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should entirely refuse to empower the Viceroy at Canton to act on their behalf, it will become necessary for the Board of Communications (or whoever else may exercise the power of delegation) to name an official to conduct the negotiations with this Government. In that case I presume that the Chinese Government would recognize the desirability, if not the absolute necessity, of their Delegate coming to Canton in order to judge on the spot of the local conditions, and negotiate with me (or the officer deputed by me in that behalf) in person. It has, however, been pointed out to me that if the Central Government were urged to send a Peking official to Canton for this purpose, he would probably supersede the local Managing Director Mr. Wei Hun—who is a man of broad views, and is on excellent terms with the Chief Resident Engineer. The appointment would, moreover, dislocate the present régime, and probably result in the replacement of Mr. Wei Hun and others. For this reason I hesitate to do more, at the present stage, than to ask your Excellency to press for the control to be vested in the Viceroy and the Managing Directorship in Mr. Wei Hun.

The terms of the Agreement will involve the consideration of many matters of a highly technical nature, and it is possible that I may find it advisable to secure the advice of a railway traffic manager of experience. I shall therefore require to have ample notice of the date on which negotiations are likely to begin.

5. The Secretary of State puts forward three "possible dangers" to the interests of the Colony. Regarding the first—the selection of a Chinese port for the terminus of the trunk line—I have had occasion to address you from time to time.

I am not aware that the project has of late found favour, and I am informed that the insufficient depth of water at Whampoa affords a very strong objection to the scheme. Should it be revived, it will as heretofore be strenuously opposed under Article 15 of the Loan Agreement.

6. The second danger is that "the Chinese Government may strangle goods traffic by the imposition of li-kin charges." I am aware that your Excellency has already brought this question to the notice of the Chinese Government in the case of the Shanghae-Nanking Railway, and I have seen a printed copy of your despatch No. 123 of the 16th March, 1908, but none of later date, to the Secretary of State for Foreign Affairs on this subject. The terms of the Loan Agreement for the Canton-Kowloon Railway are not identical in this matter with those of the Shanghae-Nanking Railway, and they appear to provide for exemption "from any special taxes" only until the loan has been paid off. I am also in doubt, seeing that Kowloon is not a Treaty port, whether "exemption certificates" may be claimed for goods consigned to Canton or eventually to Hankow. The question of li-kin charges would, of course, form one of the matters for negotiation under the Joint Working Agreement, but I confess that I am at present at a loss to see what rights this Government possesses which would be violated by the imposition of li-kin dues, or what lever it can use to prevent such action on the expiry of the Loan Agreement.

To put the matter bluntly, this Government has embarked on a project costing probably about 1,000,000l., but has no Agreement of any kind with the Chinese Government, with whose railways it is to connect. Such few and unsatisfactory safeguards as it possesses (such as the stipulation for no competing line) are contained in the Loan Agreement between the Chinese Government and the British and Chinese Corporation, to which this Government is not a party, and which, I presume, could be modified by mutual consent, and in any case lapses twenty-five years after the line is completed, if the loan is duly repaid. In these circumstances, I feel I have but little to negotiate upon in framing the Joint Working Agreement, beyond the terms of Article 18, which binds the Chinese Government to make an Agreement for the joint working of the two sections.

I shall be grateful to your Excellency for any information on the subject of railway li-kin, and any suggestions which you may be able to offer as to the conditions in this matter which this Government could reasonably ask, both during the continuance of the Loan Agreement and subsequently, and the arguments by which such claims could be supported.

