Papers Relating to the Foreign Relations of the United States, With the Annual Message of the President Transmitted to Congress December 7, 1909

File No. 5315/550–551.

Chargé Fletcher to the Secretary of State.

American Legation,
Peking, September 5, 1909.

No. 1239.]

Sir: Continuing my No. 1231, of the 18th of August, on the subject of American participation in the Hukuang Railway loan, I have the honor to report that Mr. Straight, the representative of the American group of bankers, reached Peking on the 19th ultimo, and on the following day a conference was held at the Hongkong and Shanghai Bank, at which were present Mr. Hillier of the British, Mr. Cordes of the German, Mr. Casenave of the French bank, and Mr. Straight and myself.

The European bankers had prepared a draft of an agreement embodying the points on which a common understanding seemed to have been reached. This draft agreement was discussed article by article, and I telegraphed that evening its substance.

I explained to the bankers that we expected satisfactory assurances from the Chinese as to the employment of American engineers, and that our acquiescence in any agreement would depend upon the receipt of such assurances. This was understood and concurred in by the bankers. The draft agreement embodied the four alternative proposals telegraphed to the department on August 10, and provided for American participation in the loan in accordance therewith.

In regard to auditors it was first arranged that they should be appointed and paid by the European banks. Subsequently the latter agreed with Mr. Straight to give the American group a voice in their appointment, it being understood that a German would be appointed for the Hankow-Szechuen line and an Englishman for the Canton-Hankow line, but that Americans would be eligible for appointment in the accounting department.

The provisions with regard to preliminary expenses were also subsequently changed in the sense that this matter was to be the subject of a subsequent equitable arrangement amongst the banks.

In regard to the purchasing agencies no changes were made in the original agreement, provided that the Deutsch-Asiatische Bank would act as purchasing agent for the Hankow-Szechuen line and a company nominated by the Hongkong and Shanghai Banking Corporation for the Canton-Hankow line, but it was agreed that all commissions would be pooled and our group receive 25 per cent of the total commissions. While this arrangement served to protect the banking interests, it did not give us as much voice in the purchases as would be desirable in order to see that American materials receive due consideration. However, as the auditors monthly statements will show the foreign materials purchased and the country of origin, some check is provided in this regard, and also it seemed difficult to devise American participation in these agencies in a practical way under the circumstances. Since the receipt of the department’s telegram of August 28, however, we have endeavored to secure a provision that one of the purchasing agencies shall be nominated by the Deutsch-Asiatische Bank and the American group and the other by the English and French groups. This is the best arrangement possible, I believe, and we are now awaiting instructions from Berlin and America in this regard.

To return to the draft agreement: The provisions with reference to the market of the bonds was discussed at some length, and it was finally decided to change the provision to read, “No party to this agreement shall issue bonds on the markets of the others.”

On the 28th I received the department’s telegraphic instructions in reply to my telegram of the 20th August. On the following day, accompanied by Mr. Straight, I called on Mr. Liang Tun-yen at his private residence and read to him the department’s telegram. He seemed greatly annoyed at first that we should change the modus operandi. I explained to him fully why the Chinese Government should be a party to the agreement. I urged upon him, in accordance with your instructions, the advisability of a single agreement. He replied that as far as he was concerned he would be willing to have the matter settled in this way, but that Chang had the decision of the question. He said he would refer the matter to Chang, (through Chang’s secretaries, as Chang refuses to see Liang). Chang is really very ill, and this fact seems to complicate the already sufficiently complicated situation. I have been informed that Chang refuses to change the original agreement, “except as to amount,” but he is willing to sign a supplementary agreement providing for American participation, and we will draw up and submit to him a draft of such agreement as soon as the matter of the purchasing agencies is settled.

The Russian minister called at the Wai-wu Pu again on Saturday, the 4th instant, to endeavor to secure participation, but assured Liang that he would not interfere with the agreement which we have practically reached, but hoped that a share might be allotted to him by the French group, and asked if, in that event, China would officially recognize the Russian participation. Liang said he thought that could be arranged, but that the agreement with the four groups could not now be delayed.

I do not believe it politic or expedient to insist further on our inclusion in the original agreement, because Chang has set himself against any further change in that particular agreement. This is quite childish, but rather than risk a crisis and consequent anti-American recriminations, I have decided to accept, as I feel authorized to do by your instruction of August 28, the less simple solution. I regret I can not secure the single instrument.

