The replacing of General Matsumuro last month by Colonel Matsui as the Japanese resident officer of the North China Garrison in Peiping is also believed to be of considerable political significance, as indicating the gradual recession of Japanese influence in North China which became particularly noticeable during the last half of December. A further indication of this recession is the reported decision of the Hopei-Chahar Political Council to enter upon a general program of retrenchment.

There are also indications that the East Hopei Anti-Communist Autonomous Government presided over by Yin Ju-keng may be on its descendency. Rumors of serious dissension within the administration of the bogus regime continued to circulate during December. It is becoming more apparent that Yin's hold is highly tenuous, and it is altogether possible that the elaborate and costly celebration of the regime's first birthday on November 25 and its reported donation of $1,600,000 to the support of the "irregular" forces attacking Suiyuan may be the harbingers of its demise.

The improvement of China's position vis-à-vis Japan developed despite ill feeling which sometimes was brought to a dangerous pitch through a long series of Sino-Japanese incidents varying from murder to trivialities. This improvement developed notwithstanding the failure of the negotiations held in Nanking between the Japanese Ambassador and the Minister for Foreign Affairs and their subordinates during the last four months of the year. The negotiations were disrupted by China's conviction, allegedly, that Japan had been aiding the "irregular" forces in their attack on Suiyuan. The Ministry of Foreign Affairs on December 6 issued a statement outlining the present position of the Chinese Government relative to the subjects which had been under negotiation. This release has been briefly summarized by the Embassy at Nanking as follows:

"1. The Chinese Government is prepared to inaugurate a civil air line between Shanghai and Fukuoka as soon as the unauthorized and illegal flights of Japanese airplanes over Chinese territory are stopped.

"2. The revision of China's tariff is a domestic affair. When tariff readjustment is studied the suppression of smuggling and the freedom of the Customs Preventive Service will be the first questions studied.

"3. With reference to the unlawful anti-Japanese activities of Koreans in China, the Chinese Government does not like to see these acts committed on Chinese soil. At the same time the Japanese Government should suppress the other unlawful activities of its subjects, Koreans, Formosans and others, committed on Chinese territory under Japanese protection.

4. The employment of foreign advisers depends upon their ability, not their nationality. Should Sino-Japanese relations improve, it would not be impossible for China on its own initiative to employ Japanese technical experts.

"5. Orders have repeatedly been issued stressing the necessity of maintaining friendly relations with foreign nationals. However, cognizance must be taken of the fact that much cause exists inciting the people against Japan."

Other unfavorable circumstances were: (1) the presence of the Communist troops in the Northwest against whom the Government troops confined their offensive mainly to "pushing"; (2) the wholesale North China smuggling by Japanese and Koreans; and (3) the Japanese cotton mill strikes in Shanghai and Tsingtao and the landing of Japanese forces at the latter port, against which action the Chinese Government protested.

At a meeting on October 15 the Standing Committee of the Central Executive Committee decided to postpone indefinitely the convocation of the National People's Congress which was to have met on November 12.

Economic and financial conditions in Kwangtung began to improve in August under the direction of General Chiang Kai-shek. In the same month resumption of service was offered on the Lung-hai Railway loans and Canton-Kowloon Railway bonds.

In September decision was made to revise the law governing the encouragement of shipbuilding. Through train service was inaugurated on the Canton-Hankow Railway, and definite plans were made to construct a modern port at Whampoa.

During October it was announced that the British Government in order to promote British exports to China had decided to guarantee credits advanced by British firms to Chinese importers. Chinese officials and business leaders publicly expressed gratification on this decision. It was believed that this action was intended to demonstrate Great Britain's desire to advance its commercial relations with China and to serve as a warning to Japan that Great Britain was not disinterested in China's future. China also expressed her approval of the monetary agreement recently concluded between the United States, France and Great Britain. The Ministry of Finance viewed the accord as a stabilizing influence in international exchange which would tend further to strengthen China's currency. He pointed out that China had profited by more than U. S. $1,000,000 through the sale of a part of its gold reserves abroad, and that China would be assisted in the discharge of its foreign loan obligations. (Chinese currency remained stable during the period under review except for slight and brief fluctuations at the time of the Sian coup).

During November it became obvious that the continuation of the shipping strike in the United States was injuring trade relations with the United States and adversely affecting American prestige and good will. The service of the China National Aviation Corporation was

extended to Hong Kong, a Pan American Clipper having made its first call at Hong Kong the month before.

