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group representatives further instructions had been issued making the cashing of German coupons even easier than he had then announced, and he undertook to furnish a copy of the instructions in question for the information of the groups.
2. Provision of a Separate Security.
The reason for this condition is evident from the Hukuang loan experience. The Chinese Government themselves, by their action in giving the railway as additional security in 1913, admitted that the security originally provided by the provincial revenues assigned was no longer effective, and, as the railway in its present state produces no revenue whatever towards providing for the original loan service, it is manifestly impossible to accept it as satisfactory security for a further loan.
3. Payment of Interest from Other Sources than Loan Funds.
The Hukuang experience also illustrates the necessity for this condition, a large portion of the funds having been expended in payment of interest during delays in construction due to various causes. It was necessary to ensure that the loan proceeds should be reserved for expenditure on actual construction work.
4. Expenditure of Loan Funds.
Expenditure of loan funds to be in accordance not only with the original loan agreement, but also with the important modifications subsequently found necessary by the Ministry of Communications and the groups, contained in the letters of agreement of the 1st and the 3rd March, 1913, the memorandum of the 12th September, 1913, and subsequent correspondence.
5. Protection of Railways from Military Interference.
This was clearly shown to be necessary from recent occurrences in many parts of China, and in particular from the reports of the engineer-in-chief of the Hupeh-Hunan section of the Canton-Hankow Railway.
6. Extension of Hukuang Railway System.
The groups consider the linking up of the Hupeh-Hunan section with the Kwantung Provincial Railway and the eventual extension of the Hankow-Szechuan Railway to Chengtu essential to the fature success of the Hukuang Railway scheme, and rely upon the assurances given by the Ministry of Communications in this connection in January 1914.
The director-general said that in the case of the Hupeh-Hunan section extension, the assurances that had been given were subject to the rights previously conceded to the Canton Provincial Railway, and he promised to inform the groups' representatives of the actual extent of line conceded to that company for construction.
Peking, December 14, 1920,
Enclosure 2 in No. 1.
Ministry of Communications to Hukuang Railway Group Banks.
Peking, February 22, 1921.
Gentlemen,
I HAVE the honour to acknowledge receipt of your letter of the 15th December, 1920, together with memorandum of meeting mentioned therein, which have uy
attention.
I have already sent you a reply stating the regulations at present in force governing the payment of German issued drawn bonds and coupons.
With reference to your statement that you shall be glad to learn if, upon further consideration, this Ministry can accept the conditious proposed by the group banks for the issue of a further loan for the advancement of construction work on the Fukuang railways, I have referred the matter to the Ministry of Communications and am informed by them that their views as to Hukuang railway policy have not varied from those expressed repeatedly in their communications of last
year.
With reference to the points mentioned in your memorandum, some replies made by me, as stated therein, are greatly condensed, and there appear to be omissions. In order to avoid misunderstanding, I take this opportunity of explaining my views on each point as under :-
1. Memorandum of Meeting.
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The memorandum states that the group representatives have received a communi- cation from their groups-now merged in the new consortium-to the effect that if an agreement could be arrived at embodying the conditions proposed in the group representatives' letter of the lat November, 1920, they would agree to issue a loan for Canton-Hankow Railway requirements.
These conditions, however, are not in accordance with the Hukuang Railways Loan Agreement. Moreover, the conditions proposed by the new consortium are not the logical outcome of the conditions of the original agreement, and it is very difficult for me to reply to them. If the representatives of the consortium, as previously constituted, could discuss with me the conditions of a further issue in accordance with the originat agreement, without altering the fundamental conditions, those of less importance might still be discussed and altered.
I shall be obliged if you will give this point your attention.
2. Procedure at present in force governing the Payment of Coupons and Drawn Bonds
of German Origin.
In the course of our interview, I replied that the procedure adopted by this Ministry in respect of bonds of German origin is a question for the Chinese Government to decide; the Hukuang Railway Administration cannot cancel the existing procedure on their own responsibility. My personal opinion is that the present regulations enable holders of coupons of German origin to cash their coupons much more easily than formerly; the last concession possible has been granted, and holders are not really placed at any disadvantage.
With reference to the bonds which are not recognised as valid by the Chinese Government, these bonds have not been cancelled by the Chinese Government; payment of principal and interest has simply been suspended temporarily, awaiting the settle- ment of indemnity accounts between China and Germany, when an equitable plan of procedure will be decided upon. There is a wrong impression prevailing as regards this point, both amongst the bankers of your country and the boudholders, and I shall send you again a general statement of the procedure decided upon by this Ministry, to be forwarded by you to your principals in order to avoid further misunderstanding. 3. Provision of a Supplementary Security.
You require separate security, owing to the fact that, as no revenue is obtained at present. the Hukuang Railway's property and materials cannot be accepted as security for a further loan.
Please note that the reason why there is no profit on the working of this railway is that owing to the outbreak of war the group bauks were unable to proceed with the second issue of loan bonds provided for under the terms of the loan agreement. L'onstruction work was stopped midway, and on that account the railway has suffered very considerable losses. If funds were forthcoming to complete construction work on the entire line, the business of the railway would flourish and, I venture to prophesy, would provide ample security.
In the course of our interview, I replied in this connection that if a supplementary issue of loan bonds, in accordance with the terms of the loan agreement, were made to the extent of a sum amounting to 4,000,0001, only, it should be unnecessary to provide separate security.
4. Further Alterations in the Conditions of the Agreement.
I add herewith certain points which have been omitted in the memorandum of our meeting.
In the course of our interview you made the following statement, viz. :—
"The conditions of the money markets in Europe and America before and after the European War are vastly different. The present stringent state of affairs is known to everyone, and therefore, if the desired issue of loan bonds in accordance with the provisions of the original loan agreement were to be made, it goes without saying that no purchasers would be found for the bonds. If the Chinese Government is determined to adhere to the terms of the original agreement and proceed with the issue of new bonds, the group banks would be unable to give any assistance. We must request the Chinese Government to pay particular attention to this point and so avoid useless exchange of correspondence."
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