Part II—China
POLITICAL
Although the Chinese people are unanimous in their desire for peace at almost any cost, there seems to be no possibility of its realization under existing circumstances. On one side is the Kuomingtang, whose reactionary leadership, repression and corruption have caused a loss of popular faith in the government. On the other side, bound ideologically to the Soviet Union, are the Chinese Communists, whose eventual aim is admittedly a Communist state in China. Some reports indicate that Communist measures of land reform have gained for them the support of the majority of peasants in areas under their control, while others indicate that their ruthless tactics of land distribution and terrorism have alienated the majority of such peasants. They have, however, successfully organized many rural areas against the National Government. Moderate groups are caught between Kuomintang misrule and repression and ruthless Communist totalitarianism. Minority parties lack dynamic leadership and sizable following. Neither the moderates, many of whom are in the Kuomingtang, nor the minority parties are able to make their influence felt because of National Government repression. Existing provincial opposition leading to possible separatist movements would probably crystallize only if collapse of the government were imminent.
Soviet actions, contrary to the letter and spirit of the Sino-Soviet treaty of 1945 and its related documents, have strengthened the Chinese Communist position in Manchuria, with political, economic and military repercussions on the National Government’s position both in Manchuria and in China proper, and have made more difficult peace and stability in China. The present trend points toward a gradual disintegration of the National Government’s control, with the ultimate possibility of a Communist-dominated China.
Steps taken by the Chinese Government toward governmental reorganization in mid-April, 1947, aroused hopes of improvement in the political situation. However, the reorganization resulted in little change. Reactionary influences continue to mold important policies even though the Generalissimo remains the principal determinative force in the government. Since the April reorganization, the most significant change has been the appointment of General Chen Cheng to head the civil and militant administration in Manchuria. Projected steps include elections in the Fall for the formation of a constitutional government, but, under present conditions, they are not expected to result in a government more representative than the present regime.
ECONOMIC
Under the impact of civil strife and inflation, the Chinese economy is disintegrating. The most probable outcome of present trends would be, not sudden collapse, but a continued and creeping paralysis and consequent decline in the authority and power of the National Government. The past ten years of war have caused serious deterioration of transportation and communication facilities, mines, utilities and industries. Notwithstanding some commendable efforts and large amounts of economic aid; their overall capabilities are scarcely half those of the prewar period. With disruption of transportation facilities and the loss of much of North China and Manchuria, important resources of those rich areas are no longer available for the rehabilitation and support of China’s economy.
Inflation in China has been diffused slowly through an enormous population without causing the immediate dislocation which would have occurred in a highly industrialized economy. The rural people, 80 per cent of the total Chinese population of 450 millions, barter foodstuffs for local handicraft products without suffering a drastic cut in living standards. Thus, local economies exist in many parts of China, largely insulated from the disruption of urban industry. Some local economies are under the control of Communists, and some are loosely under the control of provincial authorities.
The principal cause of the hyper-inflation is the long-continued deficit in the national budget. Present revenue collections, plus the profits of nationalized enterprises, cover only one-third of governmental expenditures, which are approximately 70 per cent military, and an increasing proportion of the budget is financed by the issuance of new currency. In the first six months of 1947 note-issue was tripled but rice prices increased seven-fold. Thus prices and governmental expenditures spiral upwards, with price increases occurring faster than new currency can be printed. With further price increases, budget revisions will undoubtedly be necessary. The most urgent economic need of Nationalist China is a reduction of the military budget.
China’s external official assets amounted to $327 million (US) on July 30, 1947. Privately-held foreign exchange assets are at least $600 million and may total $1500 million, but no serious attempt has been made to mobilize these private resources for rehabilitation purposes. Private Chinese assets located in China include probably $200 million in gold, and about $75 million in US currency notes. Although China has not exhausted her foreign official assets, and probably will not do so at the present rates of imports and exports until early 1949, the continuing deficit in her external balance of payments is a serious problem.
Disparity between the prices of export goods in China and in world markets at unrealistic official exchange rates has greatly penalized exports, as have disproportionate increases in wages and other costs. Despite rigorous trade and exchange controls, imports have greatly exceeded exports, and there consistently has been a heavy adverse trade balance.
China’s food harvests this year are expected to be significantly larger than last year’s fairly good returns. This moderately encouraging situation with regard to crops is among the few favorable factors which can be found in China’s current economic situation.
Under inflationary conditions, long-term investment is unattractive for both Chinese and foreign capital. Private Chinese funds tends to go into short-term advances, hoarding of commodities, and capital flight The entire psychology is speculative and inflationary, preventing ordinary business planning and handicapping industrial recovery.
Foreign business enterprises in China are adversely affected by the inefficient and corrupt administration of exchange and import controls, discriminatory application of tax laws, the increasing role of government trading agencies and the trend towards state ownership of industries. The Chinese Government has taken some steps toward improvement but generally has been apathetic in its efforts. Between 1944 and 1947, the anti-inflationary measure on which the Chinese Government placed most reliance was the public sale of gold borrowed from the United States. The intention was to absorb paper currency, and thus reduce the effective demand for goods. Under the circumstance of continued large deficits, however, the only effect of the gold sales program was to retard slightly the price inflation and dissipate dollar assets.
