File No. 893.77/1469

Minister Reinsch to the Secretary of State

No. 624

Sir: Referring to the Legation’s despatch (No. 286) of June 29, 1914,2 I have the honor to enclose herewith a copy of the English text of a contract concluded on March 31, 1914, between [Page 157] the Chinese Government and the The British and Chinese Corporation, Limited, for a loan of £8,000,000 for the construction of a railway from Nanking to Nanchang and thence to Pinghsiang to connect with and incorporate the present Pinghsiang-Chuchow Railway (the latter point being on the line of the Canton-Hankow section of the Hukuang Railways), with a branch to Wuhu (Article 2)—and with a preference for an extension from at or near Hweichowfu, via Yu Chien, to Hangchow (Article 19). The text of this agreement, hitherto unobtainable, has been supplied to the Legation by an official of the Ministry of Communications.

The loan agreement transmitted herewith is of the classical type, and appears to require no comment except upon the political significance conferred upon it by the Japanese demands of January 18 last,13 in view of the fact that the fifth paragraph of Article Five of those demands, reading in part as follows:

China agrees to grant to Japan the right of constructing a railway* * * line between Nanchang and Hangchow* * *

contemplates the concession to Japan of a line which would closely parallel, if it did not altogether replace, the line of which the construction of the Nanchang-Hweichowfu section is given outright, and of which the option for the Hweichowfu-Yu Chien-Hangchow section is reserved, to the British and Chinese Corporation.

I have [etc.]

Paul S. Reinsch

Nanking-Hunan Railway Loan Agreement

This agreement is made at Peking on the thirty-first day of March 1914, corresponding to the thirty-first day of the third month of the third year of the Chinese Republic, and the contracting parties are:

The Government of the Republic of China (hereinafter called “the Chinese Government”) acting through the Minister of Finance and its Minister of Communications, of the one part, and the British and Chinese Corporation Limited, (hereinafter called “the Corporation”) of the other part.

Article 1. The Chinese Government hereby authorizes the Corporation to issue a five percent (5%) Gold Loan for an amount of eight million pounds (£8,000,000) sterling. The loan shall be of the date on which the first series of bonds is issued to the public and shall be called The Chinese Government Five Percent Nanking Hunan Railway Loan.

Article 2. The loan is designed to provide capital, first: For the resumption by the Chinese Government of the Anhui Provincial Railway Company’s works and property in the neighborhood of Wuhu: secondly,

For the construction of a government line of railway from Nanking to Nanchang through Ningkwofu and Hweichoufu, and with connection to Wuhu and Kuangtechou; and from Nanchang to Pinghsiang, to Chuchow: thirdly,

For the incorporation of the said Chuchow Pinghsiang railway as an integral part of the railway to be constructed under the present loan agreement from Nanking to Pinghsiang. The actual route to be followed between these two points shall be decided by the Ministry of Communications after completion of the final survey.

Article 3. The capital so provided shall be solely devoted to the purposes above-stated, including the purchase of land, rolling stock and other equipment, and to the working of the railway and to payment of interest on the loan during the period of construction which is estimated at four years from the actual beginning of the works, the commencement of which is not to be delayed beyond six months from the date of the signature of this agreement, within which period the Corporation shall place a sum not exceeding £500,000 [Page 158] at the disposal of the Railway Administration, to be held in Europe or remitted to China as it may direct, as a first instalment on account of the proceeds of the loan. This amount of £500,000 or whatever portion thereof is actually advanced, together with interest thereon not exceeding a charge of six percent (6%) per annum, shall be deducted from the proceeds of the first series of bonds.

Article 4. The rate of interest for the loan shall be five percent (5%) per annum on the nominal principal, and shall be paid to the bondholders half-yearly. The interest on each series of the loan shall be calculated from the date on which it is issued to the public and shall be paid by the Chinese Government during the time of construction either from the proceeds of the loan or from other sources, and afterwards in the first place, out of the revenue of the railway, and then from such other revenues as the Chinese Government may think fit to use for the purpose in half-yearly instalments according to the amount specified in the schedule attached to this agreement and fourteen days before their due dates, Western Calendar, as calculated half-yearly from the date on which each series of the loan is issued to the public.

Article 5. The term of the loan shall be forty-five (45) years, repayment of principal shall commence after the expiry of the fifteenth (15) year from the date of the loan and, except as provided in Article 6 hereinafter, shall be made by yearly amortization to the Hongkong and Shanghai Banking Corporation out of the revenues of the line or such other revenues as the Chinese Government may think fit to use for the purpose according to the amounts specified in the schedule attached to this agreement, but fourteen (14) days before their due dates, Western Calendar, as calculated from the date on which the first series of the loan is issued to the public.

