CO129-571-16 New Territories 13-4-1938 - 12-12-1938 — Page 145

2.

a dismembered China may in course of time prove to be as

worthless to the victor as those wrung from Germany after the

war.

when Chiang Kai-shek speaks of being able to hold ont only for a few more months without financial assistance he may purpose. ly be under-estimating his staying power. Doubtless the currency cannot be maintained for much longer and Hankow may be lost but his reserves should be sufficient to prevent "puppet" governments from maintaining themselves without Japanese assis-

tance and until those governments can be so maintained,

economic strain on this country must continue.

A consideration which it seems to me must always be present

to our mind is that whereas in a world war or threat of a world

war the attitude of China would not be a determining factor, the reverse is true of Japan. Any breach in our relationship with Japan which is of such a character as to bring her irrevocably a German (? dependence) is bound sconer or later to react upon our defensive position in Europe a risk which we can presumably ill-afford to take at the moment.

If United States (and possibly French) Banks could be associated in granting of such credits risks, of such a movement would obviously be pro-tanto diminished and I presume nothing would in any case be done without first ascertaining whether such support would be forthcoming. If it were forthcoming and if

United States Government were prepared to share in hazards of undertaking the proposal would take on another complexion.

Addressed Foreign Office; repeated Sir A. Clark Kerr.