A program to stabilize the economic situation was undertaken in February, 1947. The measures included a wage freeze, a system of limited rationing to essential workers in a few cities, and the sale of government bonds. The effect of this program has been slight, and the wage freeze has been abandoned. In August, 1947, the unrealistic official rate of exchange was replaced, for proceeds of exports and remittances, by a free market in foreign exchange. This step is expected to stimulate exports, but it is too early to determine whether it will be effective.
The issuance of a new silver currency has been proposed as a future measure to combat inflation. If the government continued to finance budgetary deficits by unbacked note issue, the silver would probably go into hoards and the price inflation would continue. The effect would be no more than that of the gold sales in 1944-1947, namely, a slight and temporary retardation of the inflationary spiral. The proposal could be carried out, moreover, only through a loan from the United States of at least $200 million in silver.
In the construction field, China has prepared plans for reconstruction of communications, mines and industries. Some progress has been made in implementing them, notably in the partial rehabilitation of certain railroads and in the textile industry. Constructive results have been handicapped by a lack of funds, equipment and experienced management, supervisory and technical personnel.
On August 1, 1947, the State Council approved a “Plan for Economic Reform.” This appears to be an omnibus of plans covering all phases of Chinese economic reconstruction but its effectiveness cannot yet be determined.
SOCIAL—CULTURAL
Public education has been one of the chief victims of war and social and economic disruption. Schoolhouses, textbooks and other equipment have been destroyed and the cost of replacing my considerable portion cannot now be met. Teachers, like other public servants, have seen the purchasing power of a month’s salary shrink to the market value of a few days’ rice ration. This applies to the entire educational system, from primary schools, which provide a medium to combat the nation’s grievous illiteracy, to universities, from which must come the nation’s professional men, technicians and administrators. The universities have suffered in an additional and no less serious respect—traditional academic freedom. Students participating in protest demonstrations have been severely and at times brutally punished by National Government agents without pretense of trial or public evidence of the sedition charged. Faculty members have often been dismissed or refused employment with no evidence of professional unfitness, patently because they were politically objectionable to government officials. Somewhat similarly, periodicals have been closed down “for reasons of military security” without stated charges, and permitted to reopen only after new managements have been imposed. Resumption of educational and other public welfare activities on anything like the desired scale can be accomplished only by restraint of officialdom’s abuses, and when the nation’s economy is stabilized sufficiently to defray the cost of such vital activities.
MILITARY
The overall military position of the National Government has deteriorated in the past several months and the current military situation favors Communist forces. The Generalissimo has never wavered in his contention that he is fighting for national independence against forces of an armed rebellion nor has he been completely convinced that the Communist problem can be resolved except by force of arms. Although the Nationalist Army has a preponderance of force, the tactical initiative rests with the Communists. Their hit-and-run tactics, adapted to their mission of destruction at points or in areas of their own selection, give them a decided advantage over Nationalists, who must defend many critical areas including connecting lines of communication. Obviously large numbers of Nationalist troops involved in such defensive roles are immobilized whereas Communist tactics permit almost complete freedom of action. The Nationalists’ position is precarious in Manchuria, where they occupy only a slender finger of territory. Their control is strongly disputed in Shantung and Hopei Provinces where the Communists make frequent dislocating attacks against isolated garrisons.
In order to improve materially the current military situation, the Nationalist forces must first stabilize the fronts and then regain the initiative. Further, since the government is supporting the civil war with approximately seventy per cent of its national budget, it is evident that steps taken to alleviate the situation must point toward an improvement in the effectiveness of the armed forces with a concomitant program of social, political and economic reforms, including a decrease in the size of the military establishment. Whereas some rather ineffective steps have been taken to reorganize and revitalize the command structure, and more sweeping reforms are projected, the effectiveness of the Nationalist Army requires a sound program of equipment and improved logistical support. The present industrial potential of China is inadequate to support military forces effectively. Chinese forces under present conditions cannot cope successfully with internal strife or fulfill China’s obligations as a member of the family of nations. Hence outside aid, in the form of munitions (most urgently ammunition) and technical assistance, is essential before any plan of operations can be undertaken with a reasonable prospect of success. Military advice is now available to the Nationalists on a General Staff level through American military advisory groups. The Generalissimo expressed to me repeatedly a strong desire to have this advice and supervision extended in scope to include field forces, training centers and particularly logistical agencies.
Extension of military aid by the United States to the National Government might possibly be followed by similar aid from the Soviet Union to the Chinese Communists, either openly or covertly—the latter course seems more likely. An arena of conflicting ideologies might be created as in 1935 in Spain. There is always the possibility that such developments in this area, as in Europe and the Middle East, might precipitate a third world war.