Hong Kong's Economic Relations With China 1949-55 ... · The Commodities Exchange Bureau in ports in North China required all inessential imported goods to be returned to Hong Kong

12 Hong Kong's Economic Relations With China 1949-55: Blockade, Embargo and Financial Control s Catherine R. Schenk

Hong Kong' s post-wa r relation s wit h Chin a wer e rocke d b y thre e shock s associated wit h th e victor y o f th e Chines e Communis t Part y i n 1949 . The first wa s th e blockad e o f Shangha i an d th e Pear l Rive r b y retreatin g nationalist forces an d subsequent ai r raids on shipping. The second was the embargo o n trad e wit h China , Hon g Kon g an d Macau pilote d b y th e US A in 195 0 and reinforced by a United Nations embargo in 1951 . The third was the freezin g o f US $ asset s owne d b y Chinese , whic h wa s impose d b y th e Americans i n Decembe r 1950 . Together , thes e constraint s o n China' s foreign trad e ar e widel y credite d wit h endin g Hon g Kong' s traditiona l entrepot rol e an d encouragin g instea d th e manufacturin g secto r o f Hon g Kong. They also, however, created opportunities for Hong Kong traders and shifted th e direction o f their international trading links .

This chapte r wil l explor e th e genesi s an d impac t o f thes e successiv e shocks to Hong Kong' s economi c relations with China . New evidence wil l be presente d fro m th e archive s o f th e Hongkon g Ban k (HSBC) , Foreig n Office, Treasury , Bank of England and the US State Department. 1

200 CATHERIN E R . SCHEN K

Nationalist Blockade

Trade with communist-occupied nort h China was initially disrupte d by th e uncertainty associate d wit h the changeover o f politica l control . In the firs t months afte r th e communis t take-over , trad e wa s conducte d eithe r o n a barter basis o r using privately supplie d foreig n exchange . Towards the end of Marc h 1949 , thre e Hon g Kon g steamer s chartere d b y loca l Chines e merchants departed from Hong Kong for Tianjin to resume trade on a barter basis.2 Th e communist authoritie s limite d import s to essentials to conserve foreign exchange , resultin g i n losse s fo r Hon g Kon g merchant s wh o ha d held contracts dated from before the liberation. The Commodities Exchange Bureau i n port s i n Nort h Chin a require d al l inessentia l importe d good s t o be returned to Hong Kong. The ensuing congestion and uncertainty brough t trade with Hong Kong to a virtual halt by mid-May 1949. 3

Conditions ease d throug h June , bu t th e bombin g o f th e Anchises i n Shanghai an d th e announcemen t b y th e KM T (Guomindang) o n 2 6 Jun e that communist held ports were to be blockaded forestalle d th e resumption of trade . The blockade included th e mining o f the Yangzi Rive r a s wel l a s air and sea attacks. After th e fall o f Canton to communist forces a t the end of Octobe r 1949 , th e blockad e wa s extende d t o th e Pear l River , wit h th e further disruptio n o f shippin g fro m Hon g Kong. 4 Despit e protest s b y th e British an d th e Americans, 5 th e blockad e wa s formall y lifte d onl y i n lat e May 1950. 6

The blockad e wa s initiall y effectiv e al l th e wa y u p th e Chines e coas t but in the first par t of July the KMT lost control of islands of f Taku , whic h made an y blockad e o f Tianji n o r Qingda o impossible . From mid-July , th e KMT concentrated it s attention o n blockading th e port o f Shangha i an d s o ships destined for ports further nort h (Qingdao, Tianjin, Yingkou ) were lef t relatively unmolested. 7 Foreig n ship s wer e ver y activ e i n runnin g th e blockade. In particular, Jardine Matheson and Co. and Butterfield an d Swire ran 30 000 tons of cargo to north China from August to mid-October 1949. 8

In Septembe r 1949 , thes e tw o companie s wer e agent s fo r fiv e ou t o f 1 5 sailings fro m Hon g Kon g t o Tianjin. 9 Th e America n Isbrandtso n lin e dominated th e trad e t o Shanghai . Fou r Isbrandtso n ship s wer e engage d i n runs to Shanghai from th e beginning o f September 1949 , suffering varyin g degrees o f interference , especiall y o n thei r return journeys t o Hong Kong . The Eas t Chin a Foreig n Trad e Contro l Burea u reporte d that , fro m th e beginning of June to the end of October 1949 , goods imported into Shanghai using private foreign exchang e amounted to US$8.5 million, £1.44 million, and HK$30 million. 10

HONG KONG' S ECONOMI C RELATION S WIT H CHIN A 1949-5 5 20 1

Nevertheless th e damag e cause d b y th e blockad e t o th e trad e o f Shanghai wa s substantial . Th e communis t newspaper , Economics Weekly, reported i n January 195 0 that 5 0 000 tons o f shippin g (equivalen t t o mor e than half the Shanghai shipping stock after the KMT retreat) had been sunk or damaged a s a result o f raid s by nationalis t aircraft. 11 A variety o f step s were taken t o ensure th e continuation o f supplie s int o Shanghai . To evad e the blockade , good s wer e initiall y shippe d a t nigh t bu t thi s prove d to o hazardous becaus e o f th e destructio n o f buoy s an d navigationa l aids . Th e shortage o f willin g sailor s wa s countere d wit h a polic y t o compensat e families o f crewmember s kille d whil e transportin g essentia l militar y o r government supplies . Othe r governmen t incentive s include d grant s an d loans t o salvag e damaged shipping , an d ai r defence station s establishe d a s safe havens for shippin g along the coast from Shangha i to Jiujiang .

