CO129-343 - Public Offices & Foreign Office - 1907 — Page 17

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ment under this heading; nor is there in reality any reason why the line should not be efficiently worked, under such conditions, as an Imperial Chinese railway; a similar position, on a smaller scale, exists in the Canton-Kowloon line, where the British and Chinese sections must necessarily be under the control of their respective Engineers- in-chief. I see no reason to think that the Chinese will seriously dispute this provision of the Preliminary Agreement, upon which compromise could not be considered.

Another question to which I would call the Board's careful attention is the provision, under Article 28 of the Final (draft) Agreement, for a "loau service reserve fund" to be built un, by appropriation of 20 per cent. of the surplus of the net annual revenue, until it reaches the sum of 4,000,000/. You will have noted the views of the Chinese Repre- sentative as expressed at the twenty first meeting of the 15th instant; and in reference thereto I venture the opinion that diplomatic support would not be forthcoming to pre- vent the Chinese Government from using such a fund for the immediate redemption of their loans after expiry of the period specified (twelve and a-half or fifteen years), and on payment of the premium of 24 per cent. up to the thirtieth year. Under these circumstances, and in any event, it appears to me that to insist on the Chinese accumu- lating a loan redemption fund out of profits, must be bad policy fron the point of view of the Syndicate's interest, nor is it necessary for the protection of the bondholders, who would presumably prefer to postpone redemption of securities guaranteed by the Imperial Government and secured on a railway ethiciently maintained. It may be that the provision of reserve fund and schedule of amortization (unusual in British loans) has been included to meet conditions of German law with which I am not familiar; but I would suggest that, if it be possible, these provisions be eliminated and replaced by the simple condition that the Chinese shall set aside out of the surplus of net annual revenue, and deposit with the Syndicate Banks a sum sufficient to meet the next year's instalments of interest, leaving the repayment of capital to be made under conditions similar to those of the Shanghae-Nanking Railway Agreement.

The matter may, I think, be briefly stated as follows: If the railway is not financially successful, there would be, under conditions of the present draft Agreement, no reserve fund, and the bondholders' security would consist of the Government's guarantee; if the railway is a success. the bondholders would, ipso facto, have the security of a valuable property in addition to the Government guarantee. But if it proves a success, the Syndicate's participation in the profits is well worth preserving and would continue to be more valuable each year, to make the reserve fund for redemption of bonds a compulsory condition of the contract would therefore appear to be unnecessary and bad policy. It is not in the nature of Chinese officials to appropriate profits for a reserve fund or to redeem loans, if it is in their power to use the funds in other ways, and the prospect of redemption within twelve and a-half or fifteen years is therefore small unless they are compelled to set aside money for this specific purpose. We might conveniently make the elimination of reserve fund appear to be a concession to the Chinese, and endeavour to get other compensatory advantages.

I may add that I did not fully appreciate the intentions of Article 28 when writing on the subject of the redemption clause in my letter (No. 5) of the 3rd instant. If the reserve-fund condition is retained, it will be necessary, to obtain any considerable share in the profits, to insist on the maximum period obtainable before redemption begins; but the precedent established in the case of the Shanghae-Nanking Railway renders this a matter of difficulty unless the Syndicate can command diplomatic support sufficient to insist on strict fulfilment of the Preliminary Agreement,

I hope that the Board, after consulting with the German group on the above matters, will favour me with instructions by cable.

M. Casenave arrived here on the 23rd instant, and I am keeping in close touch with him in regard to these negotiations and other matters.

I have, &c.

(Signed)

J. O. P. BLAND.

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