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Sir R. Hopkins
Sir H. Wilson
Mr. Wilson Smith
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The position about which Sir Horace Wilson and the Chancellor have asked is briefly as follows.
Before last July sterling owned by non-residents could be sold by them to other non-residents. Accordingly foreigners who had to make payments in sterling could buy sterling from other foreigners instead of having to obtain it by paying dollars etc. to our exchange control. The arrangements which we made with the Americans in July, and the payments agreements which we have made with other countries since, have had the effect that sterling owned by most foreigners can no longer be sold to foreigners residing in another country. Thus we have stopped up the gap which had previously weakened our dollar position to a serious extent.
We have not hitherto dealt with the Far East,and Shanghai has, since July, been the only important market for free sterling. China is "long" of sterling and "short" of dollars. Thus Chine is in a position to sell sterling to Americans who have to make financial payments to this country,so that these Americans do not pay us dollars to obtain the sterling as they would otherwise have to do.
We have long felt that this is a serious gap in our exchange control, but we were anxious to choose the right moment before dealing with it. When China obtained substantial dollar assistance from America and ask us for sterling, it seemed clearly the right moment to act. China wanted sterling credits for political and not for economic reasons. Actually China already has too much sterling, but politically they wanted us to give them help at the same time as America was doing so. We accordingly said that we would give them financial assistance in sterling to the extent of up to £10 millions, on condition that all sterling owned by residents in China could in future only be used in the sterling area. (When we deal with sterling owned in China we intend to deal with sterling owned in Japan in the same way.) We felt that China could not reasonably complain of our ceasing to provide her with sterling convertible into dollars at a time when her dollar needs were being met on a generous scale by the U.S.A. We also felt that, politically, the best time to impose this restriction was when we were ourselves giving financial assistance in response to the Chinese request.
We told the Ambassador what we intended to do, but he now says that, until he had talked with Mr. Hall-Patch, his Financial Commissioner, and with Mr. Rogers, who is acting as adviser to the Central Bank of China, he (the Ambassador) had not understood the full meaning and scope of our proposals. The Ambassador how pleads that the condition which we propose to attach will spoil the political effect of our loan and that, if we negotiate with Mr. T.V. Soong, the result will be that Mr. Soong will lose prestige and not gain prestige as we had hoped. I think that the answer is that we had fully considered the political as well as the
technical
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