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actual numerical strength of the Communists, except in the areas which they control, is almost negligible, but their influence might easily expand very quickly if any major disaster were to occur.
49. If there should be a breakdown of the Central Government, there would no doubt be a temporary resumption of war-lordism and provincialism in some form, and the only point on which unity could be regained, assuming, as one must, that the Japanese war was then terminated, would be the anti-foreign cry for which by that time the Chinese would be fully prepared. This would no doubt be encouraged by the Japanese and would result in the extermination of foreign influence in China. It is therefore essential in the interests of foreigners in China to preserve the Central Government in power and to reinforce it in every way in its struggle against Japan. It will be gratitude for such help that will be the guarantee for future foreign interests in China. There is already a tendency for the anti-foreign feeling to grow, especially amongst the more left- wing elements. For instance, there is considerable criticism of the use of foreign advisers and specialists, when it is suggested that there are plenty of Chinese to do the job, and do it much more cheaply. Also the disappointment at the failure of the Western European Powers to give effective help has led to a good deal of hostile criticism, which could easily develop into a fanatical anti-foreign movement if it were encouraged.
50. The movement for rapprochement with Japan which is being carried on by Wang Ching-wei will not have any effect upon the Central Government or upon those parts of China under the direct control of the Central Govern- ment. Wang Ching-wei is looked upon as a traitor to his country, and is universally hated and despised for his pro-Japanese attitude. The publication at the end of January of the proposals for settlement between him and Japan were read with amazement and horror throughout China, and finally destroyed the possibility of his getting any support from decent Chinese people. The Central Government have no fear or anxiety over this movement at all, and are confident of its failure to disrupt China, which is, of course, its intention. On the day after leaving Chungking I heard of the visit Leyton Stewart and saw a copy of the proposals that he was carrying for a peaceful settlement of the war. I do not know what will come of these, but it seems quite incredible that they can have any support from the Japanese Government, as they amount to a complete capitulation. If they are genuine, then they would no doubt form a basis for discussion. If the Central Government can get the Japanese out of China proper, they will not, I think, quibble about some arrangement over Manchuria.
51. It is perhaps necessary to say a few words about the relationship between the Provincial and Central Governments. So far as Sinkiang is concerned I will deal with that in a separate section. I have already dealt with the case of the Border Government in the north-west, and there remain, as effective and important areas in the west, Szechuan, Yunnan and Kansu and those parts of Shensi and Shansi not under the Border Government, and the easterly provinces, most of which are partially occupied, though only very partially, by the Japanese. In this actual war zone there is and has been no suggestion of difficulties between the provinces and the centre. War-lordism or individualism in provincial government has only been alleged, recently, so far as the western provinces are concerned. The question cannot arise in Szechuan since the Generalissimo is also Governor of that province, though the actual work is done by a very competent deputy at Chengtu. In Kansu the Governor at Lanchow is a very devoted follower of the Generalissimo, and there is and has been no trouble of any sort between him and the Central Government. The same applies to Shensi and Shansi. The only remaining case is that of Yunnan, where it has been suggested that General Lung is not really a supporter of the Central Government. I think there is little doubt that some of the old war-lordism survives in Yunnan which has so very recently come into close contact with other parts of China. But the great activity of the Central Government in Yunnan, both in the construction of roads and railways and the building of factories, has completely altered the situation. General Lung is a clever and competent man. I had two long talks with him and many with members of his executive council. I asked him point blank about his relationship with the Central Government, and his answers quite satisfied me of his loyalty, but I think that, at the same time, he, like other Governors, enjoys his autocracy and that he is not above utilising the war circumstances to assist in the development of Yunnan, which is a poor and sparsely inhabited
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province, and also of his own purse and those of his more immediate followers and supporters. There has been some trouble with the province over taxation as the Provincial Government has imposed taxes which the Central Government consider to be their prerogative. However, wisely I think, they are letting the matter remain outstanding for the present as they are confident that the present developments, together with the centralisation of the army, will, before long, enable them to exert whatever control and direction may be necessary over the Governor and the province. The personal relations between the Generalissimo and General Lung are excellent and there is, I am convinced, no truth in the suggestions that the Governor or the people of Yunnan are not behind the Central Government in their fight against Japan. These suggestions, like so much one hears of China, are the result of Japanese propaganda and can be completely discounted.
52. On the whole the relationship between the centre and the provinces is satisfactory if one bears in mind how comparatively recent is the attempt at any real centralisation of control.
Finance.
53. I do not propose to deal in any detail with the budgetary position in China or with the general financial situation, as all this is fully dealt with in the reports submitted from time to time by Mr. Rogers from Hong Kong. I had the advantage of a number of discussions with him as well as with other persons, including Dr. Kung at Chungking. The position about the currency is. however. so vital that I wish to make some observations upon this aspect of the problem.
54. I am convinced that the maintenance of the value of the Chinese national dollar at some exchange value above 4d. sterling is absolutely vital to the victory of the Chinese. One of the major successes of the Chinese has been the main- tenance of their currency in North China and throughout the occupied areas. This is almost entirely the excellent work of Mr. Rogers and is a very remarkable feat. Its value is not merely that it maintains the outside purchasing power of the dollar, but it has, too, maintained the loyalty of the Chinese in the occupied areas. which is a very important point indeed. The attempt of the Japanese to force other currencies upon the Chinese has so far failed and has resulted in further antagonism to the Japanese. When first the paper currency was introduced and replaced silver, the Chinese were most distrustful of it since they had been accustomed to a very stable silver currency in which they always knew just how much rice a silver dollar would buy, and this is their major care so far as any currency is concerned. They finally became reconciled to the paper currency and realised that it had a purchasing power. Its subsequent variation in value, in terms of rice, has been hard to accustom them to, but, in the war situation. they have recognised the need for these variations, and they now cling to the dollar as a stable measure of value.. If it were to be allowed further to depreciate to any great extent, the people would lose all faith in it and would abandon it in favour of any Japanese or puppet currency they could get, and this would have the most serious political effects in the occupied areas. We found, for instance, that in Canton the national dollar was readily accepted whereas no one would accept the local puppet currency which was at a heavy and daily- varying discount.
55. The present time is a very critical one for the currency. The usual drain upon it, as the result of the import season which is now coming on, is liable to be particularly heavy this year owing to crop shortages and the way in which the Japanese have denuded the Yangtze Valley area of supplies by taking them to Japan. The interference with the export trade and the difficulties in getting agricultural products and minerals to the coast is also tending to diminish the set-off against imports. Added to these factors are the heavy expenditure necessitated by the war and the need for further supplies in the interior, due to the large refugee population which has migrated there. The net result of all these factors is a tendency for the exchange value to weaken and the need for the support of the dollar from the Stabilisation Fund.
56. Unfortunately, it has been necessary, in the peculiar circumstances of the war and the Japanese occupation, to maintain a free exchange market, and this gives the speculators in Shanghai an opportunity to operate whenever there
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