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settlement, in accordance with the arrangement made between the two Governments in April 1925 (p. 123). The instalments are in practice paid over by the Inspector-General of Customs to the Banque de l'Indo-Chine, as the French custodian bank, in Shanghai, and the usual indemnity receipt obtained. The amount in question is then, however, banded back in the form of a gold dollar draft to the Commissioner of Customs at Shanghai, who gives a formal receipt for it, and he in turn hands it on to the Banque to the Banque le Commerce et l'Industrie, the successor franco-chinoise pour industrielle, against their receipt. The money is then used for the service of the per Cent Gold Dollar Loan raised in 1925, redeemable in twenty-three years, the bonds of which were handed to the Far Eastern creditors of the Banque industrielle in exchange for the bons de répartition" issued to them by the bank when it closed its doors (p. 123). The ostensible object of this arrangement was to set the bank on its feet again under a new name, and it would be only natural to suppose that, once the bank was in a position to resume profit-making activities, at least a portion of such profits should be used to replace the funds thus borrowed from the indemnity. It is, however, doubtful if this was ever the serious intention of the French Govern- ment and what the understan.ling between the Government and the bank really amounted to. As above stated it is, at any rate, not known that any part of the indemnity instalments, at present released under the 1925 arrangement, is being used for educational or philanthropic purposes.
Belgium.
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6. The existing state of affairs in regard to the Belgian indemnity payments was It was shown in fully described in my despatch No. 2215 of the 15th December last. that despatch that the Sino-Belgian Indemnity Commission (p. 125) had not yet been formed, but that an agreement had very recently been reached between the Belgian and Chinese Governments stipulating, it was understood, for the establishment of such a commission, and for the employment of 25 per cent, of the indemnity funds available for educational objects, while the remainder was to be used for the purchase of Belgian railway material.
Italy.
7. The arrangement with Italy, resulting from the gold franc controversy, was much the same as that made with Belgium (pp. 125-6), namely, that China had to pay Italy in a lump sum the balance of the principal of the Italian portion of the indemnity outstanding on the 1st December, 1927, in paper francs, and this amount was advanced by the Italian Bank for China at the end of 1925, on the condition that repayment should be made from the monthly instalments of the resumed indemnity payments as from the 1st January, 1926. As, however, Italy agreed to take the deferred payments at the close of the indemnity term, i.e., from 1941 to 1948, and did not insist on payment being made concurrently with the usual monthly instalments from January As soon as it is 1926, as Belgium had done, this advance is taking longer to refund. repaid to the bank the monthly instalments will be paid over to a Sino-Italian Indemnity Commission to be used for philanthropic objects and for works of public utility, for which latter it was stipulated that Italian materials and a fixed proportion, 50 per cent., of Italian engineers should be employed. Nothing has yet been heard of the appointment of this commission, but it will presumably come into being when funds are available for it to distribute.
Russia.
8. Political events have rendered the disposal of the Russian share of the indemnity, by far the largest individual national portion, the most complicated part of this long story. To understand the present position it is necessary to retrace very In that year, when the roughly the course of events in this connexion since 1917. various Powers agreed to defer for a period of five years the payment of their shares of the indemnity as the result of China's entry into the war, Russia only consented to a partial deferment, namely, that
of her total share of 29 per cent. of the whole indemnity she would defer roughly a portion representing 10 per cent., while she retained for her own use an amount roughly equivalent to the remaining 19 per cent. of the whole (p. 111). These titles "deferred' and "retained" have been used At the commencement of this to indicate these separate payments ever since.
