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VIII. MACHINERY OF CONTROL AND DATE OF OPERATION OF THE SURTAX.
It was the intention of the Washington Conference that the Special Conference should, after due enquiry on the spot, endeavour to provide for the establishment of machinery which would effectively prevent the revenues derived from the surtax being applied to useless, unproductive or harmful objects, and ensure the observance of any conditions imposed by the conference in sanctioning these revenues.
It is the desire of His Majesty's Government to interfere as little with the sovereignty and responsibility of the Chinese Government as is compatible with securing the objects indicated above.
Were it possible to exclude all consideration of the unsecured debts from the conference and arrange for the expenditure of the proceeds of the surtaxes on specified productive purposes, His Majesty's Government would contemplate the formation of a Board of Trustees with the power not only of receiving and holding the revenue. but also of determining whether or not any proposed allocation were in accordance with the decisions of the conference. But if the proceeds of the surtaxes are to be merged in the rest of the customs revenues and used for debt consolidation purposes, the problem becomes one of the general custody and control of customs revenues. Reference may be made in this connection to the relevant proposals in article 3 of the scheme contained in Annex (M). As already explained in these notes, the control of customs revenues vested in the Diplomatic Body under the arrangement of 1912 (see following section) has since been to a great extent transferred to the hands of the Inspector-General of Customs. In the present temper of the Chinese there would seem to be little chance of their agreeing to the control of customs funds by any International Commission, and it is possible that the best solution will be found to lie in associating the Inspector-General in his control of customs funds with other Chinese and foreign officials in the Chinese service, and possibly representatives of Chinese and foreign banking interests, while strengthening at the same time, as far as may be possible. the position of the custodian banks (see following section).
His Majesty's Government feel, however, that they must leave it to the discretion of the British delegates to make the best arrangements possible in the light of local circumstances and the development of the labours of the conference.
The date of operation of the surtax is also left to be fixed by the Special Conference. The governing principle should be that the surtax should not begin to be collected until all the arrangements for its custody and allocation are in force. but, subject to this condition, the date of operation should not be unduly postponed, All things considered, six months from the conclusion of the conference would seem to be the latest date to which the British delegates should agree, unless forced to admit a later date by irreconcilable opposition by other Powers or by the difficulty of bringing the arrangement for the custody and allocation of the increased revenue into operation.
It was suggested in the course of the Washington discussions that the surtax might be imposed in two steps of 14 per cent., with an interval between them. The British delegates should resist this last-named proposal, which is not in accord with the interests of trade generally, as it would involve a double change of customs duty within a short period.
If the British delegates find it impossible to obtain unanimity with regard to a date not later than six months after the conclusion of the conference, they should refer home for instructions.
IX. CUSTODIAN BANKS.
The position of the custodian banks is sure to be questioned at the Special Conference. During the Washington Conference the Japanese representative expressed the desire of his Government for a readjustment of the present arrange- ment for the custody of the customs revenues; the delegates of France, Italy, Belgium and Helland associated themselves with this view. Senator Underwood, on behalf of the American delegation, said in conclusion, that though he had no doubt that the two banks (Hong Kong and Shanghai Bank and the Russo-Asiatic Bank) that had handled in the past the revenues of China, had done so efficiently and in an honourable way and effectively, yet for the large amount of revenue collected for governmental purposes in China to continue to go through separate banking Institutions, and all the other banks of China to be deprived of deposits of that
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kind, would naturally lead to misunderstandings not serious misunderstandings, but it did not appear to be an equal and fair distribution of the moneys involved. Mr. Koo, on behalf of the Chinese delegation, not only associated himself with Senator Underwood, but added that at least a part of the deposits should be allocated to those Chinese banks which were generally recognised as being sound and solvent (see Annex (I) ).
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The custodian banks were constituted as such under an Arrangement for the establishment of a Commission of Bankers to receive the customs revenues for the service of the foreign debt charged thereon," made between the Wai-chiao Pu and the Diplomatic Body at Peking, dated the 30th January, 1912. Clause 2 of this arrangement ran as follows: "The banks chiefly interested, viz., the Hong Kong and Shanghai Banking Corporation, the Deutsch-Asiatische Bank, and the Russo- Asiatic Bank shall be custodians of the customs funds at Shanghai."
This clause was twice amended. In April 1913 the following words were added: "but as soon as the service for the current year of all loans contracted before 1900 is provided for by funds in these banks, then the surplus shall be divided pro ratâ till the end of 1913 amongst the banks having charge of the Indemnity Service." Finally, on the 24th December, 1913, this addition was in turn amended and the whole clause made to read as follows: "The banks chiefly interested, viz., the Hong Kong and Shanghai Bank, the Deutsche-Asiatische Bank and the Russo-Asiatic Bank shall be custodians of the customs funds at Shanghai; at the end of each month, beginning with January 1914, the surplus, after all payments due each month on account of loans secured on the customs revenue and contracted previous to 1900 have been fully met, shall be divided pro ratá amongst the banks having charge of the Indemnity Service up to the amount of the instalments of the indemnity respectively due to them each month.”
The arrangement has undergone no modification since that date, except that the Deutsch-Asiatische Bank dropped out on the entry of China into the war, and the custody of the customs funds is now therefore shared by the Hong Kong and Shanghai Bank and the Russo-Asiatic Bank
It will be seen that under the arrangement of April 1913, the whole of the customs funds remained in the hands of the custodian banks until the service of the pre-Boxer Loans for the year had been provided for, after which the whole surplus was distributed pro ratá among the indemnity banks.
Under the arrangement of the 24th December, 1913, which, though several times challenged, still remains in force, the custodian banks first meet the service of the pre-Boxer Loans for the current month, and then distribute the balance of the revenues to the Indemnity banks, but only up to the amount required for the Indemnity payments for the month. This distribution takes place month by month, but the balance is held by the custodian banks until releases for other purposes (e.g.. for the service of the Reorganisation Loan, or, formerly, for special objects sanctioned by the Diplomatic Body, and nowadays for the internal debt service) are authorised by the Inspector-General of Customs. Owing to the increased customs receipts the balance has in recent years been considerable, and such sums have on occasion remained deposited with the custodian banks for some time. It is this fact which has excited the jealousy of the other banks.
The governing principle has been that the banks responsible for those loans which have a first charge on the customs revenues have the first claim on the custody of such revenues. This principle ought in theory to be maintained. If, as the result of the increase to the effective 5 per cent, and eventually to 7 per cent., new obligations are secured on the customs, such obligations should be treated on the same footing as the Boxer Indemnity, while ranking of course after it, ie., the surplus, after the pre-1900 loans, the Indemnity payments and the Reorganisation Loan Service have been met, should be distributed pro rate among the banks having charge of the service of such new obligations.
The pre-Boxer loans in the first place, the Indemnity in the second and the Reorganisation Loan in the third are secured on the whole customs revenues,
The custodian banks should, therefore, have the security of the 24 per cent, surtax as well as of the original 5 per cent., and if, in any year, the whole 7 per cent. were required to meet these obligations they would be entitled to take it. It follows that the 21 per cent. surtax cannot in theory be exclusively earmarked for any new obliga- tions, but only such part of both it and the original 5 per cent. as may be left over after the prior obligations have been met. The principle, consequently, that all funds go in the first instance to the banks charged with the obligations which
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