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FOREIGN OPPICE, S.7.1.

325

22nd June, 1940.

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(@ 3239/176/10)

OUT FILE

Dear Hall. Folch

We have been giving thought to the proposal contained in Tokyo telegram 992, and the following considerations occur to us.

It seems to us that while some of the Japanese may now have genuine economic reasons for wishing to maintain the value of the Chinese currency (which their military authorities are still trying to destroy) one cannot disregard the possibility that this approach is a political manoeuvre designed, like so many others, to draw the democratic Powers into the position to co-operating with Japan for the settlement of Chinese affairs on the basis. of the "new order". The proposal is in effect that the Japanese, British, United States and French Governments shall set up a committee to evolve a scheme for the control of the Chinese national currency. It may be taken for granted that in such a body the Japanese member would have the leading voice, while apparently the Chinese Government are to have no direct say in the matter.

Any scheme for stabilising the exchange value of the currency must obviously involve some control of the foreign exchange reserves on which the currency is secured. Those foreign exchange reserves are used by the Chinese Government not only as a backing for the currency but also for the purchase of munitions of war, and it is morally certain that they would not agree to part with their control to an international body on which they were not only not represented, but which was dominated by their enemies.

The manner in which this proposal is put to us tends moreover to increase one's suspicions of its motive. If the Japanese have a genuine financial scheme with some

5.7.Hall-Patch, Esq., C.M.G.

Treasury.

/chance

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