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on a permanent basis. In view of the number of electric power plants and permanent factories already established, or in course of erection, it is impossible to contemplate the discontinuance of industrial production in this area when the hostilities terminate. At least one very large and one smaller hydro-electric plant have been planned and are to be erected. These, together with the coal resources available, give a power reserve which is bound to find its outlet in industrial production. The people in the area are becoming industrially conscious, and the standard of living throughout the area will undoubtedly rise with the growth of industry to an extent that will make it impossible to revert to pre-war conditions. One of the main industrial problems at the moment is the provision of fuel for transport purposes, but this has been dealt with in the "Transport section.
96. In view of the constant attacks by Japanese airplanes upon all Chinese towns, it has been considered wise as undoubtedly it is to erect small units of production, relying upon a multiplicity of these rather than upon one large unit. This no doubt tends to reduce overall efficiency, but on the other hand it eases to some extent the transport problem. There are very few factories other than cotton spinning and weaving mills, and the arsenals, which employ more than 200 operatives. The arsenals, as well as some smaller factories, are now producing large quantities of all types of small arms, including machine-guns and ammunition, but not arms of large calibre. The main aircraft factory at Lowing, under American management. has just come into production, its construction having been completed in twelve months, a remarkable feat in view of the isolation of its situation. The Sino-Russian Aviation Factory is now under erection by the Central Government in Sinkiang, and there is another aircraft factory in operation at Kunming.
97. In reviewing the situation as regards industrial reconstruction. I was struck with the importance of the "returned student personnel which is to be found everywhere in managerial and technical positions. These men are both keen and efficient in their work, and are certainly putting their whole energy into the task of freeing China from Japanese aggression, often under most difficult circumstances. I gained the impression, from contact with a great number of them, that they were prepared for almost any sacrifice in their patriotic devotion. It is very noticeable how such persons, consciously or unconsciously, influence the policy adopted in the purchase of machinery. For instance, in a factory which is run by an American returned student, most of the machinery will be American. and so with other nationalities. This makes it a matter of very great importance that our country, if it wishes to get orders from China in the future, should do its utmost to encourage the Chinese to come to Great Britain both for university and technical courses and also to work in British factories. Some of the larger British industries are apparently hostile to this procedure. For instance. I discussed this matter with the IC.I. representative in Kunming, and he told me that his firm would not allow any Chinese student in their works on principle. He further added that they were hostile to giving any help in the setting up of any industry in which they were interested in China, as they wished to retain China as an export market for their own manufactures. Nothing could be more hopelessly short-sighted than such a policy, and if it is persisted in by British firms it will only lead to the complete loss of Chinese sympathy and of the Chinese market. A very different attitude is. I gather, adopted by other big industrial countries, including Russia.
98. I desire to emphasise that some immediate action is necessary if Great Britain is to maintain her trading position with the new China. The competition to help Chinese reconstruction, after the war is over in Europe, will be very intense as China will be one of the few really hopeful export markets for heavy industry. The opportunity of getting any advantage in that competition will depend, not so much upon what is done then, but very largely upon what is done in the period from now until that time. So far the reserves of goodwill in China are more in favour of Russia and America and some of the smaller countries than they are of Great Britain. Indeed, it would not be an exaggeration to say that the prestige of Great Britain, which once stood so high that no major step was taken without consultation with the British, has now fallen to a low ebb, and if matters continue as at present there will be nothing upon which Great Britain will be able to rely for gaining any special position, or perhaps any position at all, in the reconstruction of China.
99.
In order to supplement the efforts of the Chinese Government and also to deal with the refugee problem in Western China, the Chinese Industrial Co-operatives (C.I.C.) were started by a group of foreigners and Chinese. The C.I.C. has set up a very large number of producing co-operatives throughout Western China, though they are stronger in the north-west where there is less mechanised industry and where there is more of the Communist influence than in the south and west. Many have also been established in the areas behind the Japanese lines, where they are still in contact with the central organisation and are doing excellent work. This movement has the support of the Chinese Govern- ment, who have given it considerable financial assistance and have placed very considerable orders with it for military supplies. During the present year over 1 million blankets have been ordered and will be delivered to the army by the co-operatives. The co-operatives rely almost entirely upon handwork. I believe that at present they have only one power machine, and that is an old motor engine converted to use producer gas. I visited some of these co-operatives, including one near Chengtu, where they were making simple machine-tools and engineering material with lathes, &c., operated entirely by hand power. Unfor- tunately there are as yet no accurate statistics as to their production, but the attached report(") gives an account of their activities up to the time that I left China. Their staff consists of a very keen and competent set of young men and women who are devoting themselves to this work for the merest pittance, from purely patriotic motives. The opportunity for the expansion of this work is almost unlimited, and it has the great merit of producing the goods in small units of production widely distributed and often close to the point of use, thus assisting in the economy of means of transport. Under the existing circumstances in China, and for a long time to come until transport facilities are very greatly improved and transport costs greatly diminished, there will be almost unlimited opportunities for the C.I.C. to continue with its development and expansion, and it will be able to play an important part in the industrial production of the country. The C.I.C, however, is not only of industrial importance, the educational work that it is doing is also likely to have a marked and permanent effect upon Chinese life. This work is primarily devoted to education in co-opera- tive ideals, but it necessarily awakens the political and civic consciousness of the people and helps to prepare them for the exercise of their democratic rights. At a recent exhibition of co-operative production in the north-west over 20,000 peasants visited the exhibition which was entirely organised by the peasants themselves.
100. To start up such work even with the simplest hand machinery and to acquire the necessary premises, &c., involves a very considerable outlay, though it is small compared with the capital required for mechanised industries. The C.I.C. are much hampered at present by their lack of funds for this purpose. There was a proposal in Great Britain that a Sino-British society should be set up to give the C.I.C. assistance, and steps had been taken to this end when the war broke out in Europe and the proposal was put aside. I think that every effort should be made to revive this idea and to bring it into effective operation, as this type of help now given at very small cost would find a ready response from the Chinese and might lead hereafter to a considerable trade of a limited character between the two countries. The assistance would be quite unofficial, but the British Government could, in fact, do a certain amount to facilitate the launching of such a venture and so give it an auspicious start. Mme. Chiang, who is a keen supporter of the C.I.C., has also herself started a series of Women's Co-operatives for the production of articles of household use, &c., for which women's hand labour is particularly suitable. So far their production is a negligible quantity.
101. If the British Government is not prepared itself as I gather it is not from the replies that have been given to the Chinese requests-to assist directly in the reconstruction of China through the National Government, something else must be done to preserve the future position of Great Britain in the Chinese markets, by actively encouraging all other agencies which may help in that direction, and by facilitating the supply of all goods that it is feasible to supply. There is, and can be, no doubt as to the importance of the Chinese market when war production ceases in Europe and America and a change-over has to be made
[21258]
(*) Not printed.
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