File No. 893.811/221

Minister Reinsch to the Secretary of State

No. 1056

Sir: In continuation of my despatch No. 923 of February 4 last, I have the honor to report on the progress of the negotiations with respect to the improvement of the Grand Canal, in connection with the Huai River Conservancy.

When the negotiations were taken up by Messrs. Carey and Gregory, the Minister of Agriculture and Commerce emphasized the desire to have the improvement include the entire course of the Canal between the Yangtze and Yellow Rivers. This is desirable from the point of view of income and utility; if the use of the Canal could be assured at all times of the year, a large and profitable through traffic could be counted upon between the two rivers and between the two provinces (Shantung and Kiangsu) through which the Canal passes. In consultation with the Minister of Agriculture and Commerce and with the Director of the Conservancy Bureau, the American negotiators decided to take up first the Shantung section. I had expressed to them the opinion that it was preferable to make the Kiangsu contract first; they were, however, determined by the fact that the situation with respect to Shantung had some [Page 108] very favorable elements. The gentleman in charge of conservancy work there, Mr. Pan Fu, is an official of unusual ability and energy. He has made a complete survey of the works needed which he has put forth in a large size printed volume. Both Mr. Pan and the Governor of Shantung were extremely anxious to have this work undertaken as it would very materially enrich the western part of the province. The Government of Shantung was therefore in every possible way very ready to facilitate the making of the contract and the execution of the work.

Attention being called to the provisions of the treaty with Germany of 1898, the Chinese officials stated to the American negotiators that there was nothing to apprehend on this score: the German Consul at Tsinanfu had been given notice, but it was unlikely that the Germans were willing to furnish this amount at the present time; no other rights in the matter had accrued as yet, and the Chinese officials expressed a complete confidence in being able to handle the situation. As it was only the obligations of the Chinese Government that were involved, the American negotiators proceeded on the basis of these assurances.

The negotiations with the Shantung officials were carried on at Tsinanfu and Peking for the space of four weeks, and every detail of the contract was carefully considered. The result was the making of a preliminary contract which provides both for the furnishing of the loan and for the execution of the work on contract. Considering all its terms, the contract may be held to be the most favorable ever obtained by foreigners in China; this is especially true because of the first actual use of a contract for construction work on a ten per cent (10%) commission basis. The Chinese hitherto have been unwilling to make use of this established method of carrying out large works of construction, partly because they believe they could themselves sublet the contracts and supervise the work as well as foreigners, and partly because the introduction of a foreign supervising firm greatly reduces the opportunity for incidental gains. That the officials in this case decided to use a method hitherto so unacceptable is a sign of decided progress in official ideas. The first introduction of this idea occurs in the preliminary agreement for the Huai River conservancy of January 30, 1914.7

Negotiations are at present proceeding and are likely soon to be concluded for a contract covering the work on the southern portion of the Canal, lying within the Province of Kiangsu; when this has been secured it will practically lie within the option of the bankers to attack the Kiangsu portion first and to delay action on the Shantung section until all possibility of international difficulty has been removed by the Chinese. The Chinese were desirous of having a definite offer from American financiers on this matter because then they would be in a position to demand of any eventual claimant immediate furnishing of the money, which they believed would result in clearing the field of every possible opposition.

I have [etc.]

Paul S. Reinsch