The Northern ports of China recovered relatively quickly, helped by the loss of competition from Shanghai. 12 I n September 1949 , total imports into Tianjin double d and exports increased 50 percent over August to exceed the pre-war level . While abou t 9 0 percen t o f Shanghai' s trad e wa s conducte d by Stat e Trading Companies , th e stat e wa s responsible fo r onl y abou t on e third o f th e trad e o f Tianjin . O f th e othe r tw o thirds , foreig n merchant s accounted for 21 percent of exports and 5 percent of imports. Just over half of exports from Tianji n wer e destined for the USA and 41 percent for Hon g Kong.13 Th e Shanghai manager of the Hongkong Bank reported that during the blockade:

certain smal l coasters , run b y loca l mushroom companie s hav e traded between Hon g Kon g an d Shangha i bu t thei r hig h freigh t rate s an d uncertain service s inspired little confidence, an d most traders preferre d the train routes to Tientsin (Tianjin) and Tsingtao (Qingdao).14

There wer e a tota l o f 9 7 departure s fro m Hon g Kon g t o Chin a an d North Korea between 29 September and 26 November 1949, 15 clos e to half of whic h wer e i n November . O n averag e abou t on e shi p se t sai l fo r thes e ports each day in September an d October . British flag ship s dominated th e traffic, accountin g fo r jus t ove r hal f o f th e tota l sailings . Butterfiel d an d Swire were the agents most involved in this trade, contracting 1 9 departures, mainly t o Tianjin . Panamania n ship s wer e th e nex t mos t common , accounting for 1 8 departures, half of which were destined for North Korean ports.

By contrast , i n Septembe r an d Octobe r onl y seve n vessel s se t sai l fo r Shanghai an d mos t wer e intercepte d b y th e Nationalis t Nav y an d charge d


"squeeze" in return for continuing their journey. The American shi p Flying Trader o f the Isbrandtsen Line reached Shangha i on 3 October with freigh t worth HK$10 0 pe r to n an d pai d $HK2 5 pe r to n i n bribes. 16 I t carrie d cigarette paper and machinery from New York, cotton from Karachi , rubber from Colomb o and Singapore and a wide selection of industrial goods fro m Hong Kon g includin g chemicals , dyes , pharmaceutical s an d oil. 17 O f 1 3 ships whic h lef t Hon g Kon g fo r Shangha i afte r 2 3 October , onl y fou r succeeded i n reaching th e port an d returning wit h varying degree s o f risk , delay an d damage. 18 Anothe r Isbrandtse n ship , the Si r John Franklin , wa s heavily shelle d an d unabl e t o leav e Shanghai , promptin g a publi c protes t from th e US State Department .

Foreign businesses in China complained bitterly about the impact of the blockade o n thei r profit s an d th e lac k o f officia l respons e fro m thei r governments. Th e American s officiall y acquiesce d t o the blockade a s par t of thei r ebbin g suppor t fo r th e nationalis t cause . Despit e Britain' s detachment fro m th e KM T an d imminen t recognitio n o f th e communis t government, i t was unwilling to antagonise the Americans by sending naval ships t o break th e blockade. 19 Finally , from 1 November 1949 , the Britis h Navy announce d tha t i t woul d protec t Britis h ship s outsid e Chines e territorial waters (a three mile limit) while on their voyage to Chinese ports. Despite the continued American recognition of the KMT, at the end of 194 9 the US Isbrandtso n shi p Flying Arrow wa s shelle d by nationalis t force s a s it approache d Shanghai . Th e CI A reporte d tha t "th e Nationalist s hav e explained tha t th e actio n wa s take n t o preven t th e vesse l fro m sufferin g certain destructio n b y mines . Th e rea l motive , o f course , wa s thei r determination t o prolon g th e isolatio n o f Shangha i b y sea." 20 Fro m th e beginning o f 1950 , after th e USA change of policy with respect to Taiwan, the blockad e becam e indiscriminat e an d th e U S Nav y agree d t o operat e rescue missions as a humanitarian gestur e for US ships in danger. 21

Despite thi s protection , th e U K Trad e Commissione r i n Hon g Kon g advised i n December 194 9 that "the blockade in the mouths o f the Yangz i and the Pearl Rivers continued to be regarded a s dangerous."22 Fro m early November there was a queue of at least six ships waiting to run through the Nationalist guar d ships at the mouth of the Yangzi River . Some returned t o Hong Kong or were diverted to ports further north. 23 I n November only fou r vessels entered Shanghai and six were able to clear the port. The next month, no ship s wer e abl e t o ente r an d onl y on e shi p cleared. 24 I n November, b y contrast, 49 ships entered Tianjin an d 28 entered Qingdao (of which 1 6 were from Hon g Kong) . I n th e sam e mont h 4 2 ship s cleare d Tianjin , an d 2 4 cleared Qingdao (of which 1 3 were destined for Hong Kong).25


Because th e world' s trad e wit h Chin a focuse d o n Hon g Kon g fo r transhipment, th e mai n impac t fo r Hon g Kon g wa s th e accumulatio n o f goods whic h ha d bee n importe d fo r re-expor t t o China . Throug h bill s o f lading wer e difficul t t o contrac t whic h lef t good s i n Hon g Kon g awaitin g transport aboar d charter s willin g t o ru n th e blockade . Thi s buil t u p t o a critical congestion o f merchandise an d shipping through the second half o f 1949 26 gy j ujy 1949 ^ 5Q QQQ i3aies of raw cotton were stored in Hong Kong awaiting export to Shanghai.27 Th e Hongkong Bank and other British banks operating i n Chin a an d Hon g Kon g wer e pu t unde r increasin g pressure . Merchants incurre d larg e losses , an d letter s o f credi t offere d b y th e bank s to traders had to be extended .

