803.50/8–3047
The Ambassador in China (Stuart) to the Secretary of State
[Received September 9.]
Sir: I have the honor to refer to the Embassy’s despatch No. 652 of April 21, 1947, regarding the economic reform plan adopted March 23, 1917, by the Third Plenary Session of the Kuomintang Central Executive Committee, and to the Embassy’s telegram No. 1583 of July 25, 3 p.m.,37 stating that the plan, with minor modifications, had been approved July 21 by the National Economic Council (NEC). Reference is also made to the Embassy’s despatches Nos. 665 of April 25, 1947,37 regarding the proposals for economic reform presented to the Kuomintang CEC meeting by Dr. Chen Li-fu, Minister of the Kuomintang Board of Organization, and 887 dated July 18, 1947,37 on the subject of the National Economic Council and the economic reform plan.
The plan was adopted August 1, 1947, by the State Council of the National Government of China, reportedly with few if any changes being made in the plan as previously approved by the NEC. What was purported to be a complete translation of the plan as it now stands was issued August 11, 1947, by the Government Information Office. A copy of this translation is enclosed.37
Present Plan Versus Original Draft of Plan. The present plan contains most of the recommendations which originally appeared in the draft plan approved March 23 by the Kuomintang CEC. In general, however, the plan as it now stands is a more compact and better organized document and reflects the extended discussions on the plan which took place in the NEC during the several months it was under discussion.
The plan consists of a foreword, which purports to explain the need for reform, and recommendations given under three main headings, as follows: A. Banking System; B. Production and Reconstruction; and C. Financial Reforms. The brief conclusion states that, to achieve desirable results in the enforcement of the plan, particular attention should be paid to the giving of “reasonable” improvement of treatment accorded military personnel, government employees and educators; to placing State-operated and private enterprises on an equal footing; and to the launching of an extensive economic reconstruction movement among the people.
As expected, the proposal to establish hsien (county) banks was [Page 1185] most bitterly contested in the NEC meetings but was finally approved with certain modifications. It was originally proposed that the capital of these banks, whose main objectives assertedly are to improve rural economy, to facilitate local reconstruction, and to help enforce the local self-government program, would be initially supplied by the National Government to the extent of 60 percent, with the remainder being supplied by the hsien governments. In the final draft of the plan it is stated that the hsien governments, and subdivisions thereof, are expected to make the necessary investments, and that the hsien banks “may also accept private capital by selling shares to people residing in the hsien.” Limited National Government support is provided for in a new provision to the effect that “the Central Bank of China and the provincial bank concerned should, besides making investment for the sake of promotion, provide the hsien bank with trained personnel, guidance and assistance to carry out its functions.”
Some clarification is made in stating the specialized functions of various banks and allied financial agencies of the National Government. It is of interest to note that the following recommendation is restated and clarified: “The specialized functions of the Central Trust of China should be to handle trust, re-insurance and the insurance of public enterprises and to guide private trust and insurance enterprises.” This recommendation, if carried out, presumably would result in the restriction of operations of the Central Trust by divesting it of its manifold trading and other activities which have given rise to much complaint by foreign and Chinese business interests.
Among measures aimed to increase agricultural production and stabilize prices, the provision for establishment of a system of “everstable granaries” was amplified, it now being recommended that “the initial plan to set up such granaries in various important localities in the Yangtze Valley should be completed speedily. Local granaries should be promoted and set up on a large scale in order to further increase food storage.” It is also newly recommended that “the Farmers Bank of China should extend its credit facilities and take an active part in the transportation and distribution of farm products so that the Bank with its financial resources will assist the Government in boosting production and transporting foodstuffs from regions of plenty to regions where there may be a shortage.”
Recommendations for development of forests, animal husbandry and fisheries have been clarified and amplified.
It is stated in more specific terms than previously that, in the development of industry, efforts should first be directed to meet the needs of rural communities, with priority being given to water conservancy projects and industries for manufacture of chemical fertilizers, [Page 1186] farm implements and transportation equipment. Regarding other industrial development, it is recommended that special attention be given to increase of fuel production and promotion of the power industry; exploitation of various mines; production of steel, cement and other construction materials; and establishment of machine-making factories. The recommendation is repeated that the National Government should stipulate the main classifications of industries which are to be state-operated and privately-operated.
It was originally recommended that “the Government should call all public and private banks together to organize a reconstruction financial corporation” to make long-term loans for mining and reconstruction enterprises. This recommendation appears substantially altered in the present draft of the plan, it being stated that “the Government should organize and promote various industrial and mining enterprises and encourage the formation of investment corporations so that long-term capital may be invested in such enterprises.”
In the preliminary remarks on recommendations to improve and expand commerce, the following has been newly added: “In regard to domestic trade, inadequate transportation facilities and multiple taxation impede the flow of goods and cause shortages of commodities in the market, resulting in the decline of trade. It is, therefore, imperative that restrictions on trade should be removed so as to expedite a return to normal conditions.” This recommendation seemingly refers to the revival of the likin system, whereby goods shipped from producing areas to markets are repeatedly taxed by various local authorities.
