2
bear further losses from suspension of work. I have repeatedly requested the group representatives to discuss the terms of a supplementary loan, but as yet have not received a definite reply from them and therefore have been obliged to ask the Ministry of Communications to endeavour to furnish funds from other sources for construction work on the Chu-Heng section which is to be commenced some time in May. I still hope that the group banks will discuss at the earliest possible date proposals for the second issue of loin bonds in accordance with the Loan Agreement. However, as regards the provision of funds for the commencement of work on the Chu-Heng section, I wish to make the following points clear:—
1. The provision by ourselves of the whole of the funds required for the new construction work on the Chu-Heng section is a measure of a different character from that contemplated in article 15 of the Loan Agreement, which states that "if the loan funds should not be sufficient to complete the construction work the amount of the deficiency shall be provided, in the first place, from Chinese funds," &c.; and therefore until the amount thus expended has been refunded, as stated in heading No. 2 below, the whole of the work and administration is free from the control of the Loan Agreement.
2. Funds advanced on account of the Wuchang-Chuchow section and disbursements made on account of the Chu-Heng section, together with accrued interest thereon, must be refunded to the Ministry of Communications by the Chinese Government from the proceeds of the supplementary issue of loan bonds.
3. With regard to the provision by ourselves of funds for construction work on the Chu-Heng section, there is another most important point that I wish to explain. Our action in this matter has been taken with the sole object of rendering temporary assistance in order to avoid further losses, and I still sincerely hope that the group representatives will put forward at the earliest possible date definite proposals for the issue of loan bonds on account of the Hupei-Hunau section of the Hukuang Railways.
I shall be glad to receive an early reply from you.
Please communicate the contents of this letter to the representative of the American and French Group Bauke.
I am, &c.
KUAN KENG LIN.
Seal of Director-General of the Han-Yueh-Chuan Railway Administration.
Enclosure 2 in No. 1.
9
Enclosure 3 in No. 1.
Memorandum.
A NEW Loan Agreement would have to be framed on a basis which would justify the consortium in making a firm offer for the first issue of bonds and in taking the risk of being able to sell them to investors in their respective markets, It is therefore clearly to the mutual interest of the Chinese Government and the consortium to make the bonds attractive to foreign investors; since the inability to find a market for the first bonds would prejudice the succese of further issues.
2. The conditions which the investor will seek are that the bonds are well- secured, from his point of view; and it must be remembered that it is his point of view which will be important when the bonds are offered for sale. As to the nature and extent of the guarantees required, the parties to the negotiation will have to confer with complete frankness, in order that everything necessary to satisfy the investor may be covered in a new Loan Agreement. The market conditions abroad and the internal conditions in China existing at the time a new agreement is put into final form, would have to be taken into account before the consortium would commit itself by signature.
3. By appropriate clauses in the new agreement the rights of bondholders under the old agreement would be fully protected, and the issue of further bonds under that agreement declared closed.
4. As part security for the new bonds, the net revenues of the entire Canton- Hankow line (subject to all existing liens) should be pledged, and with this object the entire line should be brought into the ownership of the Chinese Government, by the acquisition of the property and rights of the Kwangtung Provincial Railway Company as a part of the loan plan.
5. The new Loan Agreement would not provide for construction by national sections, but would change the principles of the old agreement whereby such national sections were established
6. The details of the new agreement on the subject of supervision of expenditure and receipts, purchase of materials, engineering and operating supervision, &c., should be determined on the principle that all concerned are interested alike in attaining the same ends, namely, the construction and operation of the railway in the best possible manner, at the lowest possible cost.
7. The co-operation of Chinese banks in providing some of the money necessary to complete this line, will be welcomed.
8. A refund out of the loan proceeds of money to be spent by the Ministry of Communications as suggested in the letter of the Director-General of the 11th April, 1921, should not be relied upon; but a final decision of this matter may await the result of the negotiations.
Sir,
Group Banks to the Director-General Hukuang Railways,
May 4, 1921. YOUR communication of the 11th April, 1921, has been considered by us, and we indicate in a memorandum herewith the general lines upon which negotiations, relative to the Hukuang Railways, might be taken up.
As you are aware, the former British, French and American groups named in the 1911 Hukuang Railways Loan Agreement have become merged in the consortium composed of the groups we represent.
We have, &c.
Representatives of the British group:
E. G. HILLIER.
S. F. MAYERS.
Representative of the French group:
J. R. BAYLIN.
Representative of the Japanese group:
K. ONUKI
Representative of the American
F. W. STEVENS.
group:
Enclosure 4 in No 1.
Memorandum.
AT the meeting of the British, French, Japanese and American groups representatives held here to-day, there were present Messrs. Hillier, Allen, Mayers, Baylin, Onuki and Stevens. The business was the approval and signature of the final draft of the reply to the Director-General of the Hukuang Railways of to-day's date. Before signing, Mr. Stevens said he wished to state that, for his own part be could not admit as precedent the order of signature indicated on the signature copy; he wished it understood that he signed the letter with this reservation, and intended to raise the question on a future occasion.
Mr. Hillier replied that the order of signature in question was that which had always been observed, and was adopted at the conference at New York for the signature of the agreement and minutes.
Mr. Stevens contended that it had been departed from on one occasion in Peking, in December last, when the acting American group representative signed first; but it was pointed out in reply that this was an isolated case, the matter dealt with happening to have been the subject of telegraphic correspondence between the American representative and his group.
Mr. Hillier said that he felt unable to depart from the order now observed, but would make a note of Mr. Stevens, reservation.
Hong Kong and Shanghai Bank, Peking, May 4, 1921.
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