After th e fal l o f Canto n t o the communist s i n October , th e nationalis t blockade wa s extended . A t first , moto r junk traffi c wit h th e souther n por t of Shanto u thrive d o n th e shortage s o f good s i n China . Junk s charge d a n extra fee for running the blockade which amounted to about HK$20 per 10 0 catties of commodities s o that a medium sized junk could earn HK$10 000 for each trip. The main commodities in this trade were evaporated milk and kerosene.28 Large r ship s bega n t o trad e wit h Xiame n an d Shanto u i n November 1949 . At the beginning of the month, however, two British ships, the Sin King an d the Cloverloc k wer e bombed durin g dayligh t i n Shanto u so that ship s i n futur e loade d a t night an d wer e lef t unattende d durin g th e day.29

In the case of the Pearl River blockade, all but junk traffic wa s excluded by November 194 9 afte r KM T destroyers intercepte d th e SS Kwai Wah. 30

Junks were small enough to evade nationalist guards by negotiating shallo w rivers bu t th e traffi c wa s irregula r an d subjec t t o interception , claim s fo r ransom, and confiscation o f cargo. After the loss of Sam Chau Island, KMT naval vessel s operate d fro m Li n Ti n Islan d an d th e rewards fo r blockade -running tempte d mor e traffi c int o th e trade. 31 Th e continued exchang e o f essential commoditie s prevente d shortage s an d kep t price s fro m risin g excessively i n bot h Hon g Kon g an d Guangzhou . Th e mos t lucrativ e commodities wer e flour , industria l chemicals , dyestuffs , medicine s an d sugar.32 Figur e 12. 1 show s tha t Guangzho u wa s th e mos t importan t destination fo r Hon g Kon g product s i n 194 7 but i t los t it s place to Maca u in 1948 . Onc e th e embarg o wa s enforced , trad e wit h Maca u dominate d Hong Kong' s export s carrie d b y junks. Macau wa s used increasingl y a s a transhipment point for trade with China. 33


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Figure 12.1 Ton s of Cargo in Junks leaving Hong Kong

Figures 12. 2 and 12. 3 show that the total value of trade between Hon g Kong an d Chin a increase d throug h 194 9 despit e th e blockade . Thi s wa s particularly true for exports, which increased both in terms of value and also as a percentage of total Hong Kong exports. Part of this increase, of course, was du e to rises i n the market prices o f traded good s du e to shortage s an d because o f th e extra cos t o f shipping. 34 I n November 194 9 it was reporte d in Qingdao, for example, that merchants were exporting cloth to Hong Kong at a los s o f 2 0 percen t bu t the n bough t good s i n Hon g Kong , whic h the y sold a t a profit o f 40 percent.35 Give n the potential for profit , trader s foun d ways to transport their goods through ports other than Shanghai and between July an d mid-Septembe r a n estimate d 13 0 000 ton s o f carg o wa s shippe d from Hon g Kon g t o Chines e ports. 36 Th e main commoditie s shippe d t o China wer e stee l bars , chemicals , rubbe r tyres , petrol , kerosene , vehicles , copper wiring, medical supplies and bulk paper. On their return voyage the ships carried bean curd / cakes, and food items .

The overal l impac t o f th e blockad e o n th e trad e o f Hon g Kon g i s difficult t o determine. The disruption tende d t o be short-term a s new trad e routes were found t o Shanghai overland via Tianjin o r by rail or air to south China and then to Hong Kong either directly or via Macau. The Pearl River


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Figure 12.2 Hon g Kong's trade with China 1949-55

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Figure 12.3 Hon g Kong's trade with China as a % of total trade


blockade was even more short-lived a s the KMT forces wer e weakened by the time the embargo began. In the longer term, trade was distorted not only by th e blockade s bu t als o b y th e uncertaint y an d administrativ e change s associated wit h th e war with Japan sinc e 1937 , the civi l wa r i n China an d then the establishment of the communist regime. The cumulative effect wa s to increas e th e importanc e o f Hon g Kong' s trad e wit h Nort h Chin a a s compared t o sout h China . Hon g Kong' s export s t o north Chin a comprise d only 8- 9 percen t of tota l exports to China in the late 1920 s compared wit h 21 percent in 194 7 and 42 percent in 1948 . Conversely, 8 0 percent of Hong Kong's export s t o Chin a wen t t o sout h Chin a i n th e lat e 1920 s compare d with 63 percent in 194 7 and 37 percent in 1948 .

Perhaps th e mos t importan t conclusio n i s tha t th e blockad e teste d th e ingenuity o f th e Chines e merchant s an d thei r wester n partner s i n evadin g these obstacles. It should be noted in this context that traders in Hong Kong were generall y optimisti c tha t th e communis t regim e woul d eventuall y restore stability to the Chinese economy and so improve economic relations with Hong Kong . The blockades prolonged the disruptions o f the civil war in Chin a int o th e perio d i n whic h th e Wes t institute d mor e forma l (an d effective) trad e sanctions . Th e optimis m amon g Hon g Kon g an d Britis h business abou t the stability promised by the unification o f China under the communists prove d t o b e unfounde d i n th e longe r ter m du e t o thes e late r sanctions, bu t th e embargoe s lef t th e promis e o f th e communis t administration untested .

Western Embargoe s

In Novembe r 194 9 th e US A impose d a n embarg o o n export s o f strategi c goods to China . This was followed b y a more general embargo on trade in December an d a UN resolution imposin g a n embargo o n trade with Chin a in May 1951 . The trade embargoes imposed by Western governments in the wake of the communist take-over are more deeply researched in the existing literature tha n th e blockad e o r financia l control s discusse d i n thi s paper . Given the importance for the future prospects of Hong Kong, however, there has been relatively littl e detailed research on the role of Hong Kon g in the development o f th e embarg o policy . Thi s sectio n wil l firs t identif y th e importance o f Hong Kon g to the Anglo-American deliberation s ove r trade restrictions, and then examine the impact o f the embargo o n Hong Kong' s trade.


Development of the embargo policy

From th e outset , the positions o f th e US an d the UK o n the approac h t o a new communis t regim e in China were very different . Th e British hoped t o maintain the status quo as far as possible, and to encourage the continuation of politica l influenc e throug h commercia l links . The importanc e o f Chin a to the prosperity of Hong Kong (now a strategically as well as economically important Britis h outpost ) wa s o f considerabl e influenc e i n thi s policy , which culminate d i n th e recognitio n o f th e communis t regim e i n Januar y 1950. For the Americans, political rather than economic considerations were most influential , an d the changeover i n China fel l int o the Cold War etho s of America n foreig n policy . Th e American s wer e muc h mor e activ e i n supporting the nationalist cause and more determined to resist the legitimacy of the communist regime.