A number of loan operations in connection with the financing of the construction of the Nanking-Kiangsi Railway, which will link Nanking with the Canton-Hankow line and thus make a direct connection between Nanking and South China, were concluded during December. It was announced on December 16 that a loan contract for Yuan $34,500,000 for the construction of the Chengtu-Chungking Railway had been signed by the Szechuan-Kweichow Railway Corporation and a French banking syndicate. Indications at the end of the year were that the United States, notwithstanding the American shipping strike, would continue to enjoy the largest share of Shanghai's foreign trade, with Germany showing the greatest gain over 1935.

During the period under review there were no marked changes in the relations between China and the western nations. There were indications, however, of an increasing rapprochement between China and Great Britain. Great concern, moreover, was shown by Chinese officials and the public regarding the conclusion of the anti-Communist pact by Japan and Germany and the reported de facto recognition of "Manchukuo" by Italy. Chinese officials and the Chinese press expressed gratification over the election of China to a non-permanent seat on the Council of the League of Nations. The reelection of President Roosevelt was accepted by the Chinese newspapers and public with great enthusiasm.

Respectfully yours,

For the Ambassador:

F. P. LOCKHART, Counselor of Embassy

CHINA

PROBLEM OF CHINA'S ECONOMIC RECONSTRUCTION AND THE ATTITUDE OF THE UNITED STATES AND OTHER GOVERNMENTS RESPECTING FINANCIAL ASSISTANCE TO CHINA1

893.48/1034

Memorandum by Mr. Raymond C. Mackay of the Division of Far Eastern Affairs

[WASHINGTON,] January 3, 1936.

Conversation: The Chinese Ambassador, Mr. Sao-Ke Sze;

Mr. Hornbeck 2;

Mr. Mackay.

The Chinese Ambassador called at the Department and, after referring to recent negotiations in regard to payments due on the wheat credit of 1931 and the cotton and wheat credit of 1933, affirmed that the Chinese Government had been "penalized" by the effecting on December 31, 1935, of payment in full of the sum of $3,000,000 plus then owing the Farm Credit Administration. The Ambassador further stated that the situation had resulted from his having placed "all his cards on the table" and that therefore there devolved on him the "guilt" for China's loss of the accommodation which had been sought. Mr. Hornbeck said that he could not agree either as to there being any "guilt" (or fault) or as to the contention that the Chinese Government had been "penalized" by the effecting of a payment in full of the amount due on the given due date.

The Ambassador then said that he hoped he might be able to obtain from the Farm Credit Administration a refund of $2,750,000 and from both the Farm Credit Administration and the Reconstruction Finance Corporation more liberal terms covering payments on those portions of the credits under reference which remain outstanding. The Ambassador asked whether Mr. Hornbeck would, in case the Ambassador should succeed in obtaining by direct approach to the F. C. A. and the R. F. C. the concessions which he had indicated,whether Mr. Hornbeck would refrain from opposition. Mr. Hornbeck said that he doubted whether it would be possible by any process

1 Continued from Foreign Relations, 1935, vol. III, pp. 526-664.

2

Stanley K. Hornbeck, Chief of the Division of Far Eastern Affairs.

459

to effect a refund such as the Ambassador had mentioned; that he personally would not view with favor any procedure to that end, although the Ambassador was of course at liberty to canvass the situation; that neither he nor the Department could in advance give a blanket assurance as to a future position in regard to such a matter; and that, if at some future time there were submitted to the Department a new project or plan for revised schedules of payments on the obligations of the Chinese Government under reference, such projects or plans would be given thoughtful consideration at the time in the light of the then existing circumstances.

There followed a lengthy and detailed discussion of recent developments in the matter under consideration. It was suggested and was agreed that the existing situation called primarily for consideration of possible future action rather than of developments in the past. The Ambassador, however, again referred to "errors" made and faulty tactics employed by representatives of the Chinese Government in their recent negotiations for a postponement of payments due on the credits under reference. Mr. Hornbeck expressed the opinion that in the scale of importance there rested far above such matters as tactics and strategy the all-important question of the attitude of the Chinese Government. Mr. Hornbeck further stated that, expressed in simplest terms, the situation under discussion was one in which the Chinese Government had requested of the American Government material concessions; that the American Government, in indicating to the Chinese Government the extent to which it might be in position to comply with such request, had sought an indication of a definite disposition on the part of the Chinese Government to take appropriate steps toward the liquidation of various of its long outstanding obligations to American private creditors; that the only response which the Chinese Government had made, as contrasted with the eminently satisfactory spirit of cooperation displayed by Ambassador Sze, were indications of dissatisfaction with the concessions which the American Government had indicated that it might be in position to make and a statement emanating from the Chinese Minister of Finance implying that it was the Chinese Government's view that nothing could or would be done by the Chinese Government to meet the wishes of the American Government; and that in view of such indicated attitude on the part of the Chinese Government there had followed, as a natural consequence, the action of the American Government in accepting on December 31, 1935, payment in full of monies then due to it by the Chinese Government.