File No. 893.811/234

Minister Reinsch to the Secretary of State

No. 1224

Sir: I have the honor to report on the progress of the negotiations with respect to the Grand Canal improvement work in the Province of Shantung, reported originally in my No. 1056 of April 28 last.

I have the honor to enclose a translation of an undated letter, written to the American International Corporation by the Shantung Provincial Government, and received by the former during May, in which the approval of the loan by the Central Government is recited.

On June 27, last, a letter was written to the representative of the Province, addressed to the Governor of Shantung, making known to him the acceptance by the American International Corporation of the Agreement of April 19, 1916, and the desire of the corporation further to negotiate with respect to a supplementary agreement concerning certain matters of administrative control (vide: your telegram to the Legation of June 20). This letter was held back at the request of the representative of the province, and was embodied in [Page 124] a letter written to the Governor of Shantung on August 23, last, to which no reply has been received by the Corporation.

Mr. Pan Fu was designated by the Governor to carry on the negotiations for the supplementary agreement; and after long and arduous discussions the main provisions asked for received Mr. Pan’s acceptance. The provisions were then to be submitted to the Governor for his approval. For this purpose Mr. Gregory, accompanied by Mr. Pan Fu, proceeded to Tsinanfu.

In the meantime, on September 15, a telegram was received from New York (No. 523) by the representative of the American International Corporation to the effect that the latter must insist upon a loan service charge of one-quarter of one per cent in addition to the discount already allowed. This new demand, dealing with a matter of so small importance and yet put forth in a categorical manner at this late stage of the negotiations, did not serve to help matters along, although it was accepted by Mr. Pan.

The Governor, who had been absent from Tsinanfu, having returned to that town, was on September 26, to be approached for his signature. Evidently, however, a powerful obstruction and opposition had been organized, for when Mr. Gregory interviewed the Governor he declared point-blank that he could not see his way to signing the preliminary agreement.

The outstanding feature of the situation thus created was that the Governor claimed that the supplementary land tax, which was to serve as security under this loan, had already been pledged previously to secure a loan of $2,000,000 made by the Bank of China, the Bank of Communications, and other interests. This extraordinary state of affairs indicates the laxness of Chinese financial administration.

When the refusal of the Governor to sign the contract was made known to the Legation, the matter was immediately discussed with the Minister of Finance, the Premier and the President himself. All these high officials maintained an entirely favorable attitude and expressed their desire that the supplementary agreement should be immediately concluded; and instructions were issued by telegraph to the Governor of Shantung, authorizing him to substitute the proceeds of the national stamp tax in Shantung as security in place of the supplementary land tax.

Mr. Gregory, who had returned to Peking, thereupon again went to Tsinanfu, confident that the signature would be obtained without question. The instructions from the Central Government were, however, ignored by the Governor, who now stated more positively what he had intimated in the first interview: namely, that opposition to the contract had arisen in the Shantung Provincial Assembly, and that all the points of the agreement would have to be gone over again. Mr. Gregory’s argument that the original contract, having been completely concluded before the reconvening of the Provincial Assembly, was not within the jurisdiction of the Assembly, did not make any impression on the Governor.

I had an informal interview last night with his excellency Dr. Chen Chin-tao, Minister of Finance, who is also Acting Minister for Foreign Affairs, in which he stated to me that the Central Government had received a formal communication from the Government of Shantung, claiming that the contract had become null and void through forfeiture.

[Page 125]

The corporation argued that the claim of forfeiture of the original contract on account of failure to deposit $2,500,000 immediately upon the execution thereof is not well founded, because the forfeiture clause was vitiated by the Governor’s acting, until the beginning of October—more than five months after the signing of the original contract—on the assumption that the contract was still in force.

I stated to his excellency our position on this point; namely, that if forfeiture might be said to have occurred, it was waived by subsequent negotiations. Dr. Chen stated that this was also his view. He stated that all the officials of the Central Government were in favor of immediately concluding this contract, and that a number of the Shantung members of the National Parliament, as well as the Private Secretary of President Li, a Shantung man, had been induced to proceed to Tsinanfu, in order to argue with the members of the local Assembly.

Considering the fact that the making of this contract was originally requested by the Shantung Government and that no shadow of opposition had hitherto been seen, the sudden appearance of a well organized local obstruction has led to the surmise that influences unfavorable to American enterprise in China, particularly in Shantung, have been active in organizing this local opposition. From confidential reports which have reached me it would however appear that the trouble is due to a certain amount of distrust of the Central Government on the part of the local Assembly. It would seem that a tale is current to the effect that the engineering work would require only $1,000,000, and that the rest of the money is to be spent by the Central Government, while the burden is to be imposed on the province. This is of course a misunderstanding which I hope can be cleared up without delay.