In early 1949 , once the communists had gained control of parts of North China, the Americans began to plan a trade embargo. From the start , it was obvious tha t British co-operatio n i n an y embargo wa s essentia l because o f the importanc e o f Hon g Kon g a s th e pivo t o f China' s internationa l trade . The officia l America n positio n wa s tha t "Britis h co-operation , wit h particular reference t o the entrepot centre of Hongkong, would be essentia l to the effectiveness o f US controls" over strategic exports to China. 37

Groves, o f th e Britis h Embass y i n Washington , wa s calle d int o th e State Departmen t i n Februar y 194 9 t o be questione d abou t th e possibilit y of imposing control s on Hong Kong' s trad e with China to prevent Chines e supplies reachin g th e USSR. 38 Grove s wa s non-committa l bu t wa s subsequently informe d tha t the Stat e Departmen t ha d develope d a schem e for contro l o f trade in Hong Kon g an d he was invited t o view it. 39 Grove s initially demurre d bu t finall y sa w th e Stat e Departmen t plan s a t th e en d of March. Grove s insiste d on what was to become the British line on suc h trade restrictions : tha t restricting th e trade o f Hong Kon g alon e woul d no t suffice — ports like Macau and Manila would need to be included to prevent the entrepot business merely shifting awa y from Hon g Kong and to another centre.40 Export s fro m American-occupie d Japa n woul d als o hav e t o b e restricted to prevent materials reaching China . The American response was that Hon g Kon g wa s th e onl y reall y activ e por t i n th e are a an d wa s th e only on e t o b e considered . The y agreed , however , tha t thei r pla n woul d require th e co-operatio n o f th e UK , SCA P an d possibl y othe r Europea n states.41

The UK was asked formally fo r their opinion on 21 April 1949. 42 The y stalled, unwilling to act against the interests of Hong Kong despite increased


pressure from th e State Department afte r th e fall o f Shanghai . Opinion was split betwee n department s suc h a s th e Foreig n Office , Treasury , Colonia l Office an d Board o f Trade , but provisional view s were finally give n to the State Departmen t a t th e en d o f May . Contro l o f export s fro m th e U K t o China posed no problem, althoug h they could no t guarantee the support of the res t o f th e OEEC . Th e proble m wa s tha t Britai n woul d als o hav e t o impose control s o n export s t o it s colonie s suc h a s Hong Kong , Singapor e and Malaya . Eve n thes e control s woul d b e ineffectiv e withou t restriction s on trad e elsewher e i n th e Fa r Eas t suc h a s Japa n an d Manila . Otherwis e trade woul d merel y b e diverte d awa y fro m Britis h colonie s t o thei r detriment. I n conclusion , th e Foreig n Offic e solicite d specifi c proposal s from th e USA, which could be discussed a t a technical level in London.43

American official s dul y arrive d i n Londo n o n 2 0 Jun e 1949 . Th e American plan was to control exports to China of arms and strategic goods that wer e currentl y restricte d i n trad e wit h Easter n Europ e (know n a s 1 A goods). I n addition , however , the y wishe d t o ad d certain othe r item s suc h as oil and petroleum products, mining and steel making equipment, transport and powe r generatin g equipment , whic h wer e importan t t o th e Chines e economy (know n a s I B goods). 44 The y suggeste d tha t suc h a n embarg o should star t with th e UK, USA , Hong Kon g an d Singapor e an d that , onc e in place, effort s t o attrac t othe r participants shoul d be made.45 Th e British position wa s tha t ne w control s woul d b e administrativel y an d politicall y difficult t o impos e an d the y doubte d th e usefulnes s o f trad e control s i n general as a political tool. Furthermore, the embargo would threaten British interests i n Chin a and , finally , ther e woul d b e considerabl e damag e t o entrepots suc h a s Singapor e an d Hon g Kon g i f th e embarg o wer e no t geographically complete. 46

The ministerial position was not established until the end of July 1949 , at which time it was agreed tha t the UK would not extend existing contro l on transhipments in Hong Kong and Singapore until the Belgian, French and Dutch ha d agree d t o d o th e sam e i n thei r territories . Importantl y fo r th e Americans, minister s als o insiste d tha t SCA P shoul d confor m t o th e embargo. Onc e thes e othe r partie s ha d agreed , th e U K woul d contro l th e first categor y o f goods , i.e . arm s an d strategi c material , bu t they wer e no t willing t o exten d contro l t o th e industria l product s suggeste d b y th e Americans. The y suggeste d instea d tha t British , America n an d Dutc h oi l companies shoul d b e aske d no t t o sel l oi l t o Chin a i n exces s o f China' s domestic civilian requirements. 47

Not surprisingly, the Hong Kong governor was strongly opposed to any further contro l o n transhipment s i n Hon g Kong. 48 H e re-iterated tha t thi s


would merely divert trade elsewhere and also added the point that smuggling was rife i n the waters around Hong Kong which would make such control s impossible t o enforce . I f control s wer e t o b e imposed , the y shoul d b e initiated a t sourc e rather tha n i n Hon g Kong . H e als o note d tha t three U S oil companie s wer e activel y sellin g oi l to China o n barte r terms ; indeed a Caltex tanker had been sent to Shanghai as soon as the port was opened and was onl y stoppe d b y th e nationalis t blockade . Thi s smacke d o f som e disagreement betwee n th e America n governmen t an d U S business . Ther e was als o a dange r tha t Chin a woul d reac t b y cuttin g of f essentia l foo d exports fro m Canto n t o Hong Kong. 49 Th e Governor, therefore , supporte d British policy . Britis h representative s i n Nanjin g als o warne d tha t an y Chinese retaliation would be aimed at Hong Kong. Furthermore, an embargo on industrial goods would merely push China towards autarky, which would generate suffering fo r th e Chinese people and UK business interests. 50

At th e beginnin g o f Augus t th e American s formall y expresse d thei r disappointment in the British response, suggesting that this cast doubt about the possibility o f a joint approach to communism in Asia. They insisted o n the importance o f a n embargo on industrial good s and asked for talk s with the U K t o b e resumed. 51 Denin g expresse d th e British positio n (agree d i n London by the Secretary of State):

