the Société d'Etudes" mere negotiating, and were prepared to make substantial concessions in respect to security and sharing of profits, in order to postpone redemption.
From the moment that I was advised by London that the French were in agreement with us, I kept M. Casenave fully informed of what I was doing, and gave equally full information to the French Minister on the two occasions on which he personally called on me to ask for news.
Mr. Bland having raised objections to my proposed negotiations for this loan, which, he informed me, he had referred to his Board by telegraph, I telegraphed to London on the 12th May asking whether, in view of this, I was authorized to proceed with independent negotiations, and I received a reply in the affirmative.
Certain attacks upon the Belgian negotiations had, in the meantime, appeared in the native press, and there were also indications of a division of counsels among the Chinese. I therefore thought the time had come to approach the Board of Communications personally, and I met the President by appointment on the 14th May. As a result of that interview I received an assurance from him that he was prepared to consider the best offer in respect to the proposed Redemption Loan, and that he would inform me of the amount required as soon as it was decided.
On the 9th June I attended at the Board at the request of Mr. Liang Shib-yi, who informed me that he had been deputed to discuss with me the subject of the loan. They had decided, he said, to borrow 7,000,000l., secured upon provincial revenues. The money was to be applied to general productive purposes connected with the Board of Communications, including the redemption of the Peking-Hankow Railway Loan, although they were anxious that the latter should not be brought into prominence. They had no objection to French and German participation, and Mr. Liang would call upon me in a few days with a Memorandum containing particulars of the proposed security.
As I heard nothing further from Mr. Liang, I again called upon him at the Board on the 27th June, when he handed me Memoranda of the security and of the main conditions proposed by his Board for the loan. We discussed these generally, and it was arranged that I should consider them at my leisure, and furnish him with a Memorandum of the terms upon which the bank would be prepared to negotiate. He referred to our Agreement with the Germans. He said that the Board would prefer to know as soon as possible if the Germans desired to take a share of the loan, and suggested that I should try to ascertain this. I have addressed an inquiry on the subject to London, and received a telegram yesterday informing me that Mr. Addis had gone to Berlin, so the matter is no doubt under discussion.
On the 1st July I telegraphed to London the terms which I consider suitable as a basis for negotiation, to be embodied in the Memorandum for Mr. Liang, and to this I am now awaiting a final reply.
E. G. HILLIER.
Peking, July 9, 1908.
(Signed)
Inclosure 10 in No. 1.
Extract from the "Peking and Tien-tsin Times" of July 7, 1908.
THE PEKING-HANKOW RAILWAY.
THE net profits of the Peking-Hankow line last year amounted to about 2,000,000 dollars. This is satisfactory; but it is only a beginning. It needs no prophet to foretell how valuable an asset this inland trunk line must become when it links up its traffic with the Hankow-Canton Railway to the south and with the numerous branch lines and feeders, east and west, that must before long bring to it the people and the products of untapped regions of industry. Given efficient maintenance and honest management, and the Peking-Hankow Railway cannot fail to be one of the profitable undertakings in the world. It comes therefore as somewhat of a surprise to realize that within two months a year will have elapsed since the date on which the Chinese Government became entitled to redeem the loan made in 1897
Roughly, 200,000l. It is not clear if this means after the bondholders have been paid their 5 per cent. interest; if not, the Chinese Government lost in 1907, owing to the guarantees, 5 per cent. on 4,500,000l., or 225,000l. - C. S. C.
by the "Société d'Etudes," the Belgian Company which financed and constructed the railway. Why this delay? The matter is a simple one, and the negotiations which are at present being carried on between the Board of Communications (representing the Government), and the local representative of the "Société d'Etudes" should not if properly and intelligently handled present the slightest difficulty to the Chinese. What are the facts? By the Loan Agreement the concessionnaires are entitled to 20 per cent. of the net profits of the undertaking during the currency of the loan, but the Chinese Government became entitled, on its part, to redeem the loan on September 1907, and thus to annul the said Agreement together with all further participation in profits. As the railway is now showing substantial returns on its capital, it is evidently to the interest of the Chinese Government to redeem the loan, so that the whole profit of this important enterprise may revert to the Imperial Exchequer. The capital required for the redemption of the loan (4,500,000l.) can readily be obtained by the Chinese Government in more than one quarter, and on easy terms. Proposals from responsible financiers have lately been put forward, and there can be no doubt that the railway having proved itself a remunerative undertaking, the Board of Communications can readily finance the redemption of the existing loan, giving the revenues of the line as security, to the immediate advantage of the Chinese Government. Assuming the cost of floating a new loan to be 5 per cent. on 4,500,000l., the operation would entail an expenditure of 225,000l., a sum which is entirely insignificant when the actual and potential profits of the railway are considered. The advantages of this course are self-evident, for if after redemption, the Chinese Government were to set aside annually 20 per cent. of the net profits of the line as a sinking fund for repayment of the new loan, it would not be more than a few years before the railway would be the unencumbered property of the Chinese Government, and a most valuable asset.
The situation, therefore, is this: the Chinese Government have to decide whether it is better to pay 225,000l., being 5 per cent. on a loan of 4,500,000l., or, at least, 400,000l.* annually, being 20 per cent. of the profits of the line (2,000,000l.† in 1907).
This should be a simple question to decide, nevertheless if one may credit the rumours now generally current, the Board of Communications does not realize, apparently, the importance of this question, and is inclined to allow the Belgian Agreement to run on with slightly modified conditions. Offers, as above stated, have been made to the Yu-ch'uan Pu by French and British financiers to negotiate the conversion of the existing loan under conditions which would involve no participation in profits, but for reasons unexplained, these have not been well received. The negotiations with M. Prudhomme, the Belgian Company's engineer and agent, were suspended for a time, it is true, but they have lately been resumed with every prospect, it is said, of an early conclusion. Strict secrecy is maintained on the subject, but it is evident that his Excellency Chen Pi is not disposed to encourage any serious competition with his Belgian friends; he seems, in fact, to have inherited the policy of Sheng Kung-pao in this direction. It is to be sincerely hoped that nothing will be done without the fullest inquiry by the responsible Boards. If the Belgian Company is prepared to surrender all further rights to participation in profits, in recognition of China's undeniable right to redeem the loan, the Board of Communication would be fully justified in allowing them to remain in possession of such other advantages as their Agreement entitles them to; but if, for political or personal reasons, the Belgian Company is enabled to retain any interest in the profits of the railway, now that the Chinese Government is in a position to redeem them, the Yu-ch'uan Pu should reassure the public that its policy has been dictated solely by consideration of the Chinese Government's interests.
We understand, however, that his Excellency Chen Pi professes to anticipate difficulty in availing himself of the self-evident advantages of competition, because the Belgian Legation has intimated that the railway's revenues cannot be pledged as security for any other loan, as the present Belgian loan remains unredeemed. The statement is difficult to believe. If true, it would imply the urgent need for elementary education in financial matters at the Board of Communications. Some other explanation will, no doubt, be found for the present position of affairs.
* I do not follow the argument at all. Interest would have to be paid both in the case of the old and of the new loan: 20 per cent. interest on 2,000,000 dollars equals 400,000l. - C. S. C.
† Surely this should be dollars. See line 2. - C. S. C.
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