Repeated to Bruce 68 with reference to your telegram 101  and Bruce's telegram 641. 
I believe that the Far Eastern situation can be stated in simple terms.
Major factors influencing Japan's future actions in order of importance are (1) trend of the battle for Britain (2) trend of China war (3) attitude of the United States (4) attitude of Russia.
Until the result of the battle for Britain is sure it is certain that the present Japanese Government will not consider negotiation for general settlement in the Far East and Pacific. Once Britain has demonstrated ability to maintain herself and her fleet against German onslaught Japan may negotiate. Unless and until general settlement with Japan is in sight it is to our interest for China to continue the struggle and therefore get all help possible.
So far as I know we have now no means of helping China. Possibly the United States could help China with some requirements through Vladivostok and Russia but clear that most practical and immediate help that America can give is by financial support through stabilization fund for Chinese currency maintenance and prestige which is essential to China's ability to continue internal production and finance the army and guerilla tactics. Above would be in line with the United States policy relying on economic weapons and her known desire to help China.
Also this has the advantage of not recoiling on us.
Bruce complains that neither Britain nor the United States have any definite Far Eastern policy.
I fail to see how Britain by herself can follow any consistent line when she has not the armed strength to go to the Far East to back it up. It would be different if America would play.
Dangerous realities of the situation well expressed by two paragraphs in your telegram No. 101 of 27th July beginning 'Second alternative is' and ending 'any non-issue'.
Britain has now given in on Hongkong Burma Road and Shanghai. The best policy for future would appear to be to resist every unreasonable Japanese demand as long as possible and offer them no concessions. With the present Japanese Government in power any further easily won concessions will discredit us with Americans and Chinese.
It is probably too late and may even be interpreted as sign of weakness to dangle privately before appropriate highly placed Japanese individuals' eyes many economic blessings that might be obtained from British and United States if wiser counsels were to prevail in the Japanese Government. As to the United States policy as suggested sure that they will make no major policy decisions and no commitments in the next three months before election that might leak out and give opponents of the present Administration any political weapons. The United States has used economic weapons in denying Japan aviation petrol and scrap iron. If to defend American honour in the Far East she has to do anything more it will probably be by way of further use of economic weapons against Japan. In the last resort the United States could embargo trade with Japan which in Japan's present weakened economic position would be a very heavy blow.
Whilst we should keep the United States advised well in advance of our views and decision we should impress on the United States the desirability of discussing with us any further economic measures.
Aviation petrol embargo was an unhappy example of unconsidered and undiscussed brainwave consequence of which will fall on us. At best Japan will demand right to buy additional aviation petrol from Netherlands East Indies which will probably be agreed to and British buyers will have to pay dollars for American supplies equivalent to the amount we will have to give up to Japan.
A few days ago the United States renewed trade agreement with Russia for twelve months whilst she has consistently refused to do the same with Japan. Every opportunity should be taken to emphasize this to Japanese. Above is admittedly short-range view which we are forced to take by circumstances outside our control.
We must put long range view of Far East and Pacific Area settlement into the back of our minds for the present.
The essential requirement is for the British case to be handled in Tokyo firmly and skilfully and that course of Japanese policy be assessed accurately and dispassionately.