The German representative has taken advantage of the department’s position that the agreement must be signed by China of the first part instead of the European banks to say to China that the Americans do not really want to participate in the loan, but desire to defeat any loan at all, and point out that we no sooner receive concession in regard to one point than we raise others. The Chinese, under the influence of the rival interests, are becoming restive and are complaining of our action, and I fear the effect on future American enterprises of similar nature if too obdurate a position is taken on this matter of the form of the agreement, and I think it most essential that the matter be disposed of as soon as possible.

I inclose copies of the working regulations referred to in my No. 1231 of the 18th ultimo, together with a letter which was originally intended to be addressed by Chang Chih-tung to the banks, but which will now be considered as part of the working regulations.

I shall of course keep the department informed by telegraph of the progress of the negotiations.

I have, etc.

Henry P. Fletcher.

[Inclosure 1.]

working regulations drawn up by the director general of the hupeh-hunan section of the canton-hankow railway and the hupeh section of the szechuen-hankow railway.

1. The managing director.—Under the terms of his appointment by the director general he will be clearly instructed as to the extent of the railway line under his control, and his administration will comprise all matters relating to the said railway line, as, for instance, the selection and appointment of Chinese and foreign officers, the determination of the amount of their salaries, the examination into their character for industry, the deciding of engineering work of every description, as well as the dealing with Chinese and foreign correspondence; also the drawing and transfer of funds and the ordering of materials. As to his powers in matters connected with the employment of the staff and with the control of funds, their promotion or dismissal in the one case and sanction or refusal in the other, he shall, as such cases arise, report to the director general, whose authority having been obtained the managing director will give his signature, and the decision will then take effect.

2. The codirector will be appointed by the director general and will be associated with the managing director in the administration of the railway affairs. Should the managing director be called away from his post by important work, or should he be sent by the director general on a mission of inquiry, the co-director can in such cases be called upon to temporarily assume the powers of the managing director with a view to the avoidance of injurious delay; but on the return of the managing director to his post the administration shall revert to his control in order to preserve the centralization of power.

3. The chief engineer.—Under the terms of his agreement, as approved by the director general, the extent of the railway line in the respective Provinces as described therein will pass under the special control of the chief engineer in respect to construction works of every description for its entire length, and he shall be the head of all the engineers of that line. In the arrangement of all necessary estimates and whenever matters are referred to him for his opinion or investigation he must prepare betimes suitable proposals without delay and submit them to the managing director, who will refer them to the director general, and after they have received his approval they may then be put into effect.

4. Chinese and foreign officers for the line generally.—The Chinese officers shall be chosen for their familiarity with the customs and people of the locality, the foreign officers for their experience and professional attainments, and for all such officers alike their character and reputation under ordinary circumstances are matters of the highest importance. Chinese officers shall be appointed after an examination of their antecedents and seniority, and foreigners will be engaged only after examination of their diplomas, certificates, and letters of recommendation. All must be examined with the greatest care as to the degree of their qualifications for employment. The Chinese staff will have their posts allotted to them by the managing director and the foreign staff by the chief engineer, but they all come under the general control of the managing director. If there are gentry of the Province of ability such as to fit them for employment, the managing director shall recommend them to the director general, who will issue special commissions for their employment, placing them on the same footing as deputies, all alike being subject to the general control of the managing director.

5. Chinese and foreign sectional officers.—The whole line being of great length, it will be necessary, in order to expedite the work of construction later on, to divide it into sections with due regard to local conditions, fixing beforehand the dates on which work on the various sections is to commence; but as the managing director and the codirector will ordinarily be resident at the head office, and consequently unable to exercise supervision at all points, it will be necessary for the managing director to select suitable Chinese officers and recommend them to the director general for appointment to such-and-such sections of the line as resident sectional deputies, and for the chief engineer to select and recommend foreign officers of the best character and attainments to be submitted to the director general for appointment to such-and-such sections of the line as resident sectional engineers. All Chinese officers and workmen on such sections will be under the control of the sectional deputies, and the foreign officers of the sections will be under the control of the sectional engineers, their posts being assigned to them by the chief engineer, but all being under the general control of the managing director.