At the moment we are concerned only with the survival of our business interests i n China . I f the y d o not survive , then w e shal l have los t the trading machiner y wit h th e ai d o f whic h w e hope , i n du e course , t o convince Ma o Tse-tung an d hi s boys tha t ther e i s som e advantag e in playing with the West. We should also lose all our contacts with China, and the Communists would recede still further into the arms of Moscow.52

The respons e t o the Americans wa s couche d somewha t differently . I t wa s asserted tha t th e basi s o f th e disagreemen t wa s whethe r expor t control s would influenc e Chines e politica l policy , sinc e communis t government s tended not to link trade with politics. Secondarily, i t was noted that the UK believed tha t a continue d commercia l presenc e i n Chin a wa s desirabl e t o exert pressure and influence wher e possible.53

Towards the end of 1950 , the British began to reconsider the possibility of joinin g th e US A i n a n economi c embarg o o n China . Th e Britis h assessment included controls on financial transactions as well as commercial trade but the Bank of England was not optimistic about the effectiveness o f such a policy . A t th e beginning o f Decembe r Graffety-Smit h advise d tha t "My guess would be that any economic blockade would be fairly useles s in view o f th e lon g coastline , th e neighbourin g countrie s an d th e innat e


qualities o f smuggle r whic h ar e presen t i n ever y Chinese." 54 Th e Bank' s advice was that a trade blockade would have to be extended to Hong Kong, Indo-China, Burm a an d Siam , an d woul d kil l of f Hon g Kong' s entrepo t trade and local industry i f al l leaks were closed.

On th e financia l side , ther e wa s th e possibilit y tha t Chinese-owne d assets held in Hong Kong could be blocked or controlled. Exchange controls would b e ver y difficul t t o impose , however , sinc e i t wa s difficul t t o distinguish a Chinese resident from a Hong Kong resident. It was also noted that suc h control s woul d mak e Hon g Kong' s entrepo t busines s mor e difficult. Finally , since food import s from Chin a were bought with HK$, it was impossible to prohibit the flow of HK$ to the Mainland without causing hardship in Hong Kong.55 Heasma n concluded that "As long as Hong Kong continues on anything like the present basis it may be possible to stop some of th e gap s bu t I a m doubtfu l i f al l o f the m coul d eve r b e completel y closed." Anyway , th e integratio n th e Hon g Kon g an d Chines e economie s was too entrenched to over-ride for political reasons.

In mid-January 195 1 it was agreed that a joint Anglo-US grou p woul d study th e sanction s question , an d a n inter-departmenta l Workin g Part y o n Economic Sanction s Agains t Chin a wa s se t u p a t th e en d o f Januar y t o determine th e British response.56 Th e advice of the working party was tha t existing control s on the export o f strategi c materials from th e UK could b e enhanced. A tota l embargo , however , woul d nee d t o b e extende d t o neighbouring state s (includin g Hon g Kon g an d Malaya) , an d woul d als o need th e co-operatio n o f Indi a an d Pakistan , whic h wa s unlikel y t o b e forthcoming. Restrictions on shipping would need the co-operation of all UN members including India , Panama an d South Africa, whic h might not join. Such a mov e woul d als o hur t U K shippin g interests . A nava l blockad e would be an extreme measure , which woul d invit e retaliation an d hostilit y from othe r member s o f th e Commonwealt h suc h a s India . Financia l measures would not be sufficient o n their own to stop trade and would bring sterling into disrepute.

Finally, the repercussions of an embargo on the UK and on Hong Kong were assessed . Th e trad e los s t o th e U K wa s no t expecte d t o b e ver y significant. U K companie s wer e alread y reducin g thei r presence i n China , although they might still be confiscated i n retaliation, putting British citizens at risk . Th e embarg o woul d als o threate n Commonwealt h solidarity , especially with India and Pakistan. The repercussions for Hong Kong were, of course, more serious. There was a potential loss of 45 percent of exports, the los s o f essentia l import s o f foo d an d ra w materials , an d a ris e i n unemployment. If Hong Kong was no longer an entrepot, its value to China


would b e reduce d whic h paradoxicall y migh t encourag e th e Chines e t o attack, generatin g a loss o f Britis h prestig e i n th e East . I f mad e effective , therefore, a total embargo coul d lead to the loss of Hong Kon g to China. 57

The workin g part y conclude d tha t a selectiv e embarg o coul d b e recommended bu t tha t shippin g an d financial control s shoul d be used onl y if necessary to make such an embargo effective .

Despite British reluctance, on 1 8 May the UN accepted the Additiona l Measures Resolutio n t o impos e a n embarg o o n trad e wit h China . Amon g abstentions wer e th e Commonwealt h countrie s o f India , Pakistan , an d Burma, and the Asian state of Indonesia. The UK was swept along with the UN resolution an d Hong Kong' s trad e with China was severely limite d fo r the next decade.58

Impact of the embargo on Hong Kong's trade with China

Export controls were first imposed in Hong Kong in the second half of 194 9 to confor m t o th e U K polic y t o restric t strategi c good s reachin g China . Export licences were also implemented (on petroleum exports, for example ) to ensure that Dollar Area imports into Hong Kong generated US$ earnings for Hon g Kon g exporter s t o China. These early controls , however, di d no t affect trad e significantly becaus e of the narrow range of goods to which they were applied, and the relaxed attitud e to licensing.59

Instead, i n th e month s leadin g t o th e Korea n Wa r i n th e summe r o f 1950, Hon g Kon g benefite d fro m China' s re-stockin g boo m whe n bot h prices an d volumes o f export s t o China soared . Rationalization o f China' s trading polic y an d th e resurrectio n o f communication s als o revive d trade . In terms of Chinese exports, the Hongkong Bank reported that in 1950 , "the development of interior collecting centres through the Government Trading Organisations, better transport, and unification o f the country, released larger quantities o f expor t commoditie s tha n have been available for man y years . Many smal l exporter s droppe d out , bu t th e large r an d mor e experience d ones, both foreign an d Chinese, had generally a successful year." 60 I n 1950 , British liners made 31 voyages between the UK and China and 97 trips fro m the UK to Hong Kon g compare d t o a total o f 97 in al l of 1948. 61 Th e rise in Hong Kong' s export s t o China was even more dramatic tha n th e rise in imports. Figure 12. 3 shows that Hong Kong's exports to China soared fro m 15-20 percent o f tota l export s in 194 9 to 40-^15 percent in the firs t hal f o f 1951.

