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DEPARTMENTAL No. 2.

Decypher.

The Governor (Hong Kong).

23rd December, 1940.

D.

R.

3.51 p.m. 1.15 p.m.

24th December, 1940. 24th December, 1940.

No. 152.

*******

132

DEC

1940

v. REGISTRY.

IMPORTANT.

MOST SECRET

Following for Treasury from [?Rogers].

*Kung* recently informed meeting of four Government Banks in Chungking that British Government [?Grp. omitted] in favour of exchange control in China in order that Japanese will not benefit from stabilisation fund. He also said British Government is highly critical of stabilisation fund committee. On investigation in Chungking, I have been in- formed confidentially that basis for these statements is a "conversation with a high British Treasury adviser in London". My informant mentioned Sir F. Leith-Ross but I have reason to believe reference is to Mr. Keynes with whom Quo Tai-chi recently discussed visit of Soong to London.

2. According to report of this conversation sent by Quo Tai-chi to Soong personally, Mr. Keynes is stated to have said "exchange control should be established to prevent sterling, especially overseas remittances, from falling into the hands of the Japanese and puppets and that British Govern- ment would gladly co-operate". Reply said to be given to suggestion that I should go to London in place of Soong was that I was "over-cautious" This reference has already been used against me by *Kung*

3. I have taken lines that British Government would not be expected to criticise currency policy of another Government; that at least I should have been expected to have been advised and that I am consequently convinced that "policy of exchange control" should not read as referring to China but to £5,000,000 loan which Chinese have already been told will be restricted in use.

4. I view this unfortunate development with concern, for apart from giving *Kung* every opportunity to attack Soong and to bolster up his precarious position, *Kung* now believes himself to be reinforced with the authority of the British Government against those who have been striving for the last

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