893.515/379
Memorandum by Mr. Raymond C. Mackay, of the Division of Far
  Eastern Affairs, of a Conversation Between the Chief of the
  Division (Hornbeck), the Economic Adviser (Feis), and Mr. Jean
  Monnet of Paris
                               [WASHINGTON,] December 28, 1934.
  Mr. Monnet stated that, with a view to effectively putting a stop
to the outflow of silver from China and to reestablishing confidence
in the Chinese financial structure, the Chinese Government hopes to
float a bond issue in China which will attract both foreign and Chinese
capital. Mr. Monnet stated that the proposed issue, which will be
handled by the China Development Finance Corporation, will consist
of foreign currency bonds, probably sterling bonds; that the returned
portions of the Italian, German and Russian Boxer Indemnities, which
should permit of a capitalization of twenty million sterling, will be
used as security for the proposed bond issue; and that, with a view to
strengthening the position of Chinese banks it has been suggested that
a portion of the new foreign currency bonds be issued to Chinese banks
in exchange for old Chinese currency bonds.
  Mr. Monnet further stated that as a practical matter the proposed
bond issue could not be floated abroad; that, although most of the
members of the American Group of the China Consortium are by law
prohibited from participation in such an issue, a few of the members
are free to act and have indicated an interest in the new issue; that
the Hong Kong and Shanghai Banking Corporation is prepared to
participate if approval of the British Treasury can be obtained; that
the British Treasury, however, has indicated its disapproval of that
part of the proposed project which provides for the exchange of old
Chinese currency bonds for bonds of the new issue; that Mr. Norman 42
of the Bank of England has indicated that in his opinion the proposed
project should be handled by the China Consortium.
  Mr. Hornbeck inquired what practical measures could be taken to
assist the Chinese Government in its present financial difficulties.
Mr. Monnet replied that deflation has already occurred; that the fear
now exists that banks in China will be unable to redeem their note
issues; and that what is most urgently required is a reestablishment
of confidence in Chinese currency.
  Dr. Feis stated that exports of silver from China automatically
create assets in some other form and that he did not understand what
has become of such assets. Mr. Monnet stated that in his opinion most
of the silver exports from China have been effected by foreign banks
and that Chinese exports of silver to a large measure have been con-
fined to satisfying the heavy adverse balance of trade.

4 Montagu C. Norman, Governor of the Bank of England.
    748408-50-voL. 11-35



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