Foreign Relations of the United States, 1977–1980, Volume XIII, China

29. Memorandum From the President’s Assistant for National Security Affairs (Brzezinski) to President Carter ¹

Washington, May 25, 1977

SUBJECT

• Claims/Assets Negotiations with the People’s Republic of China

You requested that State probe the Chinese for their position on the claims/assets issues. This has been done, with the results which Vance summarizes at Tab A. Vance concludes that the Chinese position offers little prospect for successful negotiations at this time. I agree and share in his recommendation that no further probes be conducted. This is a complex issue, however, and I think you would be interested in the details and your options.

Issue

While we believe we have legally blocked nearly $76.5 million (1976 value) of Chinese assets, the Chinese do not recognize the legality of our blockage. Our attempts at blockage extended to PRC deposits as of 1950 in third countries (Britain, Belgium, etc.), where we sought to block $23.5 million. PRC has successfully drained $17 million of their assets in third countries. We also blocked $12 million in assets held by third country agents of the PRC (e.g., covertly sponsored PRC corporations in Hong Kong).

In short, of the $76.5 million in blocked assets, only $41.5 million are blocked, directly owned PRC assets here in the U.S.

The difference between $41.5 million and $76.5 million is crucial, given the $196 million in private, U.S. Government certified claims against the PRC, for it is the difference between a 22¢ and 40¢ settlement. (Historically, Congress has tended to accept 40¢ settlements, though it rejected a 42¢ settlement with Czechoslovakia in 1974.)

In 1973, Chou En-lai offered to restore the $17 million which the PRC had drained from third country accounts. Subsequently, the Chinese withdrew this offer. (Neither the offer nor the withdrawal has been made public; in fact, very few people know about it.) Our probe reveals the Chinese have no interest in sweetening the kitty at this time.

This leaves you with three options:

1. Reach a settlement, and accept roughly 20¢ on the dollar. This probably would not be acceptable to Congress.

2. Persist in discussions with the Chinese, to see whether an agreement can be reached which would yield 35¢–45¢ on the dollar. However, there is no sign the Chinese will be flexible.

3. Let the matter rest. An aura of good will, as existed in 1973, probably will be necessary in order to prompt Chinese to contribute to a settlement. Vance recommends this option, and I agree for the time being.

In broader terms, this unsuccessful probe probably underscores the importance the Chinese attach to the Taiwan issue and to wider political accommodation as a precondition for improving formal bilateral relations.

Recommendation:

That you approve Secretary Vance’s request to defer this issue.²

Tab A

Memorandum From Secretary of State Vance to President Carter ³

Washington, May 17, 1977

SUBJECT

• Claims/Assets Negotiations with the People’s Republic of China

Our probe of Chinese flexibility on the claims/assets issue has received a very negative response. We have carefully examined alternative ways of proceeding and have concluded that none of them is promising at this time. The Chinese have indicated that they are now unwilling to meet us part way. We believe, therefore, that a continued US effort to pursue these negotiations would be an unhelpful prelude to subsequent moves on normalization.

Background

When the Chinese confirmed earlier this year—both to David Rockefeller and to you—that a claims/assets settlement was not linked to normalization, they did not indicate that their position had changed on the key issues that had deadlocked our previous negotiations on this subject. While the claims/assets issues are highly technical, they cannot be ignored because they significantly affect the dollar amounts that will be available to satisfy US claimants.

The basic objective is to secure a claims settlement that will be acceptable to Congress. In February 1973 we reached agreement in principle with the Chinese for a mutual assignment of claims, under which the frozen Chinese assets (valued at $76.5 million in 1970) could have been used to pay off the $196.8 million in US claims. A settlement on this basis would have provided approximately 39¢ on the dollar for the US claimants.