Gradually, the American trade restrictions began to affect Hon g Kong' s commerce. I n Apri l 1951 , J. F . Nicoll , Colonia l Secretar y i n Hon g Kong ,


wrote t o th e Colonia l Offic e t o complai n tha t th e U S consulat e wa s threatening non-US firms i n Hong Kong with the loss of licences to import US branded goods if they happened to be exporters to China.62 Th e Colonial Office agree d that this was objectionable bu t that the US Consulate shoul d not be challenged since the State Department appeared to believe that Hong Kong's trad e control s wer e ver y fir m whe n i n fac t the y wer e quit e ineffective. Th e policy was not to rock the boat. The Foreign Office minute d that "we had ourselves noticed elsewhere the State Department's optimis m about Hong Kong's controls. The Colonial Office a t any rate are apparently under no illusions."63

The U N embarg o declare d i n Ma y 195 1 threatene d mor e seriou s consequences fo r Hon g Kong . Fro m June , Hon g Kon g impose d mor e widespread control s on trade with China, in particular o n exports o f cotto n and rubber . Figure s 12. 2 an d 12. 3 sho w tha t th e dro p i n export s i n th e second hal f o f 195 1 is shar p indeed , but i n part represented a return t o the levels that had prevailed in the late 1940s. 64

The U S Stat e Departmen t believe d tha t th e mai n impac t o f existin g controls by 195 2 was t o reduce business profit s i n Hong Kon g rathe r tha n increase unemployment. 65 I t wa s recognized , however , tha t an y furthe r controls woul d affec t employmen t adversely , an d consumptio n standard s would fal l i f import s o f foo d fro m Chin a wer e stopped . Hon g Kon g imported abou t 8 0 percent of its meat from Chin a and about one-half o f its vegetables i n amount s tha t wer e equivalen t t o abou t US$3 0 millio n pe r annum. Indeed , recorde d trad e o f mea t import s wa s believe d t o underestimate actua l import s b y abou t one-half , base d o n comparin g recorded import s with actua l slaughter s i n 195 0 and 1951. 66 Th e prospects for increasin g trad e an y furthe r wit h othe r countrie s wer e no t considere d very bright , give n th e larg e effort s alread y mad e i n thi s directio n an d th e imminent return of Japan as a competitor in shipping and port facilities .

Most analyse s o f th e impac t o f th e embargoe s ar e o n th e basi s o f recorded trad e an d ignor e evasion s o f control s fo r whic h th e Hon g Kon g market was renowned. Goods could be smuggled directly to mainland China or exporte d t o Maca u fo r re-shipmen t t o China . Maca u di d no t operat e effective control s o n trad e wit h Chin a becaus e o f th e natur e o f th e loca l administration an d th e vulnerabilit y t o Chines e retaliation . Althoug h statistics ar e b y definitio n impossibl e t o collect , som e indicatio n o f th e volume of such trade is available.

From 194 9 to the end of 1951 , Hong Kong's recorded exports to Macau were very volatile. There was a substantial increase towards the end of 194 9 and through the first few months of 1950 , which then subsided until the firs t


half of 195 1 (after th e tightening of the US embargo). In the wake of expor t restrictions i n the secon d hal f o f 1951 , trade declined t o a relatively stabl e level o f HK$5-1 0 millio n pe r mont h throug h t o th e en d o f 1955 . Sinc e almost al l exports from Hon g Kon g to Macau wer e destined ultimately fo r communist China , thi s increase s th e valu e o f export s boun d fo r Chin a b y HK$60-120 millio n per year during the UN embargo. In October 195 1 the State Department observed tha t

since th e impositio n o f embargoe s o n strategi c good s exporte d t o Communist China , the Chinese Communist s hav e utilised Macau both as a transhipment point for the physical movement of strategic materials and a s a plac e t o contac t an d mak e deal s wit h busines s agent s fro m other countrie s wh o ca n operat e i n Maca u wit h a minimu m ris k o f government surveillance and interference.67

In additio n t o recorded trade , Stat e Departmen t intelligenc e indicate d tha t "there i s a substantia l volum e o f export s o f strategi c good s fro m Maca u to Communist China which have been imported into Macau through various channels, suc h a s smugglin g fro m Hongkong. " I n particula r 2 000-2 500 tons of petroleum products were reportedly exported to China each month.68

Evidence o n smugglin g activitie s i s necessaril y patch y an d anecdotal . In Septembe r 1951 , the Chie f o f Nava l Operation s reporte d tha t th e U N embargo "ha s had no apparen t effec t o n the China trade" and tha t China' s imports continued to be mainly strategic materials related to the war effort. 69

Furthermore, "Th e main transhippin g poin t continue s t o be HK, however , India an d Burm a ar e becomin g increasingl y importan t i n thi s capacity. " Banks i n Hon g Kon g wer e als o reporte d t o b e involve d i n financin g Burmese overlan d export s o f rubbe r an d cotton . The report concluded tha t "all evidence indicates that smuggling activitie s are increasing very rapidly ... smugglin g i s carried on chiefly betwee n Hong Kong, Macao, Kowloon , and Canton ; eve n shipment s fro m Okinaw a hav e bee n noted . Th e larges t volume of smuggling seems to be in petroleum products, but large quantities of pharmaceuticals , rubber , an d tires also find thei r way into China by thi s means."

From 195 2 to 195 4 there was a short-lived attemp t to compile balanc e of payment s statistic s fo r Hon g Kon g whic h include d estimate s fo r smuggling. These were compiled by "a competent Chines e official" whos e appointment wa s prompted by a visit to Hong Kong by a representative o f the Ban k o f England. 70 Thes e pu t smuggle d merchandis e export s a t £ 6 million in 195 2 and £4 million in 1953 , based on information abou t seizures which were believed to be a fairly consisten t proportion of total trade.


