My dear Prime Minister:

In view of the recent developments in China, I feel it is expedient to bring to your attention for consideration the present position in respect of the credits made available to China in 1946 by the Canadian Government.

A direct Government credit, totalling $60 million, was extended to the Government of China by an agreement entered into in February 1946 under the authority' of The Export Credits Insurance Act. Under supplementary arrangements set forth in an exchange of letters at the time of signing this agreement, $35 million of this credit was to be used to purchase Canadian goods and services for reconstruction and other general post-war purposes in China, and the use of the remaining $25 million was limited to supplies originally requested by China under Mutual Aid and other surplus war supplies, this being broadened later to include any surplus supplies purchased from War Assets Corporation.

Advances may be made under these credits up to the end of December this year, and are repayable in thirty equal annual instalments, the first instalment falling due December 31st this year, at which time approximately $2.3 million is due on principal and interest. Almost the whole of the $35 million portion and more than half of the $25 million portion of this credit has been advanced or committed. At the end of last month approximately $31.5 million had been advanced under the $35 million portion and an additional $3.5 million committed against outstanding orders placed by the Chinese Government through the Canadian Commercial Corporation; at the same date, advances under the $25 million portion amounted to approximately $16 million with additional commitments of approximately $10,000. Because most of the general credit has already been utilized and the Chinese have purchased most of the items they wish from War Assets stores under the $25 million portion, new applications for credit now being received from the Chinese from time to time by my Department are few and usually do not involve large amounts. Because the credit expires at the end of this month the Chinese Government, however, will undoubtedly wish to utilize as large a portion of the balance as possible and I have decided to withhold approvals on applications which involve additional commitments under this credit until this matter has received your attention.

A second and more involved aspect of our financial arrangements with China, is the Canadian Government Guarantee to a group of Canadian banks in respect of a credit provided by them to the Ming Sung Industrial Company, Ltd., a private Chi.. nese company, and used by that company mainly to purchase specially designed ships built in Canada for use in its shipping operations on the Yangtze River. This credit, not to exceed $12,750,000, was guaranteed by the Government of China as a condition of the Canadian Government giving its guarantee and as required by The Export Credits Insurance Act under which the Canadian Government Guarantee was given. The Chinese company agreed to put up 15% in cash and to that extent have a direct equity in the total program of $15 million which has already been fully committed. The banks have to date established credits in favour of the Ming Sung Company totalling approximately $12.2 million and appToximately $10.5 million of these credits have already been disbursed. Repayments on these credits are to be made in ten annual instalments commencing on June 30, 1951.

The most important purchases made by the Ming Sung Company under this program are six small (160-foot) and three larger (270-foot) passenger and cargo vessels specially designed for shallow water operation on the Yangtze River, constructed by two Canadian shipyards near Quebec City. The six smaller vessels have been completed and are being ferried to China, four of which have recently arrived in Shanghai or Hong Kong. Of the three larger vessels which have not yet left Canada and which in value account for approximately $7.3 million of the total program, one is due to leave Canada in a few days time.

The Canadian Ambassador to China has been requested to obtain from Ming Sung Company officials information regarding the use to which these vessels will be put and the precautions that may be taken to prevent them from falling into Communist hands. The Ambassador has been in touch with the President of the company and advises that the company does not propose to take any chances and that, if there is any danger, the ships which have already arrived in Shanghai will sail immediately for Hong Kong and the rest detained in Hong Kong pending developments in China.

Because of the situation which has now arisen in China, two questions present themselves at this time regarding the Chinese credit arrangements. In the first instance, we have to consider what effect the present political developments in China are likely to have upon the ability of the Chinese authorities to repay the credits in the future. If it is concluded that there is a strong likelihood that the present Chinese authorities or their possible successors will be unable, or unwilling, to repay the credits, we should consider whether it is desirable to continue to approve further applications for withdrawals from the credits.⁴

The second matter that has to be considered is whether in the light of overall political considerations shipments of goods already paid for out of the credits, such as the Ming Sung ships, are henceforth to be allowed to go forward.⁵

I feel that these are matters of some urgency, and shall be grateful if immediate consideration could be given to them.

Yours very truly,
D.C. ABBOTT

⁴Note marginale :/Marginal note:
No - but stall.

⁵Note marginale :/Marginal note:
Yes - for same reason Embassy remains in Nanking.