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his wish, Chang told me, to increase the amount of the loan at present. If the Wai- wu Pu could be induced to sanction the amount of 1,500,0007. now proposed, this would serve as a precedent for the further borrowing later if required. In the event of the Wai-wu Pu's opposition to this loan proving insuperable, the Viceroy hoped that we would allow him to resort to the contract advance system, of which he asked me to draw up a Memorandum.
From the point of view of the present business I do not look upon my mission from Chang as a very serious one. It seems to me almost an insult to expect that the financiers of the three great markets will form themselves into so important a combination, for a participation of 500,0001, each, in order to assist Chang's incoherent schemes. To humour his preference for provincial borrowing and sectional construction in order to deprive him of any pretext for going back on his engagements to the British is one thing, but to put in motion such important machinery for the attainment of this temporary object is quite another.
The experience I have derived from the negotiations of the past few weeks forces me to the belief that no sound progress can be looked for in railway construction if the initiative is left to the provincial authorities. The force of local opinion, the irresponsible criticism of the native press, the selfish indifference of the Peking Government, who, not being particularly interested as to whether the provinces have railways or not, show a natural reluctance to accept responsibility, the jealous concern of the people for China's sovereign rights, and their still active belief in their ability to raise share capital themselves are all factors which confront a progressive Viceroy in his efforts to promote the development of his province and improve bis straitened resources.
That any province will ever be able to contend successfully against these difficulties and work out its own salvation seems almost out of the question; and yet these factors have to be reckoned with by any reformer who sets himself to solve the problem on comprehensive lines.
Bearing these lessons and principles in mind, it has occurred to me to consider how far the latest phase of the present negotiations may be turned to practical account. There is no doubt that there is an intense desire on the part of a large mass of the people for railway construction, provided it can be achieved with due consideration for their prejudices; and, although they may persist for a time in their attempts to raise share capital, it is certain that, so long as present conditions continue, this experiment cannot succeed to any appreciable extent, and in the end recourse must be had to foreign borrowing. A combination of the British, French, and German markets would practically hold the door of foreign capital; and, if the objections to the borrowing of foreign capital can be satisfied, the era of extended railway construction may thereby be brought appreciably nearer.
My approaching interview with the Wai-wu Pu seems to furnish an occasion for pressing upon them a comprehensive scheme of this nature; and I subjoin herewith the outline of such a scheme which I propose to lay before Sir J. Jordan, and, if it meets with his approval, to submit to you by wire.
Scheme for International Railway Loan.-1. The Hong Kong and Shanghae Bank, the Banque de l'Indo-Chine, and the Deutsch-Asiatische Bank to form a combination, with the approval of their Governments, for the issue of an Imperial Chinese Govern- ment 3 per Cent. Gold Loan of 18,000,000, the Governments concerned undertaking to support the combination against other banks or firms of their nationals competing to the detriment of its objects.
2. The objects of the loan to be-
(a.) The redemption of the Peking-Hankow Railway, say, 6,000,000%; (b.) The construction of the Canton-Hankow Railway, say, 5,000,000%; (c.) The construction of the Hankow-Szechuan Railway, say, 7,000,0007.;
the last two railways representing a mileage of, say, 1,500 miles, at an average of 8,000l. a mile.
3. The loan to be floated in series, say, one of 6,000,0001, and four of 3,000,000/ The term of the loan to be thirty-five or forty years.
4. Payment of principal and interest to be unconditionally guaranteed by the Imperial Chinese Government. No specific security to be hypothecated; but, in the event of the Chinese Government at any future time hypothecating internal revenues for other loans, the present loan to have priority. In the event of default, the Chinese Government undertakes to arrange with the Powers concerned, in consultation with the
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trustees for the bondholders, for the assignment under suitable guarantees of internal revenues sufficient for the payment of the annual loan service.
5. The Chinese Government may redeem the whole or any portion of the loan within the first ten years at 24 per cent, premium, and after ten years at par--
(a.) From internal revenues of any sort; (b.) From the profits of the railway lines; (c.) From subscribed native share capital,
6. The Chief Engineer of the lines under construction to be British, in consideration of the fact that Great Britain, by its assent to this scheme, sacrifices the preference secured for British capital under the Conventions of 1903 and 1905. The sectional engineers, accountants, traffic managers, and other responsible officers to be employed during construction to be qualified Europeans (or, in the case of Hupei sections, Japanese engineers in the proportion of one-half) appointed by the Chinese Government and approved by the banks, or by the Chief Engineer. After construction is completed, it will rest with the Chinese Government to retain the services of all or any of these officers or not.
7. All materials of foreign origin used for construction (conditions of price and quality being equal to those of other markets) to be either British, French, or German. No commission to be charged on materials.
I do not know how your market would be disposed to look upon a Chinese loan unsecured by the hypothecation of specific revenue; but if any value be still attached to this form of security, I can only say that, in my opinion, and as applied to internal revenue, it is altogether sentimental. It is quite obvious, and experience has demon-. strated, that, if called upon to do so, European officials would be quite incapable of effectively administering either li-kin or land tax. The real security is now, and must be in future, the credit and good faith of the Chinese Government and the latent wealth of the country, which it needs only financial pressure and improved conditions to bring out.
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In the present instance the compensation for the absence of the threadbare formula of hypothecation is the fact that the solemn promise of China to pay witnessed by the three Great Powers, who, in case of default, are to call upon China to assign such revenues as may be necessary to secure the debt.
The merits which I venture to claim for the scheme are that-
1. Its terms are so liberal that the Chinese would find it difficult to allege grounds for refusing it.
2. It offers a strong inducement to the Chinese in the redemption of the Peking- Hankow Railway.
3. It is free from the least shadow of infringement of China's sovereign rights. 4. It disarms the objections of the patriot who still clings to the belief that sufficient native share capital for railways can be obtained in the country, since it presents to him the opportunity of redeeming the loan whenever he likes, and for any amount which he is in a position to raise by the issue of native shares.
My dear Fraser,
Yours, &c. (Signed) E. G. HILLIER.
Inclosure 2 in No. 1.
Mr. Hillier to Consul-General Fraser.
July 23, 1907. IN conformity with my promise to the Viceroy, I went this morning to see Na-tung by appointment in order to explain to him the nature and scope of my recent negotia~ tions in Hankow. He received me alone at his private residence. His Excellency knew, of course, that I had been in Hankow, and had been in negociation with Chang Kung-pao, but Chang had kept him and his colleagues quite in the dark as to the terms proposed. He asked what amount Chang proposed to borrow, and I told him 1,500,000%., adding that more than twice that amount would be required for the railway scheme Chang had in view, and I thought it a pity that he did not negotiate for all his requirements at one time. I then went into the various points which Chang Kung- pao had asked me to explain, the obstacle to borrowing directly for railway purposes
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