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Conference to determine the purposes to which the proceeds of the 24 per cent. surtax are to be allocated. There are apparently four possible courses:—
1. To place the increased revenue under the unfettered control of the Chinese
Government.
2. To allocate the increased revenue, for employment, under international
control, on purposes to be approved by the conference.
3. To make provision for the service of unsecured debts (internal and external
or only external).
4. A combination of any two, or of all three, of the above courses.
In the absence of the necessary data it is impossible to give any precise instructions for the guidance of the delegates beyond calling attention to a few questions of principle. The allocation of the increased revenues is a subject which opens up a wide field which it will be one of the chief duties of the commission to explore. His Majesty's Government therefore propose to await the recom- mendations of their delegates before definitely committing themselves to any particular course. In the meantime, the following general remarks on the above- mentioned four courses may be of assistance to the delegates :-
As regards the first course, it may be said at once that to place the total increased revenue under the unfettered control of the Central Government, with or without provision for provincial participation, offers no guarantees that the money will be All experience goes to show that spent on objects beneficial to China as a whole.
it would be frittered away in the maintenance of troops or devoted to other futile purposes, thus helping to perpetuate rather than to heal the present internal dissensions. There is little prospect that it would even serve to re-establish the authority of the Central Government. Such a policy is likely to prove an unmitigated evil, and is therefore, unless overwhelming arguments can be urged to the contrary, to be very strongly deprecated.
The second course is the one which originally commended itself to His Majesty's Government, who held that the more funds that could be devoted to productive purposes or social or other reforms, the better, provided it were possible to provide the necessary guarantees that the money would be spent on the purposes for which it was allocated. At the same time. His Majesty's Government were, and are. prepared to agree to a reasonable proportion of the increased revenues being placed at the disposal of the Chinese Government for administrative purposes in order to ensure their goodwill and facilitate the attainment of the primary object. In that case the Special Conference might, however, consider the expediency or otherwise of making the Chinese Government accountable for all sums thus granted to them. As already stated, it is difficult to specify the manner in which the funds for productive purposes might be employed; several illustrations of purposes of permanent utility were mentioned in discussion at Washington (e.g., railway an' road construction, harbour conservancy, &c.), but none was eventually specified in It was the treaty, the whole matter being referred to the Special Conference. understood at Washington that the Chinese delegation were prepared to suggest a very extensive list of objects, including public health, education, judicial reform, &c.. which, however laudable and important, seem too indefinite to be admissible as charges on the surtax, since it would be impossible to control the application of funds to such objects or to ensure that the expenditure would result in a permanent improvement.
As regards the third course, considerable complications arise from the existence of Chinese unsecured or imperfectly secured foreign debts. Of these the most important are the loans negotiated between the former Anfu" Government and Mr. Nishihara on behalf of Japan, but British and American interests are also involved to a lesser extent. The principal British unsecured loans are the Vickers Loan (£1,800,000) and the Marconi Loan (£600,000), Japan pressed strongly at Washington that these unsecured debts should be a charge on the proceeds of the surtax, and a copy of the Japanese delegate's statement will be found in Annex (G). The statement of the French delegate on the question is given in Annex (H). The British delegation was opposed to the course suggested, which appears open to several objections.
In the first place, it should be noted that to allow these debts to be secured on the increased customs revenue will be to convert highly speculative loans into gilt- edged securities. This seems in itself difficult to justifv, and might also serve as an inducement for the lending of further sums to the Chinese Government on inadequate
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security in the hope of obtaining a similar advantage in the future- a course which it is obviously desirable to avoid.
Financial conditions, when closely examined, afford what is perhaps an even stronger ground for objection. The total unsecured debts of China, internal and external, are understood to amount to some 600 million dollars, and the only method of dealing with this huge unconsolidated debt would seem to be by a long-term funding loan, costing 40 million to 50 million dollars per annum in interest and amortisation charges.
In dealing with the unsecured loans, it should not be forgotten that a large number of loans have from time to time been made to China for commercial and industrial enterprises.
The most important class of loans in this category are railway loans, the security for which is generally the line, the rolling-stock, &c., and the receipts of the railway. This securit has up to the present generally proved adequate. But default has been narrowly averted on both the Hukuang and Canton-Kowloon Railway loans, while other similar railway loans have been jeopardised by military operations and political complications. In other words, the loans in question are industrial loans of a somewhat precarious character, by no means equal to " gilt-edged" loans secured on the customs.
If any proposal is now made to secure the unsecured loans on the customs revenues, the holders of these railway and similar loans may have a legitimate ground of complaint. Such a measure would have the effect of transforming third-class securities (ie., the totally unsecured loans) into first-class securities (ie., gilt-edged securities secured on the customs), while leaving the earlier second-class securities (ie., the imperfectly secured railway and industrial loans) exactly where they are; and it may well be asked why the last named, which were loans publicly made for perfectly legitimate objects, should be left in an inferior position to much more speculative advances.
On the other hand, any proposal, however equitable, to give these loans the security of the customs revenues in the event of default, would render the suggested funding scheme even more complicated, and greatly increase the potential charges on the customs.
Now the highest estimate which can safely be taken of the revenue accruing from the 2 per cent, surtax is from 25 million dollars to 30 million dollars, and even this may prove too high an estimate if the coast-trade duties (see Section II) are abolished. It is clear, therefore, that the whole of the surtax would be absorbed by the service of a funding loan to meet China's unsecured obligations (internal and external), leaving practically no money either for the use of the Chinese Government or for purposes of public utility to be approved by the conference as contemplated by the Washington Treaty. The case would, of course, be different if the operations were confined to external loans; but it is to be feared that such definite discrimination in favour of external creditors as compared with Chinese creditors might be regarded as an unfair abuse of the powers possessed by the conference. Although His Majesty's Government fully recognise that the funding of the unsecured debts is essential to the rehabilitation of China's credit, they consider it to be of equal importance that the external and the internal loans should be dealt with as one problem and not as two. For the above reasons His Majesty's Government were originally opposed to the provision by the conference for the service of the unsecured debts, which should, they considered, be dealt with through other channels, such as, for instance, the financin by the consortium of a measure of foreign debt consolidation. It has, however, since proved impossible to dispose of the debt problem in this or any other way, while the attitude of the other Powers has shown not only that it is likely to be impossible to exclude a consideration of the unsecured loans from the conference, but that the proceeds of the surtaxes will probably have to be used, in part or in whole, for debt consolidation, leaving little or nothing available for productive or other purposes. The customs revenues are, indeed, now already used practically in their entirety for the service of the external and internal debt so far as their amount avails, and the allocation of the proceeds of the surtaxes to the same purpose would, it must be admitted, be a logical sequence, would do away with the difficulties involved in any attempt to separate them for other specific purposes from the rest of the customs revenues, and will probably be in accordance with what the Chinese Government will themselves expect and propose. The question of debt consolidation is discussed in article 3 of the scheme contained in Annex (M). In agreeing provisionally to the use of the surtaxes for the consolidation of the unsecured debt, the British
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