It is important to recognize, therefore, tha t the embargoes did not seve r the economic links between China and Hong Kong. Despite the controls on exports o f cotto n an d rubbe r t o Chin a impose d i n Jun e 1951 , Hong Kon g remained on e o f China' s mos t importan t non-communis t source s o f man y imports. Cotto n wa s importe d fro m Pakista n an d Egyp t an d rubbe r wa s imported fro m Ceylon , bu t mos t othe r product s cam e fro m Hon g Kon g either directl y o r vi a Macau . Together , thes e fiv e territorie s comprise d 9 0 percent of China's imports from non-communis t countries in 1952. 71 I n this sense, Hong Kong became a more important trading partner for Chin a afte r the embargo than it had been before. This was especially true for goods that could no t b e importe d fro m th e Easter n Blo c includin g pharmaceutical s (antibiotics an d sulpha drugs) , machinery an d dyes.

Although Hong Kong's recorded exports to China fell substantially both in absolute terms and as a percentage of Hong Kong's total trade after 1951 , imports fro m Chin a remaine d a stabl e proportio n o f tota l imports . Thi s generated a trad e defici t wit h China , s o tha t Hon g Kon g remaine d a n important sourc e o f foreig n exchang e fo r mainlan d China . Becaus e Hon g Kong currenc y wa s convertibl e t o mos t othe r currencie s throug h th e fre e exchange market s i n Hong Kong , China' s revenu e fro m thes e export s wa s particularly valuable .

It should als o be remembered tha t Hong Kong' s trad e with Chin a wa s affected b y factors other than trade embargoes. Political campaigns in China, such as the Five-Anti Campaign o f early 1952 , disrupted economic activit y and therefore trade . The move toward autark y wa s influence d no t onl y b y the western powers ' obstructiv e trad e policy bu t als o by financia l control s imposed a t the end of 1950 . These will be discussed in the next section .

US Dollar Freezing Orde r

The thir d blo w t o th e recover y o f Hon g Kong' s relation s wit h Chin a wa s the freezin g orde r issue d b y th e America n governmen t o n 1 6 Decembe r 1950. Thi s froz e al l Chinese-owne d US $ asset s an d ha d far-reachin g implications fo r th e bank s stil l operatin g i n China . Hon g Kon g ban k accounts were not frozen bu t all transactions involving a Chinese name had to be vouche d fo r t o establis h tha t ther e wa s n o communis t connection. 72

Hong Kong branches of Chinese companies were considered to be "tainted" and ha d thei r US $ asset s frozen. 73 Mos t importantly , th e freezin g orde r encouraged the movement toward barter trade organised by Chinese officia l trading organisations .


As earl y a s Jun e 1949 , Reed , Manage r o f th e Nationa l Cit y Ban k i n Shanghai, suggeste d t o th e Hongkon g Ban k tha t th e Stat e Departmen t intended t o freeze Chines e US$ assets. 74 Thi s prompted the Foreign Offic e to ask the US Treasury directly i f this was their intention75 t o which the US Treasury denied any such plans and suggested that this was a proposal fro m the National City Bank itself.76

Nevertheless, fro m th e beginnin g o f 195 0 th e Hongkon g Ban k anticipated a freezing o f Chinese dollar accounts . In mid-1950, Dunkley of the Tianji n branc h enquire d whethe r fund s coul d b e shifte d fro m accoun t of the Bank of China to a special Hongkong Bank account to keep the fund s from an y potentia l actio n b y th e USA . Raikes , o f th e Ne w Yor k branc h replied that , du e t o increase d hostilit y o f th e U S governmen t toward s th e communist regime, "it would be a dangerous policy for us to try in any way to cover up in our books funds hel d here which we know are an account of the (Bank of China). " He concluded tha t "should a freezing orde r be put in force ther e i s n o doub t tha t ou r book s woul d b e closel y inspecte d an d al l funds hel d i n Specia l Account s fo r ou r Chin a Agencie s woul d hav e t o b e fully explained." 77 B y 1 3 December, day s befor e th e freezin g order , th e Bank o f Chin a accoun t i n th e Ne w Yor k branc h o f Hongkon g Ban k wa s closed, althoug h th e Ne w Yor k branch' s Tianji n accoun t hel d US $ fo r account of the Bank of China which were used to finance trade. 78

The Chinese authorities also anticipated a freezing o f US$ accounts . In January 1950 , the Shangha i manage r o f Hongkon g Ban k reporte d that , i n anticipation o f a freezing o f Chines e assets , US$ credit s o f si x banks ha d been transferred t o Russian account in the USA.79 These were all banks that traded in foreign exchang e for the Bank of China. The Chinese also shifte d their US $ t o Swis s ban k account s whic h the y hope d t o concea l fro m th e American Treasury . I n Marc h 1950 , HSBC an d Chartere d Ban k receive d instructions to open accounts in their own names in New York for the Bank of Chin a an d to receive US$3 million eac h from th e Chemical Ban k Trus t Co. Th e Ban k o f Chin a the n instructe d the m t o transfe r thes e fund s les s US$100 000 in each case to the Swiss Banking Corporation Ne w Yor k fo r account of the Societ e Banque de Suisse in Zurich.80 I n the event, the US$ secreted i n Switzerlan d prove d difficul t t o us e an d provoke d a seriou s conflict betwee n Hongkong Ban k and the Bank of China in 1951 . Because of the implications for British interests in China, it is worth going into some detail on this point .

On 9 December 1950 , days befor e th e freezing orde r wa s announced , the Hongkong Bank opened a Letter of Credit in favour of Jardine Matheson and Co . through th e Swis s Ban k Corporatio n i n Zurich. 81 Th e funds wer e


transferred fro m th e New York branch of the Hongkong Bank to the Swis s Bank (New York) for account of its Zurich office. A week later, these fund s were frozen . Th e Hongkon g Ban k trie d t o ge t th e fund s release d throug h the Swiss consul and Jardine Matheson applie d to the US Treasury wit h no result. Eventuall y th e par t o f th e fund s relate d t o good s tha t ha d actuall y been shipped was released but US$986 616 remained frozen .

