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(b) Provision for separate security for proposed loan operation. In this con- nection Pacific Development Corporation is willing to give American group for benefit of consortium all option on its entire position under its loan agreement of the 26th November, 1919. Present contract specifies neither objects for which loan shall be devoted nor provides any measure for supervision of expenditure of loan proceeds. Both these are cardinal principles in new consortium policy, and accord- ingly if Chinese Government is prepared to approve transference of contract to us consortium will need to rewrite the existing agreement with provisions specifying objects of any loan to be raised on the security of the wine and tobacco tax, the Chinese Government accepting frankly the principle of reasonable supervision of revenue collections along lines of salt and customs service and expenditure of proceeds for purposes agreed upon, as well as the continuation in office during the full period of any loans made of the present associate inspector or a successor approved by the consortium,
(c) Development of the Hukuang Railway Loan Agreement along lines covered in letter addressed to the Minister of Communications by Peking representatives under date of the 28th April, 1920.
On the foregoing basis we would consider it practicable to proceed before long with a first issue of a loan of which total could be fixed at $100,000,000 gold, all of such loan to be equally secured by a lien on revenue of wine and tobacco administra tion puri passu with existing loans so far as practicable and prior to any future charges, the loan to cover also the revenues of railways to be constructed. The first issue we would anticipate might be for the equivalent of $20,000,000 gold, or possibly $25.000.000 gold, depending upon what share could be absorbed by London and Tokyo markets. Present conditions in American market would call for an 8 per cent. Lund, running for twenty or twenty-five years, and sold publicly at perhaps 96 or 97. thus realising in the neighbourhood of 90 net to China, the service of the loan to include a sinking fund sufficient to retire, say, not less than 5 per cent. of the issue each year either by purchase in market at lowest possible price or by call at, say, 115, along lines of Belgian and other foreign Government loans issued in America. Out of the proceeds provision would be made for paying Pacific Development Loan and providing for Chinese requirements for Hukuang coupons and bonds now in default, the balance being earmarked for Canton-Hankow line. Future issues would contain such terms as the then conditions would require, and would be subject to the fulfilment of the condition that the then annual revenue of wine and tobacco administration for a period of, say, three consecutive years should not be less than, say, twice the annual service on all outstanding loans secured thereon and on bonds proposed to be issued. -You will understand that the carrying out of any such plan as this is subject to all possible modifications required by changing market conditions; in fact, ordinarily we should delay making any concrete proposal, hut owing to the conditions which it is necessary for the Peking Government to meet in order to clear up their own situation, we think it wise to lay out tentative views before you for informal discus- sion with the Minister. If such a plan could be carried out, we should expect as part of the programme that Chinese Government would authorise an issue of silver bonds to be issued in China, through the banks for subscription locally, under such terms as may be agreed upon between Chinese Government and representative banks, but not more favourable to the investor than terms proposed for the foreign loan.
The entire plan is based on our assumption that present charges on wine and tobacco administration are limited to the following :-
Frs. 100,000,000 Pukow Industrial Loan of 1934. £500,000 Chili Provincial Loan due-date unknown.
$5,500,000 Continental and Commercial Loan due the 1st November, 1921. $5,500,000 Pacific Development Loan due the 1st December, 1921.
Please confirm our understanding in this respect, and that charges on Communi- cations Loan of £5,000,000 will continue to be paid out of revenue of Peking-Hankow Railway, and such revenues are sufficient therefor. If, as we understand, no work has been done on Pukow industrial project and proceeds of loan are on deposit in France, we recommend paying off this loan because of exchange situation.
C.
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APPENDIX 3.
Paraphrase of Telegram received from American Legation, Peking, duted October 13, 1920, 6 P.M.
To the Secretary of State,
YOUR 5th October, 9 P.M. Supplementing the contract of 1896. Article 1. The railway agrees to pay to the Chinese Government 5,000,000 taels according to article 12 of the original contract, together with interest at 6
per cent. calculated from the time of the opening of the railway to traffic, as provided in article 16 of the railway statutes, up to 1920.
Beginning with the year 1920, the interest on this sum will be at 5 per cent, and bonds issued by the railway for the payment of said sum shall form a first mortgage on the railway and the rolling stock. Such bonds are to be redeemed in silver either at the moment of the repurchase of the railway by the Chinese Government or other- wise moneys to be used for the repurchase of the railway. (The Legation states that this sentence is translated literally and that its meaning is not clear, that the manager of the Russian bank claims that it was inserted at the request of the Chinese Govern- ment and that the last part is intended to mean that the Chinese Government has the right to set aside silver to be used in buying back the railway.)
Article 2. The Chinese Government is entitled to four Chinese members on the directorate, not necessarily stockholders, besides the president. Five members may be freely elected by the stockholders, but in case of a tie the president may cast the deciding vote.
Article 3. No decision of the directorate is binding unless approved by seven members.
Article 4. Chinese Government may name two Chinese from five members of the committee of audit. The president who shall be elected from the above-mentioned five must be a Chinese,
Article 5. Chinese and Russians shall share equally railway jobs.
Article 6. The company shall henceforth have a purely commercial character towards which end the Chinese Government reserves the right to prescribe restrictive
measures.
Article 7. All regulations of the Chinese Eastern Railway Company and all provisions of the contract of the 2nd September, 1896, not contrary to this present contract are to remain in effect.
In a letter which accompanies the contract the Russian Bank manager states that due to a divergence of opinion as to the year when the railway was opened to traffic, said date will be determined later. After an examination of the claims of the Chinese Government as opposed to those of the bank also, the Russian Bank manager states in another announcement (?) declares that other than Russia and China, no other nation has any interest in the Chinese Eastern Railway.
Railway first instituted new tariff of freight (?) returns from which indicate that the railway is self-supporting.
The Legation states that it does not consider that this supplementary restate- ment of the 1896 Agreement is intended to discontinue the present Inter-Allied provisional control. Although the question of the Inter-Allied control was not voiced, the Legation feels assured that the Chinese Government wishes its continuance.
It intimated to the Legation that the principal of the proposed bonds will never be paid or at most will be accepted as part payment for repurchase of the railway.
CRANE,
APPENDIX 4.
Memorandum on the Effect of pooling Agreements on Spheres of Influence in China.
THE effect upon spheres of influence in China of the consortium arrangements for pooling concessions or options is twofold. On the one hand it carries with it the abandonment of the policy of reserving or attempting to reserve by diplomatic pressure the right of any one country to finance railway construction or other
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