In Shanghai before World War II what were relations like between the Europeans living there and the local Chinese?

The book "Two Kinds of Time" [1] by Graham Peck is an excellent glimpse into China during the 1940s. The author took two long-duration trips to China and wrote extensively about his travels and impressions of China, although his impressions are mostly recorded for the period of about 1940 through 1946. By 1940 the coastal cities were under Japanese control, and so Peck traveled primarily through the "Nationalist" interior. He did desire to get up to the northwest "Communist corner" to observe them, but never succeeded.

Background

Beyond providing us with many keen observations of Chinese life at the time, Peck wrote copiously about the Europeans and Americans in the country and their attitudes to the local Chinese, and their attitudes about even being in the country.

What the question describes is largely in line with Peck's book. Peck described most Europeans and Americans as showing at minimum a high amount of apathy toward local Chinese, with most exhibiting a severe amount of condescension. Most outsiders thought Chinese culture to be utterly broken and backwards.

To be fair, the Chinese social and economic system had indeed come undone and was suffering a massive collapse during this time. Drought, war and famine were taking a severe toll, such that the Chinese social classes were consuming each other, and many had become refugees. Chinese society was indeed unraveling, and the realization of what was happening to themselves had unusual effects on Chinese. Peck described it as a colossal joke:

...I had sometimes suspected that everyone I watched was obscurely engaged in an enormous practical joke. ...they made a great show of their busyness; like people who were in on a joke, they seemed determined to look plausibly matter-of-fact, with just a hint of a knowing smile. (pg 85)

Among this, European and American people remained in the Chinese interior (away from the Japanese zones). It appears few wanted to be there, but most were rather "assigned" to their positions (government jobs), or in some cases their outside connections had collapsed and they were somewhat stranded. To be thrust into a strange culture and to resent being forced into such a situation is tough enough.

For example, Peck discusses how being raised in a typical American small town in no way prepares one to encounter China.

I had already learned that personal affairs, business, politics, and war could be more complicated in China than elsewhere. This was a leading cause for anti-Chinese feelings among foreigners. ("These goddam people always have to do things the slow, hard, silly way.") It was true that human relations in China were sometimes marked by customs which had become impractically elaborate and corrupt through centuries of use. The savage individualism which had grown so strong during the recent century of national disintegration could make for anti-social behavior. But there were reasons for enriching every situation, no matter how small, with overtones of intrigue, conflict, or sheer nonsense. ... Instead, they chose to thrust themselves upon one another, if only in inconvenience. Theirs was a civilization based on the belief that the interplay of personalities was most important. (pg 91)

As such, we can see that foreigners who had minimal preparation for China, and for many who were there somewhat unwillingly, were up against a society that was so deep into collapse that the ability to understand each other was likely impossible.

Observations of Anti-Chinese Behavior

Peck bounced around between several journalist and embassy circles, and then had a job with the US Army in a press office as it arrived in force later on. His remarks about his US Embassy visits capture the essence fairly well. Here are some quotes Peck makes from those officials:

"...And as I was saying, these Chinese just don't value human life. Only the other day we found another of them in the gutter, starved to death and frozen, right out by the gate in front of our PX." (pg 65)

"...Ah, what the hell! Why do you have to talk about China out of working hours? The way I figure it, we're doing the world a favor, helping these goddamn Chinese kill each other off." (pg 65)

Missionaries had other views, mixing between sympathy and condescension, although their locations made them more keen to the local conditions.

"We have to live as we do because it is part of our mission to demonstrate the American standard of living." (pg 369)

While Peck does have more severely "un-Christian" anecdotes about the missionaries, he does try to explain them:

This chapter is not intended as an attack on missions as an institution. American support of missions has obviously been prompted by that spirit of abstract altruism which is one of the most unusual features of our country. Many missionaries I met in China were as admirable as the mission propaganda claimed. Because of America's present problems in Asia, though, I think it wise to recognize that missionaries can be fallible. (pg 370)

When American soldiers arrived en masse, they were likely the most culturally unprepared group in China and exhibited some of the worst anecdotes:

[Two US Army officers arrive from General Stilwell's HQ to a mission hospital]

"You were really making good time," said one of the missionaries. "Did you hit anything?"

"Two or three dogs," said the ranking officer, laughing jovially, "and a couple of Chinks, of course, but they don't count, huh-huh!" (pg 377)

The most severe cases he described were American soldiers buying local girls as sex slaves (pg 457), and Chennault's brothels and trafficking women to them is also well known[2].

It wasn't all bad, though. Peck relates a story where a lieutenant wanted to enjoy a nice, sociable time with a woman (as in a nice dinner and not prostitution). The local girls wouldn't go along with it, and he got angry and decided that he would give someone else a nice time in the name of generosity. He picked up a beggar and tried to take him into a nice restaurant to give him a nice dinner, but the Chinese restaurant manager threw them out, saying he did not serve beggars. (pg 538)

[1] Two Kinds of Time. By Graham Peck. University of Washington Press. 1950.

[2] Wikipedia entry for Claire Chennault: https://en.wikipedia.org/wiki/Claire_Lee_Chennault