In December 1951 , the Bank of China tried to force Hongkong Bank to make a deposit in the Hong Kong branch of the Bank of China equal to the HK$ equivalen t o f th e froze n US$ . Sinc e thi s contravene d th e freezin g order, Hongkon g Ban k refused . Th e Chines e authoritie s personall y threatened th e manage r o f th e Hongkon g Ban k i n Shangha i wit h cour t action. I n a telegra m fro m th e Hon g Kon g office , Yoxal l (manage r i n Shanghai) wa s reminded tha t "you must realise that any action of ours tha t could b e construe d a s gettin g roun d th e America n Freezin g Orde r woul d lead to most serious consequences to our New York Office an d to the Bank as a whole. We would receive no sympathy from the British Authorities."82

Yoxall tried to find a way around the impasse by suggesting that the froze n funds i n th e Swis s accoun t migh t b e free d t o financ e Japanes e import s t o China bu t th e Ne w Yor k offic e refused. 83 Unde r considerabl e persona l pressure, Yoxal l urge d tha t the Bank o f China' s wishe s be complied with . At the en d o f December , h e wrot e t o Adamson i n Hon g Kon g tha t " I ca n only urge you to use all your influence with the Authorities to effect releas e of funds , availabl e t o th e Ban k o f China , fo r th e equivalen t o f th e outstanding balance of this L/C (lette r of credit)."84

The disput e wa s droppe d durin g th e San-fa n an d Wu-fa n movement s but wa s raise d agai n b y th e Ban k o f Chin a i n Jun e 195 2 afte r Hongkon g Bank decide d t o clos e it s Shangha i operations. 85 A s one of th e condition s for allowin g th e Shangha i branc h t o close , th e Chines e insiste d o n bein g reimbursed fo r thes e froze n dollars . I n December , Yoxal l blame d th e hardening o f the Chinese attitude to the closure of branches o n the il l wil l caused b y th e froze n Swis s ban k credit. 86 Thi s episod e show s ho w th e freezing orde r generated suspicion and ill-feeling o n the part of the Chinese toward foreign business .

As well as these banking difficulties, th e freezing orde r encouraged th e Chinese to require that all trade be on a strict barter basis. In February 1951, Russell o f Arnhold Tradin g Compan y calle d o n Yao Laian, chie f buye r o f the Chinese National Import Corporation and was told that the CNIC would conduct busines s almos t entirel y o n a barte r basi s du e t o fear s o f furthe r freezing orders . If trade on this basis was not forthcoming, the n the Chinese were willing to look to become self-sufficient. 87


New export regulations required that no goods were to leave China until imports of an equal value (or foreign exchange) had arrived in China.88 Thi s would avoi d outstandin g contracts , whic h migh t b e capture d b y futur e freezing orders . In March , a Barter Exchang e wa s established i n Shangha i to connec t importer s an d exporter s an d applicant s fo r foreig n exchange. 89

Since most foreign traders and banks could not accept the shipment of goods without paymen t i n advance , o r tyin g th e sal e o f thei r good s t o sale s o f Chinese product s elsewhere , trad e wit h Chin a throug h privat e foreig n interests wa s drasticall y reduced . Hon g Kon g retaine d som e busines s b y virtue o f th e spee d o f th e turnove r o f trad e throug h th e por t (essentia l i n barter trade), but the onerous conditions also reduced trade for Hong Kong .

The US$ was not the only exchange control imposed on Chinese trade. In August 194 9 the British imposed controls on debits from Chines e sterling account. Sha o has suggeste d tha t this "secre t governmen t action " was on a par with the American freezing orde r of December 1950. 90 He further assert s that "littl e evidence i s availabl e t o reveal the circumstances" in whic h thi s decision wa s take n b y th e British. 91 I n fac t ther e i s a wealt h o f correspondence i n Foreig n Office , Treasur y an d Ban k o f Englan d papers , which reveal that this move was not commensurate with the later America n policy.92

The UK measures were not aimed at restricting China's legitimate trade but at stopping "cheap sterling" transactions through Chinese accounts. The problem wa s tha t sterlin g are a good s wer e ostensibl y consigne d t o Chin a but were diverted to the USA and paid for in Chinese account sterling . UK exchange contro l require d tha t al l US import s o f sterlin g are a good s wer e paid for in US$. In August 1949 , it was decided to impose controls on debits from China' s sterlin g account s i n orde r to ensure tha t suc h payments wer e related t o legitimat e import s fro m th e sterlin g area . Thes e restriction s di d not, therefore, constrain trade more generally in the way that the US freezin g order did .

Concluding Remark s

This chapter has addresse d the genesis and impact of three major shock s to economic relations between Hon g Kon g an d mainland Chin a in the perio d 1949-55. Th e trad e embargoe s ar e widel y discusse d i n existin g literatur e but less attention has been paid to the importance of the nationalist blockade of 194 9 / 50 and the freezing o f Chinese-owned US$ balances at the end of 1950. These two measures had important implications for Sino-Hong Kon g


relations tha t aggravate d th e impac t o f th e wester n trad e embargo . Th e blockade prolonge d th e disruptio n o f trad e cause d b y th e changeove r o f administrative control and the attempt to stabilise the Chinese economy afte r three year s o f inflatio n an d civi l war . Th e freezin g orde r wa s arguabl y a s important a s th e embargoe s i n encouragin g th e mov e t o autark y b y th e Chinese government , becaus e i t destroyed confidenc e i n the use of foreig n exchange, drivin g transaction s t o lo w leve l barter . Whe n examinin g th e relationship between Hong Kong and mainland China in these critical years, this chapte r has show n tha t al l three external shock s need to be considere d together to explain the changing trade patterns of the region.

Documents

Hong Kong's Economic Relations With China 1949-55 ... · The Commodities Exchange Bureau in ports in North China required all inessential imported goods to be returned to Hong Kong