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.