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arrangement, the retained portion was payable to the Russian Treasury through the Russo-Asiatic Bank. The revolution supervened almost immediately, however, with the result that it was for some three years paid through the same bank to the Russian authorities of the old régime in Peking for the upkeep of their Legations and consulates, although at moments during this period the Chinese Government decided to withhold the payments, which were lodged temporarily in special accounts in the Bank of China and the Bank of Communications. In 1920 this arrangement was finally cancelled, and the Chinese Government began using the money for its own so-called special purposes. It was agreed, on the suggestion of the Inspector-General, that it should be used from January 1922 for the service of the third and fourth year domestic loans (see Appendix 5, p. 223), while under the Consolidated Debt Regulations, sanctioned by presidential mandate of the 13th March, 1921 (p. 113), it was arranged that this retained portion should, on the retirement of these two loans, be similarly used for the redemption (only) of the fifth and seventh year long-term loans. The drawing of the bonds of the third and fourth year loans is now completed, and provision for their payment in full has been made from these retained indemnity funds; that of the fifth year loan will be finished next year, when the seventh year loan redemption payments begin and will continue till 1937. There will thus be little money available from this source for some time to come.
9.
The situation is, however, different in regard to the deferred portion of the Russian indemnity. This portion was first of all used, with all the other deferred indemnities (p. 113), for the service of the seventh year short-term bond issue, and on the retirement of that issue in November 1922, when the five-year deferment period ended, it was pledged as security for other loans, ie., the eleventh year short-term loan (to run from November 1922 to November 1927), a Treasury note issue for 5 million dollars in 1923 for the upkeep of Chinese Legations and consulates abroad, and for a similar issue in 1924 for 1 million dollars for the eight higher Government institutions in Peking. The money was thus pledged on China's initiative alone, before any negotiations between the Chinese and Soviet Governments on the subject had begun. By the Declaration V, however, attached to the Sino-Soviet Agreement of the 31st May, 1924, the Soviet Government agreed to renounce Russia's share of the indemnity, and recognised the validity of these various dispositions of that share. It was also agreed thereby to appoint a special commission, consisting of one Russian and two Chinese, to administer for educational purposes the funds available from the waived indemnity after these various prior obligations had been satisfied. The balances available from the deferred portion, after the two Treasury note issues above mentioned In addition to have been provided for, are consequently paid to this commission. payments amounting to 750,000 dollars received on this account in 1926 (p. 224), the commission in that year raised a loan from Chinese banks on the security of these instalments of the deferred indemnity for 1 million dollars for the upkeep of Government institutions in Peking, and the Inspector-General guaranteed to turn over the instalments as they fall due to these banks to repay this loan, which will in this way be paid off in 1928. When the two Treasury note issues are also paid off in 1930 (it may not be till 1932, owing to the action taken by the Ministry of Finance in issuing bonds carrying coupons up to 1932, in contradiction to the original arrangement for redemption in 1930, as described at the bottom of p. 153), the whole of the deferred Russian indemnity will be at the disposal of the Sino-Soviet Commission. This will mean in practice a release of some £365,000 to the commission in the year 1931 and subsequently during the years 1941 to 1945, while from 1932 to 1940 it will be as much as £527,000 owing to the fact that under the protocol indemnity table the instalments payable to Russia were increased during the concluding years of the indemnity term as the result of the extinction of the Anglo-French Loan of 1895 (the 1941-45 payments are of course deferred payments only, see Appendix 4, p. 218). Next year it is estimated that the Sino-Soviet Commission will receive as much as 14 million dollars for educational purposes after the other obligations above described have been met, payments being in pounds sterling and the present exchange being low, The commission originally consisted of two Chinese, Hsu Ch'ien and Li Shih-tseng, well known at that time for their Communist tendencies, and a Russian named Dr. Pergament. Later, the two former ran away to the South, and have now been replaced by the present commissioners, Chu Yu-chi and Lin Hsiu-tse, while the latter was replaced by à M. Spilvanek as the Soviet member. Hsü Ch'ien incidentally made great efforts to retain control of the funds after his flight to Haukow. At a recent meeting in Peking of the commission, which was reorganised in its present form last summer, the Soviet member, referring to the support given to Chinese higher
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