893.51/10–247
Memorandum of Conversation, by the Minister-Counselor of Embassy in China (Clark), Temporarily in the United States
Mr. Gauss45 said that the Export-Import Bank was sitting on the Chinese request for loans in the neighborhood of $500,000,000 [Page 1192] and didn’t even plan to study the details of any of the requests made until administration policy in respect of loans to China had been clarified. So long as our policy was “no loans” there was no need for the Export-Import Bank to waste its time going into the Chinese requests. Should our policy become “loans to China” then the Export-Import Bank could go into some of the Chinese requests. In respect of these requests, Mr. Gauss said that none of them had been adequately documentated nor did they give assurances of repayment in hard currency. They gave every evidence of inefficient preparation and showed that the Chinese had not studied the Act of Congress46 under which the Bank operates. He showed me in this connection a letter he had written in reply to one he had received from the Governor of the Bank of China requesting a loan for a cement plant. Although the plant Chang Kia-gnau had in mind had also formed the subject of a request from the Chinese Government the details differed as did the amount involved. Gauss had pointed out in some detail the documentation requirements of the Bank and had suggested that a little more care be exercised in submitting Chinese requests to the Bank.
Mr. Gauss said that a casual perusal of the Chinese list of requests indicated that many would have to be ruled out because, like the Tangku Harbor development, they were too close to Communist dominated areas. Others like the Canton–Hankow railroad would have to be thrown out because the Export-Import Bank was being asked to take a second or third mortgage. The Canton–Hankow railroad request was too large in the first place and in the second place a large British loan and the British Boxer indemnity had first claim on the revenue from the line. If China wanted Export-Import Bank money for the railroads of China it would have first, he said, to find some way of consolidating the railroad debt and making it a charge on the general revenue thus freeing railroad revenue to be pledged for the repayment of Bank advances.
In considering requests for individual projects in China Mr. Gauss said the Bank would look into the management as well as into the justification. It would want to be assured that trustworthy engineering and management personnel were used so as to lessen the possibility of graft and increase the likelihood of repayment. The Bank took the position he said that Congress meant it when it rewrote into the act that there must be a “reasonable expectation of a return [Page 1193] of the money loaned”. Each project in China would be viewed in this light he said.
In respect of the cotton loan for $200,000,000 requested by the Chinese Mr. Gauss said that studies instigated by the Bank through our own people in Shanghai as well as through private cotton companies had indicated that China either had already in the country or en route enough cotton together with the domestic supply to keep China’s mills busy through July 1948. There would be a short gap between the end of July 1948 and the new cotton crop when China would need further imports of cotton but it was nothing like in the nature of $200,000,000. In addition the Chinese were asking for a 2% rate of interest when the Bank had to have 3 or 3½% as a minimum. Also the Chinese were asking for a term of four years rather than the two years during which the Bank would anticipate the cotton would be consumed.
On cotton loans he said the Bank’s policy was to require a showing that the raw cotton would be used to manufacture materials which would be exported and bring in hard currency foreign exchange. They expected service of the loan as the foreign exchange became available and two years was a normal time. He went on to say however that if the Chinese were to repay the $33,000,000 cotton loan now outstanding and which is due next year, then he, Mr. Gauss, would be prepared to fight, and he said that a fight would be needed when it came before the Board, to obtain a further cotton loan for China. If they did not repay that $33,000,000 cotton loan he said there would be small chance for a further loan.
The Chinese Government had, he said, supplied to the Export-Import Bank what purported to be a balance sheet of revenues, expenditures and foreign holdings. It was not too convincing a document, he said, and appeared to contain considerable guesswork. It skipped the years between now and 1951 and endeavored rather arbitrarily to establish, Mr. Gauss thought, for that year a favorable balance of payments of $50,000,000. He was afraid the balance sheet didn’t give a very accurate picture of the real situation. I mentioned to Mr. Gauss the new traffic plan for Shanghai47 and he remarked that although he had not gone into the proposal in any detail he couldn’t see how the plan would produce foreign exchange with which to repay any loan the Bank might make to finance purchases in this country of automotive equipment. That plan as the others was pigeonholed awaiting the determination of administration policy.