CO129-382 - Public Offices - 1911 — Page 171

[This Document is the Property of His Britannic Majesty's Government.]

AFFAIRS OF CHINA.

CONFIDENTIAL.

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C

[October 13.]

1168

SECTION 2.

REGE 13 JAN 11 No. 1.

Mr. Max Müller to Sir Edward Grey.--(Received October 13.)

(No. 332.) Sir,

IN his general report for the year 1908, Sir John Jordan mentioned that an

Peking, September 22, 1910. internal loan had been authorised for the purpose of supplying the deficit which would result from applying a portion of the Anglo-French loan of 5,000.0001, raised for the redemption of the Peking-Hankow Railway, to other "productive purposes.' He added that the project came to naught, and that the Board of Communications found themselves obliged to raise the necessary funds by borrowing in silver, at 7 per cent., from various foreign banks.

The loan above referred to, which received Imperial sanction on the 8th October, 1908, was for 10,000,000 dollars, bearing interest at 7 per cent. per annum and redeemable in twelve years. "Bearer" bonds of 100 dollars each were to be issued, which would entitle the holder to a 25 per cent. share in the net profits of the Peking-Hankow Railway. Beyond the fact that bonds to the value of some 500,000 dollars were subscribed by Chinese officials in Peking, and that the foreign banks in China had refused to undertake the flotation of the loan, nothing more was heard of the matter until a few weeks ago, when a rumour became current that the Board of Communications, finding themselves face to face with the necessity of providing a sum of at least 2,500,000 dollars for urgently-needed repairs to the Lu-Han line, had arranged to borrow from a Japanese group, represented by Mr. E. F. Birchal, a sum of 10,000,000 dollars-in other words, that they had at last succeeded in floating the loan above described.

This rumour was in part confirmed on the 17th September, when the agent of the Hong Kong and Shanghai Bank in Peking received a telegram from London stating that the London City and Midland Bank, acting on behalf of Messrs. Dunn, Fischer, and Co., of Threadneedle Street, E.C., and by arrangement with the Board of Communications in Peking, were about to float a loan for 450,0001, the equivalent, at a fixed rate of 100 dollars 91., of 5,000,000 dollars. The bonds, of a face value of 91., would be issued at 108, the board receiving 97 or 974, the difference to go to defraying the expenses of flotation. Interest was to be at 7 per cent. per annum, and the bonds were to carry a 25 per cent. share in the net profits of the Lu-Han Railway.

From another source I learn that a further loan of 2,500,000 dollars has been placed in Japan, also on a gold basis (88 yen = 100 dollars) and under similar conditions, and that the balance of 2,000,000 dollars will not be issued for the present.

The moving spirit in the flotation is, I am informed, the Director-General of Railways, Liang Shih-yi.

Where questions of Chinese finance are concerned prophesies are notoriously apt to fail, but there appears to be a consensus of opinion among foreigners well qualified to judge that the issue of this loan is a measure financially unsound, which is likely to have a prejudicial effect on China's credit.

If the Chinese Government, whose credit has hitherto been so good that they have been able to borrow money to an almost unlimited extent in the markets of the world at 5 per cent. interest on production of reasonable security, deliberately turn aside and endeavour to obtain money on practically no security at all, for which they naturally have to pay a higher rate of interest, they inevitably arouse suspicions as to their financial standing, and thereby seriously compromise their powers of borrowing. The present moment is, moreover, a peculiarly inopportune one for making a departure from traditional methods of finance, in view of the fact that 3,000,0001. worth of the 5 per Cent. Tien-tsin-Pukow Railway Loan will in a few days probably be placed on the London and Berlin markets.

While it is undoubtedly true that the Chinese Government and people are showing increasing signs of resentment at what they consider the harsh and

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