Your telegram 339 of 1st July regarding the proposed establishment of an Australian Legation in China.  We agree with the appreciation of the Commonwealth Government of the difficulties inherent in this question, and it is difficult to offer definite advice. Not only are the Japanese Government engaged in hostilities with the Chungking Government but, having now established under Wang Clung Wei a Government purported to be a Central Government of China, they regard the Chungking Government as merely a provincial regime. Consequently the appointment of an Australian Minister accredited to the latter would, as you suggest, tend to diminish the gratification which the Japanese have expressed at the decision to create an Australian Legation in Tokyo. On the other hand, an appointment to Chungking might avoid the impression that the Commonwealth Government were siding with the Japanese Government as against the legitimate Government of China.
(2) Apart from its political effect in Japan and elsewhere, the establishment of a Legation in China would raise certain difficulties in connexion with extra-territorial rights hitherto enjoyed by Australians in that country. The nature of those difficulties is summarized below.
(3) In virtue of treaties with the United Kingdom, British subjects, including those from the Dominions, enjoy extraterritorial status and are subject to the jurisdiction of the British Courts Administrator in General in accordance with the law of England as amplified by Regulations issued by His Majesty's Ambassador for local purposes. If an Australian Legation were established in China it would assume charge of Australian interests and it would be logical that Australian Courts should be set up whose jurisdiction of Australians would be natural. This would mean the enactment of special legislation by Australia and means would have to be devised of establishment [sic] whether individuals were Australian British subjects or not.
(4) The administrative and legislative difficulties which this process would involve could no doubt be solved as between His Majesty's Government in the United Kingdom and His Majesty's Government in the Commonwealth of Australia but there is no certainty that the Chinese would not hold that Australians being separately represented in China were not entitled to extraterritorial privileges. It is probable that any Chinese Government which emerges from Japanese hostilities will be uncompromising on recovery of China's sovereign rights and abolition of extraterritoriality.