File No. 893.51/1457.

The American Chargé d’Affaires to the Secretary of State.

No. 929.]

Sir: I have the honor to request instructions as to the attitude to be taken by this Legation towards financial transactions between American capitalists and the Chinese Government.

I have several times recently been approached by prominent Chinese, officials and others, with inquiries for American financiers who might be willing to make loans to the Chinese Government for industrial or administrative purposes.

The Vice President of the Senate, Honorable C. T. Wang, called one morning to say that the friendly attitude of the American Government was greatly appreciated by the Chinese and to ask if there were not some way in which China could requite the kindness shown. He suggested a concession for a railway line. He had no definite proposition to make, however. I reminded him that a representative of Dr. Sun had visited the United States and endeavored to interest American capitalists in his plans for railway construction, but had not so far been very successful. Mr. Wang promised to call again and talk the matter over, but has not done so.

Two days ago I learned, on excellent authority, that a contract for the construction of the most important trunk line offered by Dr. Sun has already been signed with Lord ffrench, the representative of Messrs. Pauling & Company, a British firm. Messrs. J. G. White & [Page 184] Company, of New York, are said to be interested in the contract, but in what way and to what extent I am unable at present to say. The line is to connect Canton with Chungking, in Szechuen, probably passing through the Province of Kweichou, which is rich in minerals. The contractors have, also, a seven years option on an extension of the proposed line from Chungking to Lanchou, in Kansu Province. Funds are to be provided by a loan, bearing five per cent interest, security for which will be the railway itself. The contract guards against misappropriation of funds by a provision which places them entirely under the control of the foreign engineers. The materials needed from abroad will be purchased in Great Britain. The contract has yet to be approved by the National Assembly, but inasmuch as it has been signed by Dr. Sun, it is believed that his party, the Kuo Min Tang, will support it and will be able to control the votes needed for approval.

Two or three days ago Judge King, formerly a Justice of the Chinese Supreme Court, called to say that a representative of the Vice President, Li Yuan-hung, was in Peking and would like to get in touch with some American capitalists who would be willing to make a loan for rebuilding of Hankow. He thought that some twenty million (probably Chinese) dollars would be required. The security would probably be the provincial taxes. This loan was offered last year to the Robert Dollar Company, of San Francisco.* * * Judge King stated further that Mr. Sheng Hsuan-huai, Minister of Posts and Communications under the late Imperial Government and principal owner of the Ping-hsiang Colliery, the Ta-yeh Iron Mines, and the Hanyang Rolling Mills, was anxious to raise a loan upon the security of these works. They are heavily mortgaged at present to Japanese capitalists and a good part of the output of the iron mines and the mills is sold to Japan at very little above cost. The proposed loan would be used to pay off this indebtedness and improve the works. I inquired whether the lenders would be allowed to operate the mines and mills. Judge King thought not, but said that they would be allowed supervision of the accounts.

A third loan in contemplation is one sought by the Province of Chekiang upon the security of the silk tax. The production of silk is one of the chief industries of that province. The manager of the Peking branch of the International Banking Corporation, which is American, informs me that his bank refused this loan because it was intended for political purposes only and because the security was considered to be inadequate.

The Military Governor of Mukden also is looking for another loan for administrative purposes.

In discussing these proposals with American business men, I have been asked whether the American Government would give its support to these enterprises. In reply I have reminded the inquirers that bona fide American business interests have always received the protection of our Government and that a large part of the work of the Legation consists in endeavors to adjust difficulties related to such business interests. I have referred also to the statement, issued by the President and communicated to the Legation in your telegram of March 19, 9.00 p.m., to the effect that the American people “wish [Page 185] to participate very generously in the opening to the Chinese and to the use of the world the almost untouched and perhaps unrivaled resources of China” and that “the Government of the United States is earnestly desirous of promoting the most extended and intimate trade relationship between the United States and the Chinese Republic.” At the same time the objections set forth in the President’s statement to the conditions of the recent reorganization loan contract have not been overlooked.

I have the honor to inquire whether I am to understand that the Department does not desire the Legation to encourage loans to the Chinese national or provincial Governments, secured upon national or local taxes.

It is evident that financial transactions between American citizens and the Chinese Government are altogether different from such transactions between individuals or business firms. When difficulties occur in connection with the latter, suits may be brought by American plaintiffs in Chinese courts in which our consular representatives have a right to sit as associates to see that justice is done and the treaty rights of their nationals protected; and in cases where Americans are defendants the American consular courts or the United States Court for China have jurisdiction. Should the Chinese Government, however, default in its engagements with American financiers, it might become necessary to take possession of the revenues pledged as security for the loans made and this, as the President points out, might require “forcible interference in the financial and even the political affairs of China.”

This contingency is even now at hand; China is on the verge of bankruptcy and, in my opinion, can not much longer escape from international control of its finances. I assume, therefore, that the Department does not intend to give its support to any loan contracts with conditions similar to those to which objection has been made in the case of the reorganization loan. If I am correct in this, such loans as those solicited for the rebuilding of Hankow and for the provincial administrations of Chekiang and Shengking, if made by American financiers, could not expect the support of the United States Government.

On the other hand, industrial loans, like that desired by Mr. Sheng Hsuan-huai to be secured upon the mines and mills concerned, as I understand the policy of the Department, would be looked upon with favor by the Department and would have the right to expect such protection as has always been given to American commercial interests.

In the case of loans made for the construction of railways, the Legation is not quite clear as to the attitude which should be taken. Where the loan is secured upon the railway itself, I assume that the support of the United States Government will not be withheld, even though these lines are owned by the Chinese Government and the contract is made with a representative of the Chinese Government, as has been the case in nearly all railway construction in China. The Hukuang Railway contract, however, provides for a loan which is secured upon provincial taxes. While the Department would discourage the making of such contracts by Americans in the future, I assume that since this particular contract has received the approval [Page 186] of our Government, the Legation can not refuse to take such action as may be necessary to protect the American investment already made.

The questions raised here are practical and of pressing importance.

In the case of the Hukuang Railway Loan, the fear of the bondholders that the provincial likin was no longer adequate as security led, in March last, to considerable discussion and to the temporary pledging of the property and materials of the railway as a guaranty that the likin was unimpaired. Other questions in connection with this loan are not unlikely to call for action by the Legation.

I am now asked by the local representative of the International Banking Corporation to ascertain whether or not the Department will give support to a loan for the construction of one of the lines offered by Dr. Sun and for which his bank may be disposed to negotiate. I have asked him what he means by “support.” His reply is that, should the Chinese Government or its representative fail to carry out the terms of the contract, he would like to be assured that the Legation will exercise its good offices to see that a just settlement is made. I have already stated in a preceding paragraph my understanding of the Department’s policy in such eases.

The peculiar conditions prevailing in China, where so many industrial enterprises are either wholly or partially owned by the Government, make it desirable that American business men should know how far the Legation can go in encouraging investments for the development of such official or semi-official enterprises.

The future of American trade is concerned because concessions obtained how will secure for the nations obtaining them the Chinese market for the machinery and other supplies needed in the development of the concessions. Once supplies of a certain type are introduced, they tend to become standard and the sale of other sorts becomes very difficult. In this connection, I have the honor to inquire whether the Department’s instruction of October 21, 1905, still holds good, in which the Legation is authorized to forward without comment to the Chinese Foreign Office the applications of reputable American citizens for privileges and concessions.

The Legation is desirous of avoiding any misunderstanding of the Department’s policy in regard to the questions raised herein, so that it may carry out that policy. I have the honor, therefore, to request that I may be instructed accordingly.

I have [etc.]

E. T. Williams.