256 Department of External Affairs to Embassy in Nanking

Cablegram 62 CANBERRA, 1 June 1949, 8.45 p.m.

SECRET

We have received through United Kingdom Government several telegrams from United Kingdom Ambassador Nanking reflecting views of all British Commonwealth representatives in China on questions of (a) how and when recognition might be extended to Communists and (b) extent to which commercial relations should be fostered with the Communists.

2. On (a) we have informed the United Kingdom and other Governments that our policy is to await developments. It is realistic to assume that we shall ultimately have to establish diplomatic and commercial relations with a Communist-controlled Government of China. In the meantime the Nationalist Government continues to be the officially recognised Government of China, and we gather that the Communists may not in fact be intending to set up any provisional Government until towards the end of the present year. For the present we would hope to be able to deal with the Communist authorities on a local de facto basis in areas under their occupation.

3. In our view such de facto relationships should include trade, which could provide a valuable means of establishing working relations with the new regime. In this connection we are uncertain what lies behind a recent telegram from the United Kingdom Ambassador to the Foreign Office on the subject of common economic policy in dealing with the Communists which suggests that you and other British Commonwealth representatives agree in recommending that the initiative in approaching the Communists for resumption of business should be avoided as a matter of tactics, and that by implication the Western powers should wait until the Communists are compelled to approach them with propositions for resumption of trade, 4. We can only assume that this is an attempt to meet the United States attitude. We do not think it is the right approach. We believe that the adoption of a standoffish attitude towards the Communists at this stage will be the surest way of bringing about what we would all wish to avoid, viz, close co-operation with the Soviet Union 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, and we consider that nothing is to be gained by holding back now from establishing local trade relationships wherever practicable. We would imagine that British and United States business interests in Hong Kong and elsewhere in China are anxious to trade, and we think they should be encouraged to take the initiative. We have expressed this view to the United Kingdom Government.

5. We realise that you probably face practical difficulties in telegraphing at length direct to us on matters of this kind. You should however try to keep us briefed with your own personal comments when joint recommendations of this nature are under discussion.

[AA:A1838/278, 494/2/10, 1]