Regarding international trade, the recommendation is repeated to the effect that imports of articles other than production tools, raw materials, books and laboratory equipment should be restricted so as to conserve foreign exchange. A new recommendation appears, however, as follows: “Trade guilds should be strengthened in order to improve trading methods, raise commercial morals, and help the Government in the enforcement of its price control measures.” American and other foreign business interests in China have already expressed objection against the intrusion of the trade guilds into their relations with local importers and buyers; the foregoing recommendation suggests that the increased activity of the guilds may henceforth have greater official support.
Several important changes were made in the recommendations on communications. Regarding private operation of aircraft, it is repeated that encouragement should be given for such operation but only “after preparations for air routes, ground installations and flight control measures have been completed,” the latter phrase being newly [Page 1187] added. While it is stated that “the fullest encouragement should be given to private navigation enterprises”, there is nothing to indicate that any change is contemplated to permit foreign shipping to engage in coastal or inland water services.
The recommendations contained under the heading “Increase of Production and Price Stabilization” are substantially those contained in the earlier draft of the plan. In connection with financial reforms two new recommendations appear under the heading of “Financial Readjustment”: the first states that “to meet reconstruction needs, new sources of revenue should be developed in accordance with the principle that taxes should be borne by those with the ability to pay”, while the second recommends that “priority in foreign exchange allotments should be given by the Central Bank of China to those who are able to pay with gold, provided the exchange thus granted is for the purchase of importable goods.”
In the section headed “Currency Stabilization”, it is newly—and hopefully—recommended that the Government should actively seek to increase its revenue receipts and cut down all unnecessary expenditures in order to reduce gradually the budget deficit and avoid further increase of the note-issue; that effective measures should be taken to retard the circulation of currency; that foreign exchange control measures should be strengthened; and that a time limit should be set for the people to declare their assets in foreign countries.
References to Foreigners in Present Plan. References in the present plan to foreign participation in development of China’s economy are scanty and vague. In the foreword there appears a brief statement to the effect that “favorable terms should be offered to induce foreign capital and technical help to China for the purpose of achieving national industrialization.” Even more vague is the statement which appears under the suggested policies for increased production and reconstruction, as follows: “With increased agricultural and industrial production and an improved transportation system, and through the encouragement of creative enterprise and foreign investment, prices will not fail to become stabilized.”
Under the recommendations made to assist and develop industry, it is urged that: “To hasten industrial development, the Government should make clear provisions for the encouragement of foreign investment and technical assistance.” Included in the recommendations aimed to increase production and stabilize prices, it is stated that: “The Government should negotiate favorable machinery and raw material loans with foreign countries as a means of increasing commodity supplies.”
In connection with the foregoing very general statements of policies, [Page 1188] it will be remembered that the NEC has passed a more specific statement of policy governing foreign investments in China, this statement being issued August 13, 1947, by the Government Information Office. A copy of this statement is being forwarded to the Department as enclosure to another despatch (No. 958, August 29, 1947).39
Foreign Press Reaction to New Plan. With attention at home being directed largely at the activities of the Wedemeyer Mission, the foreign press paid relatively little attention to the adoption by the State Council on August 1 of the economic reform plan. The American-owned Shanghai Evening Post & Mercury, however, made two editorial references to it, stating that the plan is the “usual recital of pious aspirations” and that it was drawn up by “professors-in-spirit who show no sign of ever having sullied their fingers by contact with life’s grim necessities.” The pertinent extracts from these two editorials are given in Enclosure No. 2.40
Chinese Press Reaction to New Plan. Chinese press comment, as indicated by translations from Nanking and Shanghai newspapers, reflect the policies of the groups or interests which operate the newspapers in question, the Kuomintang-operated press generally favoring the plan while the independent press as a rule follow a critical policy and termed the plan unrealistic. Enclosure No. 340 contains translations of the more important articles and editorials from the Chinese press.
Embassy’s Evaluation of New Plan. The Embassy’s general comments on the original draft of the plan were presented in despatch No. 652 of April 21, 1947. As the plan as now drawn up appears to be little changed, there would seem to be little reason to comment further. As previously pointed out, many of the recommendations contained in the plan were made years ago, with legislation enacted to carry them out. According to Dr. Chen Li-fu, Vice Chairman of the National Economic Council, and assertedly the drafter of the original proposals on which the plan is based, the Council considers that the enforcement of the plan is one of its most important objectives. Dr. Chen’s interest in the plan and in the Council suggests that great effort may be made to see that the economic reform measures already enacted are carried out and that new measures, designed to implement other recommendations in the plan, will be drawn up in the near future.
The Embassy is planning to make additional and confidential comment on the plan in a despatch41 supplementing confidential despatch [Page 1189] No. 887 of July 18, 1947, subject: “National Economic Council and the Economic Reform Plan.”
Respectfully yours,
First Secretary of Embassy