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I shall be obliged if after a full consideration of these documents you will announce to me for His Excellency's information the conclusions at which you have arrived.

I have the honour to be,

Sir,

Your most obedient Servant,

J. H. STEWART LOCKHART.

Colonial Secretary,

HONG KONG. No. 156.

SIR,

(Secretary of State to the Governor.)

DOWNING STREET,

27th June, 1895.

With reference to the last paragraph of my despatch No. 75 of 29th March last relative to the Military Contribution, I have the honour to inform you that Her Majesty's Government, although hitherto adhering to the principle that the contribution, whatever its amount, should be fixed for the time being in sterling.. have never lost sight of the fact that it could not consistently with the efficient administration of civil affairs, exceed a certain percentage of revenue, and that if at any time through a diminution of receipts or a fall in the exchange value of silver, the percentage assumed undue proportions, then a case for the revision of the sterling demand would arise; but as a matter of fact during the five years 1890-1894, the average Military Contribution of Hong Kong has fallen consider- ably short of what the Home Government in 1890 considered a reasonable pro- portion of the revenue, namely, one of between 17 and 18 per cent., and even in 1894 it barely reached 17 per cent. As regards the current year, however, owing to the continued low rate of exchange, the contribution if continued at the present rate of £40,000 would amount to nearly 20 per cent. of the revenue.

2. After careful consideration Her Majesty's Government have arrived at the conclusion to fix the contribution in future at a certain proportion, viz., 174 per cent. of the revenue of the Colony. This appears to offer a basis of settlement which is the most likely to be acceptable to all parties, and which can be adopted without an undue sacrifice of the claims of the tax-payers of this country.

3. The expedient of fixing a proportion of revenue as the amount of the contribution, will, I hope, prevent any further feeling of uncertainty and dissatis- faction, and will safeguard the rights of the Home Government as effectually as the expedient of fixing the amount for some years ahead, which was that adopted in my predecessor's despatch No. 8 of 20th January, 1890. In adopting the decision above indicated Her Majesty's Government have been largely influenced by the consideration that so long as the contribution is fixed in sterling the continued uncertainty in the matter of exchange is calculated to cause a greater dislocation in the finances of the Colony than would be caused to the Imperial finances if the contribution is fixed in dollars.

4. It is to be understood that the revenue on which the percentage will be taken shall include the gross receipts from all sources which are now brought into account as revenue, with one exception, viz., the proceeds of land sales, or premia ou leases, which are not strictly revenue but the proceeds of the sale. of capital assets. The revenue for 1895, less premia on leases, is estimated at $2,018,526 so that a contribution of 17 per cent. would amount to $353,242; and I have now to authorise you to limit the payments for this year to that amount in lieu of the maximum amount ($384,000) provided in the Appropriation Ordinance.

5. When the actual revenue of 1895 is known, should it be found that there was an excess of receipts over the estimate, a further payment of 17 per cent. of such excess can be made. If, on the other hand, the revenue should have fallen short of the estimate the over-payment can be adjusted by deducting 17 per cent. of the deficit from the first instalment of next year's contribution. A similar course can be followed in each succeeding year.