7. The third point to which the Secretary of State invites my attention is that "it is conceivable that the line may be so badly laid out, the permanent way so light, and the bridges so inadequate in strength that the Hong Kong trains could not safely run over them, and it is even conceivable that the gauge might be altered." It would seem to me that in this matter the Secretary of State has lost sight of the fact that the Loan Agreement stipulates that the line shall be built and equipped in accordance with the "best modern system" (Article 2), and the Engineer-in-chief is responsible for its "efficient construction" (Article 6). Emphasis is laid on the fact that, as the railway itself forms the first mortgage security of the British and Chinese Corporation, it is essential to their interests that it should be thoroughly efficient. That they will safeguard those interests is the guarantee to this Government. As regards a change of gauge, I should maintain that such an act would be a violation of Article 18, which pledges the Chinese to the joint working of the two lines as two sections of the same line. It will, moreover, be essential to their interests that their line should have access to the sea. In the matter of efficient and economical construction, I have every confidence in the Chief Resident Engineer, Mr. Grove. Hitherto, at any rate, he has received support from his colleague, Mr. Wei Hun, and I have no reason to think that the Chinese authorities are inclined to interfere with his technical work, or to bring pressure to bear upon him to make it of a less efficient character.

8. There is, however, a danger which appears to me to be of a more tangible and real character. The Chinese Government are offering what appear to be exorbitant prices for the land required. In this connection I enclose a Memorandum regarding the rates offered in the British and Chinese sections respectively. Since it is alleged that the peasants refuse even these offers, it is conceivable that they may be increased or purchase indefinitely postponed, and since all land has to be paid for out of the loan, the contingency is not remote that the available capital would be insufficient for the completion of the construction. The raising of further capital, whether by Chinese subscriptions or by a further loan from the British and Chinese Corporation, would probably afford opportunities for interminable delays. If the completion were indefinitely delayed, it seems to me that the Canton-Hankow line would have a claim, which it would be very difficult to resist, to find a terminus at the sea, if in fact such a terminus, with sufficient depth of water, can be created. Mr. Grove informs me that if the requisite land can be secured towards the end of the year, he hopes to complete in two and a half years from this date, but that if a delay occurs in securing land it will be four years from now before he can hope to finish construction.

9. Lord Crewe considers that "it is essential that steps should be taken without further delay to obtain from the Chinese Government satisfactory assurances on the points raised, and the method in which he suggests that this should be done is detailed in paragraph 7 of the despatch. Any representations of the nature indicated must be made through yourself; but I am inclined to think that the questions specified—the replies to which, so far as they can at present be given, are already known to us—would be categorically answered without bringing us any nearer to the object in view, which is, in brief, the organization of the joint working of the two sections and the determination of the basis on which profits are to be shared. In this connection I may observe that, in a conversation which I had with Mr. Grove (Chief Resident Engineer of the Chinese section) early in January last, he informed me that it would be a year or eighteen months before he would be ready to discuss the details of a Working Agreement. He added that any proposals for joint arrangements at the present stage would render the Chinese suspicious. For my own part, it appears to me very essential that the negotiations, which may be protracted, should be begun in ample time, for if they were not completed when the line, or any part of it, was open to traffic, each section would naturally retain its own profits, and it would be difficult to then introduce a division based on a recognition of the much greater proportionate outlay by this Government.

10. I have indicated in the second paragraph of this despatch the steps which at present appear to me to be advisable to take, and I would venture in this connection to remind your Excellency that the interests of the Hong Kong Government and those of the British and Chinese Corporation are not identical in this matter. When the railway is completed, the interests of the Corporation are limited to obtaining prompt payment of the interest on the bonds, and to this end (and in order to establish their reputation with a view to further railway business) they are concerned in obtaining for the Chinese section the maximum profits vis-à-vis the Hong Kong section.

I have, &c.

(Signed)

F. D. LUGARD.

P.S.—Since drafting the foregoing despatch, I have received from the Consul-General at Canton a copy of his letter to your Excellency No. 21, Confidential, of the 25th July. This despatch confirms what I suggested in my paragraph 8, and adds point to the views expressed in paragraph 2, since it shows that the disastrous and unnecessary charges for land (as well as the delays caused by placing futile orders with Chinese firms) are consequential upon the action of the central authority in depriving the Provincial Government of the control, which was contemplated by the Loan Agreement. The views of Mr. Fox and of Mr. Grove appear to coincide with my own, that

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