) These documents are in the Supplement.
  3. Despatches 326, 335, and 395, December 26 and 31, 1958, and February 6, 1959, reported meetings held by Embassy, ICA, and MAAG representatives with senior Chinese economic and defense officials to discuss the prospective size of the GRC deficit for the coming fiscal year. (Department of State, Central Files, 793.5–MSP/12–2658, 793.5–MSP/12–3158, and 793.5/2–659, respectively)
  4. Economic Counselor of the Chinese Embassy in Washington.
  5. Telegram 559 to Taipei stated that the Department would suggest to the Chinese Embassy that the matter be discussed at the technical level in Taipei. Telegram 584 to Taipei, February 25, stated that the Department had told Wong that “although there is disposition to help, available data do not demonstrate financial requirements of magnitude requested, particularly in respect additional budgetary needs.” (Department of State, Central Files, 793.5–MSP/2–2159)
  6. Telegram 610 to Taipei, March 12, authorized the Embassy to inform the ROC Government that the United States would take steps to provide additional assistance totaling approximately $6.3 million. (Ibid.; see Supplement)