CONFIDENTIAL
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14 FINANCIAL CONDITIONS IN CHINA
The Chinese economic situation is extremely
unstable and is not likely to improve so long as the
Chinese continue to waste their energies on civil war.
The Chinese Government has for years been meeting its
military expenditure and "balancing" its budget largely
by recourse to the printing press. This has produced
wild inflation; flourishing black markets in commodities
and currency; crippling of exports owing to disturbed conditions and high internal prices; and complete disequilibrium in China's external balance of payments.
The inado quaoy of the Government in dealing with
the situation is illustrated by the following brief
history of the rate of exchange of the Chinose National Dollar since the end of the war.
Throughout the war the official rate for C.N.D.
remained at 80 to the sterling. The rate in the free
market varied between 4,000 and 8,000 and even so did not reflect the actual cost of living. It was obvious that this situation would be one of the first problems the Chinese Government had to face when hostilities ended. It was not however until late February 1946 that
measuros were announced. The official rate was then abolished: the Central Bank henceforth quoted cover rates, at first only for U.S. dollars and later for dollars and sterling. But instead of keeping in touch with the market and adjusting this rate frequently cither up or down, they maintained it (originally at C.N.D. 2,020 to the U.S. dollar) despite the fact that it rapidly became unrealistic; and the last state was no
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