FO371-24687 — Page 181

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F

DISTRIBUTION B.

From: CHINA.

F 5687 108

22

1940

Decypher.

Sir A. Clark Kerr, (Chungking).

December 19th, 1940.

D.

R.

1.40 p.m.

9.45 p.m.

December 20th, 1940.

December 20th, 1940.

No. 286.

IMPORTANT.

FS205

Your telegram No. 3144 to Washington paragraphs 5 and 6 and your telegram No. 1272 to Shanghai.

[520/27/0

Following for Treasury from Financial Commissioner.

1. I have discussed this question with His Majesty's Ambassador.

2. It is necessary to emphasize that whatever external assistance may be given to China, it will be of little avail if the internal situation continues to deteriorate at the present pace. While proceeding with our plan to support China we should, I submit, use all our tact and powers of persuasion to induce her to deal effectively with the dangerous internal situation.

3. It seems to me here that the application of your proposals as they stand may just provide the shock to which His Majesty's Ambassador referred in the final sentence of the first

FS/27/28/10 paragraph of his telegram No. 184 to Foreign Office. There has been a temporary halt to the rise in prices, but retail index is only precariously held at a level which is 50 higher than that ruling at the date of that telegram. Other ominous signs of uncontrolled inflation are becoming increasingly apparent.

DEC

4. I assume that our main object now in supporting China is to insure that by her continued resistance to Japan she will apply a check to our potential enemy which we ourselves are unable to apply. If so, it is undesirable that our support should be subject to the condition which may set in motion forces only just below the surface which would precipitate internal collapse.

5. I realise the importance of drying up the remaining sources of free sterling. But even if it were possible to carry this through with complete success in the Far East, the advantages which would accrue have to be set up against possibility of breakdown in China. In any case if your proposals are applied as they stand, resentment may well be so keen that it would be unwise to count too much on the co- operation suggested in the first paragraph of your telegram No. 1272 to Shanghai. There is also the danger that Dr. H.H. Kung might be stampeded into taking injudicious action which might bring down the whole financial structure.

22

1940

.. REONSTRY!

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6.

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