6. Requisition of funds.—All the requisitions on funds are to be made in accordance with the procedure laid down in the agreement. The managing director will instruct the chief engineer beforehand to prepare and present for approval a statement of the work which it is proposed to carry out during the ensuing three months, with an estimate in round figures of the sum required, to be presented for approval to the managing director. The managing director will then issue a certificate in duplicate, one copy of which will be handed to the foreign auditor and one to the contracting banks, and the said banks shall, after receipt of the certificate, hold the funds in readiness to be drawn against as occcasion may require, the managing director at the same time reporting thereon to the director general for his information.

7. Accounts.—In the management of accounts brevity and clearness must be the guiding principle, so that they may be taken in at a glance. Every disbursement must be exhibited by corresponding Chinese and foreign entries, in order that Chinese and foreigners can both examine them. The vouchers must bear four signatures before they can become valid—first, that of the payee; secondly, that of the Chinese and/ or foreign accountant in Chinese employ; thirdly, that of the Chinese and/ or foreign controller in Chinese employ. After these three signatures have been obtained the voucher will be handed in to await verification and signature by the managing director. The accounts will be trial balanced every three months and submitted to the managing director, who will present a further copy to the director general. There will further be a general balance at the end of every year, when the construction accounts of the railway and the traffic receipts and expenditures will be published in Chinese and English for the information and satisfaction of the public. Such trial balances shall not be more than 10 days and the general balance not more than 1 month late, so as to avoid the accumulation of arrears.

8. The track.—For the projected Canton-Hankow and Szechuen-Hankow main lines the director general established offices three years ago, and has repeatedly dispatched Chinese and foreign survey parties along the routes to examine the local conformation and the important cities and market towns. The trace of the line having thus been determined, plans were made and kept for reference. The survey having therefore been to a large extent completed, the conditions prevailing differ widely from those of other lines where no preparations at all have been made. The chief engineer, on commencing work, must therefore proceed with the construction in accordance with the plans prepared wherever the line has already been surveyed and must not lightly depart from them. Where the line has not been surveyed he must continue the survey, and must in every case submit detailed plans and explanations for presentation by the managing director to the director general, who will decide as to the carrying out of the same. If after resurvey there should be any alterations really necessary, the alterations to be made may be presented in separate plans, with explanations, te be laid before the director general for reconsideration and decision. With regard to important sites for railway stations and storage yards, the greatest care must be used in their selection, a secret report being submitted in advance, which must on no account be allowed carelessly to leak out.

9. Tenders.—Whenever materials are to be purchased the engineer in chief will be directed by the managing director to prepare specifications giving particulars of the quality and pattern of the materials to be supplied. These specifications will be submitted to the managing director, who will issue a notice inviting tenders to be opened on a certain date, after which the orders will be allotted. In selecting tenders the most favorable offer must be taken, and besides, in effecting purchases, only such goods must be chosen as conform to the quality specified. The date for opening tenders will be previously reported by the managing director to the director general, who will appoint an official to superintend the opening of the tenders jointly with the official appointed for the purpose by the managing director.

10. Purchase of land.—In addition to the head construction office of the railway, a special department will be established for the purchase of land, for which special officers will be appointed to act in cooperation with the managing director. Detailed plans of all the land required for the stations and permanent way will be prepared by specially appointed deputies in cooperation with engineers, the measurement, area, and class of the land being clearly marked thereon. Apart from the arable land, a report enumerating the dwelling houses, graves, copses, gardens, ponds, and the like, which might have to be expropriated, will be furnished to the managing director to be submitted for decision to the director general, who, in conjunction with the viceroy and governor of the Province concerned, will issue proclamations, whereupon the resident sectional deputy, acting conjointly with the official deputies and non-official deputies (i. e., chosen from the gentry) and the local authorities, will summon the owner of the land to be present at the measurement and pegging out of his land, the price for which will be paid in accordance with the official scale, not the slightest room being left for dispute.

11. Purchase of materials.—In addition to reference to this subject contained in article 18 of the agreement, and in its supplementary protocol, it is understood that whenever materials are required every effort must be made to have recourse in the first instance to materials of Chinese origin, and which Chinese merchants are able to supply, with a view to preventing the profits leaving the country.

