File No. 893.51/1735

Minister Reinsch to the Secretary of State

No. 1284

Sir: As reported in my telegram of November 25, the loan of G$5,000,000, made by the Continental & Commercial Bank of Chicago, has been approved by both Houses of Parliament, by votes approaching unanimity. It is to be noted that this result was obtained notwithstanding the fact that on nearly every point the present Parliament is opposed to the Premier and his Cabinet. Its ready approval of the American loan therefore indicates the great importance and value which is attached by the nation as a whole to American financial assistance at this time.

The French Chargé d’Affaires, Count de Martel, called on me on the 24th instant, and stated that he desired me to know that the Banque Industrielle de Chine, a French institution with Chinese associates, had a claim on the wine and tobacco taxes as security for loans. Under the same date (November 24) I received from him a note in which, at my request, he had set forth the texts of the agreements in question; a copy of this note is herewith enclosed.2

Under Annex II of the Ching-Yu Railway Agreement of January 21, 1914, all tobacco taxes and imposts throughout China are pledged [Page 144] as security for advances made under the main contract. I am informed that the amount of the advances is about Francs 36,000,000. By Annex II to the so-called Pukow Harbor Improvement Loan of 1914, the annex being dated March 2, 1914, the taxes on spirits collected in the provinces north of the Yangtze are pledged.

Having at the time no official information concerning the character of the security pledged in the American loan agreement, I could only state to Count de Martel that I would take notice of the facts brought to my attention and investigate the matter. Dr. Chen Chin-tao, the Minister of Finance, upon my inquiring, informed me that while the imposts and taxes on tobacco and spirits were pledged to the French bank, as stated, the security for the American loan was the revenue from Government sales of wines and tobacco.* * *

The revenue from the Government sale of tobacco, so-called, is therefore distinguished in origin and in the method of collection from the imposts and taxes (there are taxes, additional taxes and license fees levied). The estimated revenue from the taxes and imposts during the present year is Mexican $16,000,000; from the Government sales revenue, Mexican $11,000,000.

In a discussion of this matter with Dr. Chen, he admitted that it might be possible to argue that the Government sales revenue, as now administered, was a tax under another name, but not materially differing from other taxes. Upon this admission I secured from him, as a matter of precaution, oral assurances to the effect that should the American bankers consider the security pledged to them inadequate, on account of the possible impinging of the French claim for securities on taxes and imposts, he would assign additional security. I stated to him that if the American bankers considered it necessary for their protection, an American expert might have to be appointed to assist in the systematization of the Government sales revenue. He cited to me the Russo-Chinese Declaration of June 24, 1895, in Article IX [IV] of which it is provided that should China grant to another foreign power rights connected with the control or administration of the revenues of China, such rights must be extended to the Russian Government. I stated to him that in the case in question such rights would be asked merely for the protection of security already granted, if it were endangered by a specific obstacle. It was therefore not a grant by China, but a remedy to which, under every consideration, the parties holding the security are entitled should they desire to avail themselves of it.

When the Legation had been thus informed concerning the character of the security pledged, I directed the First Secretary of Legation to notify the French Chargé d’Affaires, which he did in an interview.* * *

As to the question of the security, there is no doubt of its sufficiency for the loan of G$5,000,000. It is, however, my opinion that as specific security it might not be adequate for the contemplated loan of G$25,000,000 unless the scientific administration of the revenue be assured and the matter of the possible conflict of French claims be adjusted. The Minister of Finance has also received a protest from the Allied members of the Consortium against the American loan, as [Page 145] in conflict with Article XVII of the Reorganization Loan Agreement of 191311 which provides:

In the event of the Chinese Government desiring to issue further loans secured upon the revenues of the Salt Administration or to issue supplementary loans for purposes of the nature of those specified in Article II of this Agreement, the Chinese Government will give to the Banks the option of undertaking such loans.

The Minister of Finance is taking the position that: 1st, an option to raise the loan having been offered to the Consortium in September, upon which they have been unable to act on account of the impossibility of cooperation between the different belligerent powers during the war, the Chinese Government has fulfilled its duties under the contract and may offer options for loans to other groups or institutions; and 2nd, the particular loan concluded with the American bank does not come within the purview of Article XVII, because it is not related to any of the objects for which the Reorganization Loan was made, but is, on the contrary, as the Minister of Finance states, intended to provide a fund for industrial development which will be temporarily deposited in the Government banks for the strengthening of their credit.

It is my opinion that even as providing a bank guarantee fund, the American loan is entirely outside of the sphere of the Reorganization Loan of 1913.* * *

I have [etc.]

Paul S. Reinsch