CO882-6 — Page 670

PUBLIC RECORD OFFICE

Reference :-

C.O. 882

6 PUBLIC RECORD OFFICE, LONDON

ALLY WITHOUT PERMISSION OF THE BE REPRODUCED PHOTOGRAPHIC- COPYRIGHT PHOTOGRAPH-NOT TO

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that there are many other matters apart from the repayment of the Debentures for which it is necessary that we should be empowered to make arrangements in connection with any issue.

4. In these circumstances, it appears to us that no issue of Debentures can be made under the legislation hitherto passed by the Government of Hong Kong, and that if the idea of raising in the shape of Debentures the money which is at present required by the Colonial Government is to be adhered to, fresh legislation will be indispensable. The necessary time to obtain such legislation cannot, how- ever, be put at less than between two and three months, and we are not prepared to say that it will be possible for us to arrange to continue for so long a time to provide the Government of Hong Kong with the £1,100,000 which we have advanced to it.

5. Such being the position of affairs, it has become necessary to consider whether the money which is pressingly required should not be raised in the form of Stock, as contemplated by the provisions of the Ordinance passed in the first instance No. 11 of 1905 and I now beg to submit our views in the matter for the consideration of the Secretary of State.

6. We still adhere to the opinion expressed in our letter of the 16th of October,* that the best procedure in the interest of the Colony would have been to raise in the shape of Debentures the £1,100,000 lent to the Viceroy of Wuchang, and to make the Debentures correspond as to date of redemption with the conditions laid down in the agreement entered into with the Viceroy on the 9th September, 1905. It appears to us, indeed, to be obvious that such a procedure must necessarily be the most advantageous, as the agreement provides for the loan to the Viceroy being repaid by fixed annual instalments, which may be accelerated after five years, and the interest on the money lent is proportionately reduced after the repayment of cach instalment. It follows, therefore, that any other system of raising the money which does not correspond with these conditions must necessarily impose absolutely unknown risks upon the Colonial Government, inasmuch as the result will depend upon contingencies over which the Colony will have no control, i.e., the rate of interest at which it might be possible to employ the monies coming periodically into the hands of the Colonial Government, and, further, whether the repayments of the Viceroy are spread over the whole ten years provided for in the agreement or are completed after five years in accordance with the option given to him.

7. On the other hand, by raising the money by the issue of Stock the debt of the Colony will be inflated for a longer period than is absolutely necessary, while the obligation of the Colony in respect of interest and sinking fund will necessarily be prolonged after the repayments by the Chinese Viceroy will have come to an end. 8. The arguments in favour of an issue of Stock appear to be as follows: Such an issue would be more popular with the Stock Exchange and financial houses than an issue of Debentures corresponding in conditions of repayment with the terms of repayment arranged with the Chinese Viceroy, inasmuch as an issue of Stock would be made on the lines of the existing 34 per cent. Stock, and would therefore be issued at a discount, whereas Debentures would be issued at whatever rate of interest would most nearly command the price of par, and it would, therefore, be only large holders of the Debentures who would be able to average the risks of the drawing of the Debentures for redemption. On the other hand, the issue of Stock at a discount would involve the creation of debt by the Colonial Government to an amount con- siderably in excess of the £1,100,000 which has been lent to the Chinese Viceroy, say, to the extent of 4 per cent., and the obligations in respect of this debt would continue after the Chinese Viceroy would have paid off the loan made to him. On these grounds, therefore, an issue of Stock would appear to stand condemned, but there are certain other factors in the case which are deserving of consideration.

9. In the case of the existing 34 per cent. Stock, power exists to pay off the Stock in April, 1918, i.e., 24 years after the expiration of the period at which the completion of the repayment of the loan to the Chinese Viceroy is to be effected, and we would propose that advantage should be taken of this power. The question therefore to be considered is what means are likely to exist in 1918 to enable the Colonial Government to avail itself of the power of repayment at that date. The existing Stock of the Colony is of the amount of £341,799, and we estimate that the Sinking Fund in respect of that amount of debt will be of the approximate value of £107,000 in April 1918. The creation of Stock to provide the £1,100,000 now required will, however, necessitate an increase of the debt of the Colony to

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the extent of about £1,145,000, and the question arises what provision can be made towards liquidating that debt in 1918, and this question has been rendered the more difficult by the provision in the Ordinance No. 11 of 1905 that the Sinking Fund shall not commence until five years after the loan has been issued.

10.

We gather from the papers that the Governor has contemplated the appropriation towards the cost of the Colonial section of the Kowloon-Canton Railway of the first £500,000 repaid by the Chinese Viceroy, and although we do not consider, for the reasons we have already given, that such a procedure is sound financing, such an arrangement might, we consider, be carried through provided that the further arrangements which I proceed to describe are also given effect to. 11. We would propose that all the monies received from the Chinese Viceroy on account of his debt to the Colony, whether in respect of interest or repayment of capital, should be paid into a special fund which should be under our control, and that such fund should be administered in the following manner: The payment of the interest required for the Stock raised to provide the £1,100,000 should be the first charge on the fund. Secondly, the monies required for building the Colonial section of the Kowloon-Canton Railway should be provided up to the estimated amount of £500,000 out of the fund, the Colony paying into the 'fund interest at the rate of its permanent debt on the amount of all such advances. Thirdly, all further amounts remaining in the fund, including the interest on loaning out monies in the fund shall be considered as being earmarked towards paying off the debt created to provide the £1,100,000. Fourthly, if the Government of Hong Kong should hereafter enter into arrangements with the Viceroy of Canton to build the Chinese section of the Kowloon-Canton Railway the monies remaining in the fund might be used for the purpose, but only with the express approval of the Secretary of State.

12. If the arrangement suggested as possible in Section 4 of the preceding paragraph should be carried out, no redemption of the debt of the Colony in 1918 will be possible, but if the arrangement contemplated in Section 3 should be adopted and remain in operation, then we anticipate that there may be a sum of about £700,000 in the fund in April, 1918, which could be applied towards liquidating the Stock created to provide the £1,100,000, and this amount, together with the Sinking Fund already existing in respect of the first issue of Stock, should enable the debt of the Colony to be reduced in 1918 from about £1,500,000 to about £700,000, either by a conversion operation or by the issue of a new loan, as the circumstances of the case might prove to be desirable when the time arrives.

13. If the Secretary of State should approve of the proposals which we have submitted, I have to request that we may be furnished with authority at an early date to proceed in the matter. I have also to request that we may be informed whether the Ordinance No. 11 of 1905 conveys to us authority to sell sufficient Stock to produce £1,100,000 as well as the expenses of the issue.

6907

No. 201.

I have, &c.,

E. E. BLAKE.

SIR E. SATOW to the MARQUESS OF LANSDOWNE

(Received January 27, 1906.) (Received in Colonial Office, February 26, 1906.)

Peking, December 11, 1905.

(No. 430.) MY LORD,

As I stated in my despatch, No. 343, confidential, of the 18th October last, the Grand Secretary Na-t'ung told me on the 13th October last that the Viceroy Ts'en had been instructed to enter into negotiations with the British and Chinese Corporation in regard to the Canton-Kowloon Railway. Not hearing any corrobo- ration of this from Canton or Hong Kong, I telegraphed an inquiry on the 28th October last. On the 1st ultimo Mr. Scott replied by telegraph, stating that the Wai-wu Pu had urged the Viceroy to open negotiations, and the Viceroy agreed, but insisted that Shông, who made the preliminary agreement, should be appointed

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