Historically, the Congress has accepted claims agreements which provided a return of at least 40¢ on the dollar. The Department has frequently been attacked by Congress and the claimants, however, for concluding “cheap” settlements, and in 1974 Congress (led by Russell Long) repudiated a settlement with Czechoslovakia which paid 42¢ on the dollar. Accordingly, we need an assignment from the Chinese that would convey to us all of the blocked Chinese assets (whose value is now estimated at $81 million) or we will risk repudiation by Congress.

During the technical negotiations that followed the 1973 “agreement in principle,” the Chinese took positions that in effect denied us some of the blocked assets. Unless the PRC is assigning all the assets to us, the amounts available to reimburse US claimants could be reduced by as much as 6¢ on the dollar by disputes over whether certain assets are included. The Chinese also contend that funds already repaid to the PRC from blocked accounts in third country banks should be excluded from the terms of the settlement. (If these assets were omitted, it would reduce the amount of the settlement by some $17 million or approximately 9¢ on the dollar. Importantly, an offer by Chou En-lai in November 1973 to make a lump-sum payment of $17 million to the US Government to cover these funds was retracted by the Chinese in 1974 and was not reinstated by the Chinese in the talks we held in April.)

Unless we can satisfactorily resolve these issues, we would be faced with a settlement paying less than 25¢ on the dollar.

Our Latest Discussions

Our probe in March was designed to ascertain whether the Chinese were prepared to be more flexible in finding ways to meet US legal and Congressional concerns. We proposed to them that we return to the February 1973 “agreement in principle,” and disregard the subsequent negotiating history during which the technical problems had arisen. If the Chinese had accepted this proposal, we were prepared to make a new effort to work out a satisfactory settlement. Instead, the Chinese on April 29 not only rejected our proposal but reiterated their earlier positions in a blunt and unyielding manner, choosing the most negative of their earlier stands.⁴

In light of the above, I recommend that we defer any further approaches to the Chinese until we have reached basic decisions on our normalization strategy.

I think it is clear now that if there is any prospect of a tolerable resolution of this problem, it will have to come in the context of normalization. We will need some movement by the Chinese, and this is most likely to occur, as it did in 1973, in the positive atmosphere produced by forward movement in our relations. I can explore this further during my trip to Peking, but I do not think it desirable to raise it again at the Assistant Secretary level before then.

At the same time, in the light of your press conference remarks May 12,⁵ we do not want to give either the Chinese or the public the impression that progress toward normalization is dependent on a claims settlement. We will continue, therefore, to avoid statements suggesting that agreement is near on a claims settlement, and not suggest any linkage between this issue and the question of normalization. Such linkage is not in the interests of either side, as it could make the vital issue of normalization hostage to highly technical factors on a secondary issue.

Recommendation:

That you authorize me to defer presenting the Chinese with any further proposals on claims/assets for the time being, in the expectation that we will again address the issue in preparing for my trip to Peking.⁶

1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 8, China (People’s Republic of): 3–6/77. Secret; Sensitive. Sent for action. A handwritten “C” at the top of page indicates Carter saw the memorandum.
2. Underneath the recommendation, the President wrote, “OK. J.”
3. Secret; Nodis.
4. See Document 27.
5. During a news conference on May 12, Carter was asked whether he had set a target date for normalization of relations with China. He replied: “Well, it’s very difficult for me to set a target date, because this is a two-way negotiation. We have commenced discussions with the Chinese Government to resolve the first obstacle, and that is the claims settlement. Long years ago, we had roughly $190 million worth of American property and other goods confiscated by the Mao Tse-tung government. We in our country confiscated in return about $80 million, I believe, primarily in Chinese bank deposits. We’ve never been able to work out those differing claims. That would be the first step.” (Public Papers: Carter, 1977, p. 863)
6. Carter checked the Approve option, under which he wrote: “We should assess before your visit what—if anything—China has done in the last 10 years that was flexible or constructive. I can’t think of anything. J.” In a May 26 memorandum to Vance, Brzezinski stated, “The President has approved the recommendation contained in your memorandum of May 17.” (Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 8, China (People’s Republic of): 3–6/77)