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[This Document is the Property of His Britannic Majestys Governme2 163
CHINA TRADE:
CONFIDENTIAL.
Rece [November923 NOV 09,
SECTION 1.
[38021]
No. 1.
Foreign Office to China Association.
1909.
(Confidential.) Sir,
Foreign Office, November I LAID before the Secretary of State your letter of the 12th ultimo, on the subject of affairs in China, and in reply I am directed to offer the following observations.
His Majesty's Government share the anxiety expressed by the China Association at the deterioration in the financial condition of the Empire, and agree that it is only by reforms in the fiscal and administrative system that a remedy can be looked for. They also agree that loans to China without adequate safeguards to control expenditure are to be deprecated, and would point out that it is precisely on account of the attitude of His Majesty's Government on this point that the negotiations in the case of the railway loans now under discussion have been so protracted.
As regards these loans, British finance was, as stated in your letter, promised prior consideration for the construction of the Hankow--Canton line, but the association would appear to have overlooked the important proviso that this was granted only in so far as the terms, as regards interest and issue price, were equal to the tenders of other countries. The guarantees offered by the Chinese Government appeared, however, to His Majesty's Government to be inadequate, and in consequence of their refusal to negotiate on those terms, the Chinese Government claimed a right to accept what they considered easier terms elsewhere.
It is so far true that the pledge given to His Majesty's Government in regard to the funds for this line was regarded as a set-off for the Hong Kong loan, but it is not correct to infer that the official agreement was set aside in deference to the interests of private finance.
Following upon the refusal by China of the British terms, the offer of the German group, as the association are probably aware, was accepted by Chang Chih Tung, and negotiations were opened with that group in order to prevent a competition as to terms of loans, which would in the long run have led to loans being made without any safeguards as to expenditure.
As regards the Hankow-Szechuan line, a pledge was indeed given in 1903 that recourse should be had to British and American finance for the construction of that line-but although enquiry was duly made by this department some time ago no indication was received from the United States of the desire on the part of American finance to take up their share until quite recently--and in the meantime an agreement for the reasons given above in connection with the Canton-Hankow line had been arrived at which included both lines, and matters were in process of arrangement when the claim for participation was put forward by American financiers, and negotiations are now being carried on with a view to meeting this claim.
In regard to the question of li-kin, the association may be aware that the only step hitherto taken by the Chinese Government to carry out the provisions of article 8 of the treaty between Great Britain and China of 1902 for the abolition of the tax is a recent proposal that negotiations for an increase of the customs tariff in return for the abolition should be entered into with the Powers.
There would seem, however, to be no immediate prospect of the necessary assent of other Powers being secured, and in view of the failure of the Chinese Government to carry out other important provisions of the treaty of 1902, His Majesty's Government have replied that they are not at present disposed to support this proposal, more especially in view of the fact that new l-kin stations are being established, and that foreign trade is being subjected to li-kin exactions of greater frequency and
amount.
So long, however, as present arrangements exist, there does not appear to be any special objection to the acceptance of li-kin as part security for loans made to China, and Sir E. Grey does not quite appreciate the force of the observation made in your letter, that the pledge contained in Annex B to the treaty of 1902-that the surtaxes designed by article 8 shall not be pledged in respect of any subsequent foreign loaus---
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