Article 6. If at any time after the lapse of fifteen (15) years from the date of the loan the Chinese Government should desire to redeem the whole outstanding amount of the loan or any part of it not yet due for repayment in accordance with the schedule of repayments hereto attached, it may do so until the twenty-fifth (25) year, by payment of a premium of two and a half (2½) per cent on the face value of the bonds, that is to say, by payment of one hundred and two pounds and ten shillings for each £100 bond, and after the twenty-fifth (25) year without premium; but in each and every case of such extra redemption, the Chinese Government shall give six months notice in writing to the Corporation and such extra redemption shall be effected by additional drawings of bonds to take place on the date of an ordinary drawing as provided for in the prospectus of the loan.

When the loan has been fully repaid this agreement will immediately become null and void. Bonds and interest coupons which have matured will be collected in due order and cancelled by the Hongkong and Shanghai Banking Corporation as they are presented for payment and will be delivered by it to the Chinese Minister in London. The Corporation will refund in full to the Chinese Government the amount of any drawn bonds or any interest coupons which have not been presented for payment within thirty years from the respective due dates for redemption or payment of interest.

Article 7. The Hongkong and Shanghai Banking Corporation having been appointed by the Corporation Agents for the service of the loan the payments due for amortisation and interest, referred to in Articles 4 and 5, shall be made in accordance with the amounts of the schedule attached to this agreement and fourteen days before their due dates. These payments shall be made by the Ministry of Communications to the Hongkong and Shanghai Banking Corporation, in Shanghai, in Shanghai sycee and/or coin of the national currency, so soon as the said currency shall have been effectively established, sufficient to meet such payments in gold in London, exchange for which shall be settled with the bank either on the date of payment or at the option of the railway administration at any date or dates within six months previous to any due date for the repayment of interest and principal. These payments may, however, be made in gold in London fourteen days before their due dates, if the Chinese Government should happen to have gold funds bona fide at their disposal in Europe not remitted from China for the purpose, and desire so to use them.

In reimbursement of expenses connected with the payment of interest and repayment of principal of the loan the Hongkong and Shanghai Banking Corporation will receive a commission of one-quarter per cent on the annual loan service.

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Article 8. The Chinese Government hereby unconditionally guarantees that the interest and principal of this loan shall duly be paid in full, and should the revenues of the railway and/or the proceeds of the loan be not sufficient to provide for the due and full payment of interest and repayment of principal, the Chinese Government will make arrangements to ensure that the amount of deficiency shall be met from other sources and handed over to the Hongkong and Shanghai Banking Corporation on the date upon which funds are required, to complete full payment of interest and repayment of principal.

Article 9. The loan shall be secured by mortgage of the railway declared to be now entered into in equity by virtue of this agreement, and shall, as soon as possible hereafter be secured by a specific and legal first mortgage in favour of the Corporation upon all lands, materials, rolling stock, buildings, property and premises of every description purchased or to be purchased for the railway, and on the railway itself, as and when constructed, and on the revenues of all descriptions derivable therefrom.

The provisions of this article in respect of the mortgage are to be construed and treated as equivalent in purport and effect to a mortgage customarily executed in England.

Article 10. The Corporation is hereby authorized to issue to subscribers to the loan, bonds for the total amount of the loan for such amounts as may appear advisable to the Corporation. The form of the bonds shall be settled by the Corporation in consultation with the Minister of Communications or the Chinese Minister in London. The bonds shall be printed or engraved in Chinese and English: they shall bear the facsimile of the signature of the Minister of Communications and of his seal of office, in order to dispense with the necessity of signing them all in person. But the Chinese Minister in London shall previous to the issue of any bonds, put his seal upon each bond with a facsimile of his signature, as a proof that the issue and sale of the bonds are duly authorized by, and binding upon, the Chinese Government, and the representative of the Corporation in London shall countersign the bonds as agents for the issue of the loan.

In the event of bonds issued for this loan being lost, stolen or destroyed, the Corporation shall immediately notify the Minister of Communications and the Chinese Minister in London, who shall authorize the Corporation to insert an advertisement in the public newspapers notifying that payment of the same has been stopped and to take such other steps as may appear advisable or necessary according to the laws and customs of the country concerned, and should such bonds not be recovered after a lapse of time to be fixed by the Corporation, the Minister of Communications or the Chinese Minister in London shall seal and execute duplicate bonds for like amount and hand them to the Corporation, by whom all expenses in connection therewith shall be defrayed.

Article 11. All bonds and coupons and payments of interest and repayments of principal in connection with the service of the loan shall be exempt from all Chinese taxes and imposts during the currency of this loan.

Article 12. All details necessary for the prospectus and connected with the payment of interest and repayment of the principal of this loan, not herein explicitly provided for shall be left to the arrangement of the Corporation in consultation with the Chinese Minister in London. The Corporation is hereby authorized to issue through its agents the Hongkong and Shanghai Banking Corporation the prospectus of the loan as soon as possible after the signing of this agreement, and the Chinese Government will instruct the Chinese Minister in London to cooperate with the Corporation in any matters requiring conjoint action and to sign the prospectus of the loan.

