254 Department of External Affairs to Embassy in Washington
Cablegram 308 CANBERRA, 31 May 1949, 9.00 a.m.
China. Our immediately following telegram contains text of a message from the Prime Minister to the Foreign Secretary, London, regarding our attitude towards developments in China. 
Any question of recognition of a Communist-controlled regime for part or whole of China is obviously premature at the present time.
There are in fact suggestions that the Communists may not be intending to set up any provisional Government until towards the end of the present year. In the meantime the Nationalist Government continues to be the officially recognised Government of China.
The only realistic course however is to envisage a Communist Government having effective control over the greater part of China by the end of this year. We consider therefore that nothing is to be gained by holding back now from establishing local relationships with the Communists wherever practicable. We believe that the adoption of a standoffish attitude towards the Communists at this stage would be the surest way of bringing about what we would all wish to avoid, viz, close co-operation with Moscow against the Western Powers. One practical way in which relations with the Communists might be placed on a working basis is through encouragement of trade with Communist-controlled areas.
The message in my immediately following telegram is a commentary on a telegram from the United Kingdom Ambassador at Nanking  which reflected the views of his British Commonwealth colleagues and which suggested that while trade offers made by the Communists should not be rebuffed the Western Powers should avoid initiating approaches to the Communists for resumption of business. We assume this is also the United States' view. We think however that it represents the wrong mental approach, and that on the contrary everything possible should be done to encourage British and American interests to foster resumption of trade within and with China. In our view this offers the best hope of establishing future relationships with China on a satisfactory basis of continued contact with the West instead of orientation towards Russia alone.
This and following telegram is for your background information for use in informal discussion with Governments to which you are accredited.