The Governor, Tsai Ju-kai, who originally negotiated the agreement, was greatly in favor of the project. His successor, Sun-Fa-hsü, Civil Governor during the negotiations reported above, was unpopular in the province and was apparently fearful of making any opposition to the Assembly; he has been transferred to another province, and Chang Huai-chih will act as Military and Civil Governor. The latter’s attitude has not yet been determined, although he is believed to be favorable to the Canal enterprise.

I also have the honor to report that on September 25 last, the Japanese Legation handed to the Chinese Foreign Office a memorandum concerning the Grand Canal enterprise in Shantung, a copy of which is enclosed herewith.* * *

I have the honor to enclose a copy of a memorandum by the Minister, and one by the Secretary of Legation, in which the attitude taken by the Legation is stated.2 In oral conversation with the Acting Minister for Foreign Affairs the position thus indicated has been taken by me, and the Minister appears to share the views of the Legation in this matter.

With respect to the Kiangsu section of the Canal, the demand of the American International Corporation that the Provincial Government should guarantee the loan, referred to in your telegram of [Page 126] June 15 and in my telegrams of June 19 and June 26, has delayed negotiations. The political situation in Kiangsu is somewhat uncertain, and the Central Government has only now sent Mr. Pan Fu to that province, in order to prepare the way for cooperation of the local authorities with the Central Government in the matter of the loan. I believe that it will be possible to get a formal expression of such cooperation.

From the above report, it will appear that the method of negotiation followed in this important matter is radically wrong, and will inevitably and at all times lead to endless trouble and the expenditure of fruitless efforts in China. If the original contract had been unconditionally accepted by the American International Corporation, it would have been just as easy subsequently to get the necessary administrative modifications and interpretations; but the whole enterprise is endangered when, after a general agreement has been arrived at, the contract is allowed to remain pending while minor modifications are being discussed. This method secures for such minor modifications an importance far beyond their real consequence. It is highly to be desired and absolutely essential that in the future American concerns attempting to do business in China should definitely make up their minds as to what they want and what they can grant before the main contract is finally signed. Nothing is more irritating to the Chinese than to have long and painful negotiations come to an end, supposedly definitive, and then to find that the negotiators on the other side continue to discover things which they would like to have put into the contract.

I have [etc.]

Paul S. Reinsch
[Inclosure 1—Translation]

The Shantung Provincial Government to the American International Corporation

The Shantung Provincial Government formerly telegraphed to the Central Government the facts concerning the signing of the 7 per cent loan for the improvement of the Shantung section of the Grand Canal, and the Shantung Provincial Government subsequently received a telegraphic reply from the Administrative Council saying that a presidential mandate has been issued permitting the carrying into execution of the already signed Shantung loan for work on the Grand Canal and ordering that the same be notified to the Ministries of Finance and of Agriculture and Commerce, and to the National Conservancy Bureau.

Subsequently the final complete contract was sent to the Central Government, and on the 27th of April a mandate was issued ordering the same to be transmitted to the Ministries of the Interior, of Finance, and of Agriculture and Commerce, as well as to the National Conservancy Bureau, to be placed on record. The contract is ordered to become operative.

Having received this reply this communication is now sent for your [omission] to be placed on record.

The Shantung Provincial Government
[Inclosure 2—Translation]

Memorandum from the Japanese Legation to the Chinese Government

We have heard that the Chinese officials have made a contract with American capitalists for a loan of $3,000,000 for the renovation of the Grand Canal in the province of Shantung On the 29th ultimo the Japanese Minister, “Lin” [Page 127] (i. e., Hioki), had an interview with the Minister for Foreign Affairs, Chen, at which inquiries were made about this matter. The Minister, Chen, stated that this loan had been negotiated between the Conservation Bureau and the American capitalists. Although it had been heard of, neither the Ministry for Foreign Affairs nor the Ministry of Finance knew the details. The Japanese Legation has now obtained definite information to the effect that in April of this year the Conservation Bureau drew up and sealed an agreement with the American International Corporation and that now negotiations are proceeding with regard to the deposit of the funds and the method of carrying on the work.

I wish to observe that in Article 3 of the sealed agreement regarding the lease of Kiaochow, dated March 6, 1898, the following things are specified regarding preferential rights in Shantung Province:

In case of undertaking any work in Shantung Province, if foreign labor, capital, or materials are required, China shall first apply to German capitalists or merchants to know whether or not they are willing to undertake the said work and furnish the materials.

Two years ago Japan engaged in war for a year with Germany and expelled Germany from all influence in the Province of Shantung. The consequence was that all the rights and privileges which Germany had obtained in Shantung by treaty or otherwise reverted to Japan.

Also in Article 1 of the sealed convention between China and Japan of May 25, 1915, relating to Shantung Province, the Chinese Government, in regard to the above-mentioned rights and privileges granted, acknowledges all previously arranged with Germany as appertaining to Japan. From the above it is plain that in the matter of improving the Grand Canal within the Province of Shantung by the Chinese officials, if foreign assistance is to be asked, application must first be made to Japan.

September 15, 5th Year of Taisho [1916].

  1. Not printed.