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But side issues of this kind must not be allowed to obscure the far more vital ones on which the protest of His Majesty's Government is based. There are recorded in the correspondence which commenced with the Memorandum of the 16th February last, which I furnished to his Excellency Liang Tun-yen, and ended with the note of the 4th instant which I addressed to your Highness.
If your Highness will examine this correspondence you will find that I insisted upon adequate powers being given to the Engineer-in-chief to exercise over the expenditure of the loan funds, and that, in accordance with the spirit of proper control the 1905 Agreement, and in pursuance of the promise given by the Chinese Delegates during the negotiations, I stated explicitly that I fully relied upon the Grand Secretary giving me the refusal of the lowest bond fide offer if that offer was not made by British financiers.
Both of these were perfectly reasonable requests, and compliance with them would have by no means exhausted the obligations which the Chinese Govern- ment owed to His Majesty's Government for the extraordinary favour they received in 1903.
The necessity for the first, in the interests of China, not less than in those of the British bondholders, is unfortunately only too fully demonstrated by our recent experiences of Chinese railway loans. The case of the Shanghae-Ningpo Railway is familiar to your Highness, and, after exhausting every effort for over a year to obtain redress, I have been obliged, as a last resource, to beg your Highness' Board to lay the facts before the Prince Regent in the hope that His Imperial Highness may be graciously pleased to mark his disapproval of the utter disregard that has been shown for a solemn international Agreement.
The Tien-tsin-Pukow is another case in point, and I would draw special attention to this Agreement, as it embodies the terms which his Excellency Chang wished us to accept for the Canton-Hankow line. I feel perfectly sure that his Excellency, in making this offer, entirely failed to realize the grave irregularities which attend the practical working of the Tien-tsin-Pukow Agreement, and, in order to make clear what these irregularities are, I cannot do better than inclose, for the information of your Highness and his Excellency, a full statement showing the position of affairs on the southern section of the line up to the 31st December last, which has been prepared on the spot by the Chartered Accountant appointed to act as auditor under the 14th Article of the Loan Agreement.
Article 14 of that Agreement states that "the transferred funds shall remain on deposit with those banks (Hong Kong and Shanghae Bank and the Deutsch- Asiatische Bank) until required for railway purposes," and adds that "requisitions on the loan funds will be drawn in amounts to suit the progress of construction of the railway by orders on the Hong Kong and Shanghae Banking Corporation and the Deutsch-Asiatische Bank respectively, signed by the Managing Director of the Railway or, in his absence, by his duly authorized representative, and accompanied by his certificates stating the nature and cost of the work to be paid for."
An examination of the inclosed statement shows clearly that these formal engage- ments have been violated in every particular.
The funds were to remain in deposit with the foreign banks. What are the facts? On the 31st December last the total amount drawn from the Hong Kong and Shanghae. Bank was 968,000 tacls, of which only 308,840-49 taels had actually been spent on the railway. The balance, 653,159 41 taels, instead of being kept, as the Loan Agreement provides, in the Hong Kong and Shanghae Bank was said to be in a number of native banks, but no satisfactory evidence of its existence was forthcoming.
Again, the funds were to be drawn in sums to suit the progress of the work. As an instance of the violation of this stipulation, it is only necessary to draw attention, as the auditor does, to the fact that when requisition No. 6 for 250,000 taels was made on the 1st October, 1908, there were sums amounting to over 570,000 taels in native banks at the disposal of the Managing Director, and that, although the requisition was for rails, no payment had been made for rails up to the 31st December, 1908.
Thirdly, a comparison of the statements in the Managing Director's requisitions as to the purposes for which the money was required and of the amounts actually spent for those purposes on the railway demonstrates beyond a shadow of doubt that the "nature and cost of the work to be paid for" has not been truly stated.
If the Grand Secretary, in whose sense of fairness a long residence in China has taught me to have the fullest confidence, will dispassionately compare what he is offering us now with what he gained for the Imperial Government under the Agree-
ment of 1905, he will, I think, be constrained to admit that he is making no adequate return.
If China had been obliged to borrow in the open market the 1,100,000l. we received from the Hong Kong Government, who would have had to pay 5 per cent. at 91 instead of 43 per cent. at par. She therefore effected an initial saving of 99,0001, not to mention the lower rate of interest extending over a term of years, and she was also enabled to extricate herself from an embarrassing position.
In return for all this she now wishes to discharge her obligations by offering us terms which were never contemplated until long after the 1905 Agreement was concluded, and she invites the British Government to allow its nationals to lend money to China on conditions which, as experience shows, afford no adequate guarantee that the loan funds will be properly spent.
It is for these reasons that I was instructed to record the protest, which I have now the honour formally to repeat, against any breach of the undertaking given by the Grand Secretary, and to state to your Highness that if any such breach is committed, His Majesty's Government reserve the right to raise the question of the advantages to which they may fairly be entitled according to a reasonable interpreta- tion of the whole transaction of 1905.
As regards the Hankow-Szechuan Railway Loan, I am glad to note that the Grand Secretary is animated by a desire to preserve friendly relations, and is prepared to open negotiations with a British bank. I have informed Mr. Hillier, the agent of the Hong Kong and Shanghae Bank, who, as his Excellency is aware, out of an extreme desire to preserve friendly relations, is seeking a solution of the difficulties which have already arisen.
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I avail, &c. (Signed) J. N. JORDAN.