i
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prepared to accept the procedure laid down in this Article during the period of construction, provided that a wider measure of control by vested in the Chinese authorities thereafter. He suggests the addition of a clause in the contract to provide for this.
Mr. Bland states that so long as the loan is unredeemed the foreign capital invested requires, in addition to the security of a well-constructed railway, certain guarantees as to maintenance, such as were given in the Northern Railway Loan Agreement, In the present case, moreover, the Syndicate's interests in the profits of the enterprise necessitates supervision of accounts, &c., by an independent auditor representing the Syndicate. He points out that the principle of supervision by a Board of Commissioners is recognized also in the Northern Railway Loan, in order to afford proper representation, outsi·le of the staff, of the foreign interest involved.
It is eventually decided to draft a supplementary clause in the sense required by the Chinese Commissioners, and to refer the same to the consideration of the Syndicate's Boards in Berlin and London. At the same time, stress is laid on the importance of this modification of the accepted terms of the Agreement, and on the fact that undue limitation of the interests and securing of foreign capital must prejudicially affect the borrowing rate.
Liang Taotai is of opinion that the Chinese Government's guarantee should be sufficient in itself, provided all necessary measures are taken for the proper construction of the line. He thinks, however, that if the principle of Chinese Government control after construction is definitely accepted, the other conditions of the Agreement should be capable of amicable adjustment.
Sir,
The meeting then adjourns.
Inclosure 9 in No. 1.
Mr. J. Bland to the Secretary of the Chinese Central Railways, London,
Peking, September 26, 1906. AT the last meeting, held on the 22nd instant, in regard to the Tien-tsin-Yang-tsze Railway negotiations-the Minutes of which await confirmation-the Chinese Repre- sentatives stated categorically, as the result of instructions received from the Viceroy Yuan Shih-k'ai, that the Chinese Government does not consider the Preliminary Agree- ment of May 1899 binding, and that any Final Agreement based thereon to be acceptable would now require to be made upon conditions modifed to meet Chinese public opinion and the existing situation.
Narrowed down, after long discussion, to its essential terms, the present position of the Chinese amounts to demanding not only important modification in several conditions of the Preliminary Agreement notably the price of loan, its redemption period, and the Syndicate's participation in profits but also, as a sine quí non, control by the Chinese authorities after construction, under conditions similar to those laid down in the Northern Railway Agreement of the 10th October, 1899. Liang Taotai stated that the Viceroy's original instructions were to claim such control even during construc- tion, but realizing, no doubt, that such a preposterous demand would involve strong action by the Legations, he confines himself to the claim that the railway is an Imperial Government line, the interest on the loan guaranteed firstly by the Imperial Govern- ment, and, secondly, by the security of the line built under foreign supervision and joint control, and that upon its completion China is entitled to manage it in her own way, provided that guarantees be given that the railway will be properly maintained, under foreign supervision, and efficiently worked, and that the Syndicate's financial interests are watched and protected by an auditor, their representative.
To show the attitude and views of the Chinese I inclose copy of the Minutes, as drafted, requesting you at the same time to note that, not having been confirmed, they are liable to amendment. The gist of the matter is contained in the final statement advanced by Liang Taotai, and it is now for the Syndicate to decide as a matter of immediate importance, whether negotiations on these lines should be continued, or whether the matter should be placed in the hands of the Legations with a statement of the facts, and a request that the Chinese Government be required to fulfil its specific obligations.
Before going further I should state that the views I am about to place before you have been arrived at after most careful consideration of the question in all its bearings,
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and after due consultation and agreement with Mr. Cordes, whose experience. must necessarily carry great weight. Mr. Casenave also concurs therein, as calculated to meet the exigencies of an admittedly difficult situation,
The Tien-t-in-Yang-tsze Railway negotiations differ from those concerning other projected Chinese railways in that
1. This line must be, now and hereafter, more than usually affected by political, as distinct from purely commercial, considerations; and
2. The Preliminary Agreement, duly approved by the Chinese Government, is peculiarly full and explicit in regard to the Syndicate's right to finance, construct and work the line.
I assume, however, that the Syndicate, as well in its German as in its British group, is actuated rather by a desire to obtain satisfactory financial results under conditions affording adequate security to the bondholders, than by any political considerations; and if this be the case it appears to me a question requiring the Board's most serious consideration, whether, if such security be forthcoming it might not be good business and wise policy to permit the Chinese to have a modified control of their railways after construction ?
The Syndicate's Preliminary Agreement undoubtedly gives as the right of control (Article 29) until the loan is redeemed, but the right carries with it little or no prospect of financial advantage to the Syndicate after construction, while, on the other hand, it must entail continual responsibility and endless causes of friction calculated to prevent amicable relations and future business. The security of the bondholders is essential, but this would seem to be adequately provided by-
1. Imperial Chinese Government's guarantee.
2. The mortgage of a first-class line constructed under foreign supervision and -control; and
3. Effective supervision of receipts and expenditure.
The Board is in a position to judge whether loans could be satisfactorily floated on these terms, but recent experience and all the information at my disposal lead me to From the believe that they should prove as successful as the Northern Railway Loan. bondholders' point of view, executive control after construction would not appear to be essentially necessary.
From the Syndicate's point of view, I take it that the chief desiderata are: (1) profit on flotation; (2) profit on construction; and (3) a share in the prosperity of the enterprise. The first two would not be affected by surrendering control after construction, since the Engineer-in-chief would undoubtedly continue to guide matters in regard to supply of material. It is possible that the Syndicate's share of profits might be enhanced if the line were worked under purely foreign administration although the experience in the Northern Railway does not support this view, but the representation of the Syndicate's interests by an auditor with adequate authority would appear calculated to prevent any serious mishandling of the funds.
If the statement made by the Viceroy's Representatives are reliable the conclusion of an agreement on reasonable financial terms would be greatly facilitated by conceding the principle of Chinese control after construction, and their position is strengthened in claiming this concession by reason of the fact that Sir Ernest Satow is known to have expressed sympathy therewith.
The position may therefore be briefly stated thus: If the Syndicate is able to command in London and Berlin effective diplomatic support sufficient to insist on adherence to the essential conditions of the Preliminary Agreement, modifying the same only in details consistent with fair treatment of the Chinese, well and good. If not, it would, in my opinion, be politic to meet the Chinese on the question of control after construction with a view to facilitating the present negotiations and establishing friendly relations for the future.
Recent experience ou the Shanghae-Nanking Railway has shown the lengths to which Chinese obstruction may be expected to go in the absence of strong diplomatic support in any enterprise where their face" is not saved by recognition of the Chinese Government's authority. Only in virtue of continuous pressure can a railway be financially satisfactory under such conditions.
You will observe that the Chinese raise the question, on administrative and financial grounds, of divided control, after construction, by two Boards and two Engineers- in-chief. In raising this question they fail to take into consideration certain undeniable facts and recognized political conditions which must prevent any alteration in the Agree.
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