893.01/954: Telegram
The Chargé in China (Atcheson) to the Secretary of State
[Received July 24—2:05 p.m.]
1270. For Department and Treasury only. 1. At the risk of giving matter more emphasis than it perhaps merits at present, we report that [Page 435] there appear to be mounting evidence that not only is smuggling and trade at points between occupied and unoccupied China expanding but that commercial intercourse by Chinese travelers who proceed at will between main centers of the two areas such as Shanghai and Chungking is on the increase. It is reliably reported that frequently some of these persons use Japanese official facilities such as Japanese military planes from Shanghai to Canton for part of their journey in this direction. The informant41 mentioned in Embassy’s 1139, July 9, 5 p.m.42 [has?] Japanese pass which enables him to travel the route he mentioned in occupied territory without search or any molestation other than an occasional request that he show his pass. (The statement mentioned in Fowler’s43 [message?] contained in our 1149, July 10, 4 p.m.,42 that this informant brought with him to Chungking from Shanghai CN dollars 25,000,000 appears from a later conversation with him to have been not entirely accurate. He states that in recent months he and his associates in Shanghai have forwarded varying amounts totaling that sum for the purchase of United States currency savings certificates and that the certificates were actually purchased and in due course delivered in Shanghai.)
From what he has told us and from other sources it appears that organized trade in small bundles (“imports” into Free China consisting chiefly of so-called luxury goods) as carried on over the Lunghai route with regular stations along the way at which payment is made, that a lively exchange business has grown up at these points. Trade is carried on even in currency; he states that he brought with him 1 million dollars in CRB notes which he disposed of at the rate of 1.06 to 1. According to a leading informed banker here, the more “regular” trade in goods over the Lunghai route alone amounts to some CN 30 million per month. There is not available any estimate as to the value of the more sporadic trade and the extensive smuggling in other areas but it must amount to a figure several times that of the trade mentioned above.
2. According to the Consul at Kweilin44 and to information said to have been received by American military officers from a Kweilin banker, there has reportedly organized a “semiofficial” company known as Yuhua Chuang, capitalized at CN 100 million, under the direction of General Tai Li, head of the principal Chinese Secret Service, to control and legalize trade between occupied and unoccupied areas in south and southeast China. We have been informed on good authority that some time ago Tai Li was requested in the highest places [Page 436] to organize a company for the purpose of bringing under control smuggling operations and the profits therefrom; we know definitely that Tai Li is operating transportation companies in areas close to occupied China.
3. The Consul at Kweilin also reports that Japanese agents in recent weeks have introduced into unoccupied China large sums in counterfeit Bank of China notes printed from plates belonging to the former Chunghua Book Company at Hong Kong. This report has been confirmed by authoritative sources.
The Consul cites further reports at Kweilin that the counterfeit notes brought into unoccupied China total 10 billion dollars (an amount which seems to us fantastic and which should probably be reduced to say 100 million); that they entered China through Kwangchowan; and that with them the Japanese are purchasing strategic materials in Free China at many times the market prices and are in general accelerating economic deterioration in unoccupied China. The Consul states also that, according to a Chinese banker in a position to know, the Kweilin branch of the Bank of China has received orders from its head office to accept the bogus notes even [when?] they may be conclusively identified as counterfeit.
The Chunghua Book Company previously manufactured bank notes for the Central Government. We are authoritatively informed that at the time of the capture of Hong Kong there fell into Japanese hands not only the plates but a large number of bank notes bearing serial numbers but no “chop” and also large number of notes that were completed except for serial numbers and chops; and that there are now in circulation three categories of these counterfeits: (a) bearing proper serial numbers with counterfeit chop; (b) bearing correct serial numbers and counterfeit chop; and (c) newly printed by the Japanese from the plates. It is believed that the notes being accepted by the Bank of China are those of first and possibly second category and that acceptance is for the purpose of taking them out of circulation. According to one report, notes of the second category are being purchased by Chinese Government bankers at half of their value.
4. The economic and political implications of the above, especially paragraphs 1 and 2, are in general in line with paragraph 4 of our 803, May 28, 4 p.m.46 As regards the current question of the free sale of gold, certain implications are obvious. One political implication for the future may well be that with the expansion of regularized trade secret or otherwise between occupied and Free China there will develop progressively a significant measure of cooperation between officials and others in the respective areas. This may of course turn out to be of temporary benefit to the Central Government when and [Page 437] if the time comes for the puppets to divert their nominal allegiance from the Japanese to the Central Government. On the other hand, such development will probably also entail taking back into the fold of Quislings, etc., with the corollary establishment of the latter’s factions and of influence in political as well as commercial affairs.
It is of interest that the informant mentioned in paragraph 1 states that one of his missions here is to obtain from highest quarters a promise of “forgiveness” for certain puppets and that two of his closest personal friends are Chen Kung-po, Mayor of Greater Shanghai and one time Secretary to Sun Yat-sen, and Chou Fu-hai, Finance Minister in the Nanking régime. It is possibly of interest that P. N. Chung who prior to the capture of Hong Kong was H. H. Kung’s principal agent there and who was subsequently taken to Shanghai by the Japanese is reliably reported to be on his way to Chungking, apparently without Japanese hindrance.
Adler has seen this telegram.