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2.
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two years to make him see the extreme dangers and pit- falls of his obsession of selling exchange only in Chungking against applications. Third paragraph of Secretary of State's telegram No. 3542 to Washington refers. *Kung* is feeling so deflated that he is already openly talking of abandoning support of exchange in Shanghai as a retaliatory measure when new Central Bank opens to any Japanese [?Grp. omitted). Resulting apprehension in Shanghai is the cause of present exchange weakness. (Should I inform Hong Kong and receive instructions to this effect, I should feel bound to take the responsibility of disregarding them.)
5.
In view of the grave consequences of such action by *Kung* at the present time, I regard it as urgently necessary to correct his misapprehensions. I venture to suggest therefore whether Quo Tai-chi could not be informed that "on reflection" Treasury adviser feels that views previously expressed may have been mis-read as referring to the necessity of exchange control in China and that state- ments, of course, had reference merely to £5,000,000 *loan*. If it were felt possible at the same time to pay tribute to the conduct of the Chinese Government's currency policy during present unprecedented conditions, I feel sure that this would do more than anything else to take the wind out of *Kung's*sails and to deflect him from injudicious action.
6. I have been asked not to disclose the source of my information. It is therefore essential that the Chinese should not come to know you have knowledge of the above report of the conversation between Mr. Keynes and Quo Tai-chi.
Repeated to Chungking telegram No. 200 Shanghai
telegram No. 40 Saving.
[Copies sent to Mr. Waley).
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