12. Contracts for work.—In the case of contracts for work, care must be taken that the contractor is a really solid and reliable man and has had previous experience in contract work, or can furnish substantial guaranties in the shape of a money deposit. He will apply to the managing director, who will, after satisfying himself on these points, sanction his admission to the contracts. On no account must questionable members of the gentry or rowdy characters be allowed to assert a monopoly, resulting in delay and cheating. Detailed regulations for contracts must moreover be drawn up so as to secure the closest possible protection against delay to important work.

13. Supplementary regulations.—The foregoing regulations have been drawn up by the director general, and are to be communicated to the managing directors of each administration, who are to observe and carry them into practice. No infringement will be permitted. If there are points requiring further elaboration, either managing director may submit proposals to the director general, who will consider the question of their adoption, and his approval must be awaited before they can become effective.

[Inclosure 2.]

Hukuang Railways Loan.

[Letter originally intended to be addressed by Chang Chih-tung to the banks, but now to be considered as part of working regulations.]

imperial chinese government 5 per cent hukuang railways loan of 1909.

By article 18 of the present agreement it is provided that at rates and qualities equal to those of German, English, French, or other foreign materials, preference shall be given to Chinese materials and goods already manufactured in China, in order that Chinese industries may be encouraged.

Now, the most widely used railway materials are sleepers and rails. China produces much timber, and therefore Chinese sleepers should be purchased if of suitable quality.

As regards rails, it is agreed that one-half shall be purchased from the countries of the contracting banks or from other countries and one-half from the Han Yang Iron Works. If the output of the Han Yang Iron Works proves really insufficient for requirements, more can in that case be purchased from the countries of the contracting banks and other countries, in order to obviate delay. If, on the other hand, the output of the Han Yang Iron Works is sufficient, more rails can be purchased from them. All purchases will still be executed in the manner laid down by article 18 of the agreement.

Further, as regards engineers and other technical employees on the various sections, it shall be within the discretion of the director general to appoint either Chinese or Europeans; or, on account of their familiarity with the survey of the line, he may take into consideration the appointment of Japanese, provided, always, that such persons are suitable through possessing some knowledge of the language of the engineer in chief.

Again, since this loan is raised by the Chinese Government with the object of furnishing the necessary capital for constructing Government railways, the chief and branch bureaus established by the two Provinces shall be entirely under the control of officers deputed by the director general, and if among these officers it is found necessary to employ gentry, they shall act as deputies in all respects under the orders of the director general.

Article 14 of the present agreement stipulates that two days prior to the issue of a requisition upon the loan funds, the managing director of the railway or his representative shall in addition thereto issue statements in duplicate clearly setting forth the object of such requisition, one copy of which shall be handed to the bank and one to the auditor. The intention of this stipulation is that the managing director and the auditor shall each fulfill his responsibilities within his own province, and further that the auditor shall be enabled to discharge to the full his duties as auditor.

If the auditor is of opinion that in any requisition there are disbursements which should not be made, he shall be entitled, on the one hand, to apply to the managing director for specific information and to discuss the matter with him, and at the same time to give notice to the bank temporarily to suspend the issue of such funds. As soon as he shall have satisfied himself by inquiry that the payments are actually such as are permissible under the terms of the agreement, he must at once notify the bank that they are to issue such funds accordingly. He shall not intentionally delay or obstruct matters to the hindering of important work, and it shall be imperative upon the auditor to act in all respects in conformity with the conditions of the present agreement, which he must neither infringe nor pervert.

A further point to be noted is that the Chinese officials acting in this business are in no way entitled to any commissions whatsoever, and the banks shall not privately offer them gratuities. If it should be discovered that private offers of gratuities have been made, the banks will be held liable to a heavy monetary penalty.

Again, on the conclusion of this loan it will be necessary forthwith to organize an administration. The practice to be followed hereafter by the said administration has been laid down by the director general in a set of 13 working regulations, of which a copy is annexed hereto.

The foregoing particulars have been expressly and explicitly referred to and set down in this letter, because they are not dealt with in sufficient detail in the agreement itself, and they are to be loyally observed by each party.

Copies of this letter are hereby made in quadruplicate, one to be held by each party.

Peking, June —, 1909.