Article 13. The loan shall be issued to the public in two or more series of bonds, the first issue to be made to an amount not exceeding four million pounds sterling (£4,000,000) as soon as possible after the signature of this Agreement. The price of the bonds to the Chinese Government shall be the actual price of issue to the public in London less flotation charges of four (4) points retainable by the Corporation, that is to say, of four pounds (£4) for every £100 bond issued. The second and subsequent series shall be issued in time to permit of uninterrupted continuance of the work of construction in amounts to be determined by the Ministry of Communications in consultation with the Corporation.

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All expenses in connection with the flotation and issue of this loan, such as underwriting, commission and brokerage, telegraph charges, advertising, postage, engraving and printing of prospectus and bonds, and legal fees, shall be borne by the Corporation.

The Stamp duty shall be borne by the Chinese Government.

Article 14. The proceeds of the loan shall be paid to the credit of a Nanking Hunan Railway Account with the Hongkong and Shanghai Banking Corporation in London. Payments of loan proceeds into the credit of this account shall be made in instalments and on dates conforming to the conditions allowed to the subscribers of the loan. Interest at the rate of three (3%) per cent per annum shall be granted on the credit balance of the portion of this account kept in London and interest on the credit balance of the portion transferred to China will be allowed at the Bank’s usual rate for such accounts. After deduction of the funds required for the services of interest and for commission on this service during the time of construction, the Bank will hold the net proceeds with accrued interest to the order of the Ministry of Communications, who, in authorizing the payment or transfer of any sums exceeding £20,000 shall give notice to the Hongkong and Shanghai Banking Corporation ten days before the day on which they are required. Requisitions on the loan funds will be drawn in amounts to suit the progress of construction of the railway by orders on the Hongkong and Shanghai Banking Corporation signed by the managing director or his duly authorized representative, and the chief accountant, and accompanied by a certificate stating the nature and cost of the work to be paid for.

Funds to meet monthly or quarterly estimates of construction expenses shall be transferred to Shanghai as and when required by order of the directorate general of railways of the Ministry of Communications, such transfers being effected through the Hongkong and Shanghai Banking Corporation and transferred funds shall remain on deposit with this bank until required for railway purposes. The rate of exchange for each transfer shall be settled with the bank either on the day on which such transfer is made or at the option of the directorate general of railways of the Ministry of Communications on any date or dates within six months previous to the day on which the transfer is to be made.

The accounts of the railway will be kept in Chinese and English in accordance with the accepted modern methods, under the direction of a duly qualified British chief accountant to be chosen and appointed by the directorate general of railways of the Ministry of Communications.

The chief accountant will draw up a list of the necessary staff for his department for submission to the managing director, who shall decide and make the appointments, and the chief accountant shall have sole charge under the authority of the directorate general of railways of the Ministry of Communications and/or the managing director, or his duly authorized representative, of all disbursements and receipts of railway funds during the currency of this loan, and shall sign, in conjunction with the managing director, or his duly authorized representative, all documents appertaining to the disbursement of railway funds. The railway administration will publish annually upon the close of its financial year a report in the English and Chinese languages showing the working accounts and traffic receipts of the railway, which report shall be procurable by the public on application.

Article 15. If during the time of construction the net proceeds of the present loan with accrued interest, should, after deduction of the sums necessary for the service of interest on the loan, not be sufficient to complete the construction and equipment of the railway line, the amount of deficiency shall be provided, in the first place, from such Chinese funds as may be available, so as to permit of the uninterrupted continuance of the work of construction, any balance then uncovered being provided by a further foreign loan for the amount required, to be issued by the Corporation. The interest and other conditions of such supplementary loan to be the same as in the present agreement. If after the completion of the line there should be balance at credit of the railway account such unused balance shall be at the disposal of the Ministry of Communications to be used either for the purpose of paying interest on the loan or for other construction work and improvements or equipment of the railway, or for the construction and equipment of branch lines beneficial to the railway.

Article 16. The construction and control of the railway shall be vested entirely in the Chinese Government The directorate general of railways of the [Page 161] Ministry of Communications will appoint a managing director of the railway who will reside in the immediate neighbourhood of the line. The engineer-in-chief, who will be chosen and appointed by the directorate general of railways of the Ministry of Communications with the previous consent of the Corporation, shall be a duly qualified British engineer and shall take orders from the directorate general of railways of the Ministry of Communication and/or the managing director, or his duly authorized representative. The terms of his agreement will be fixed by the directorate general of railways of the Ministry of Communications. His duties will be to make the survey, draw up the plans of the line and make estimates, to direct the efficient and economical execution of the works and to order under the authority of the directorate general of railways of the Ministry of Communications and/or the managing director, or his duly authorized representatives, all the materials and equipment necessary for the exploitation of the railway. He will draw up a list of the necessary Chinese and foreign engineering staff for submission to the managing director and the managing director shall appoint and send them to the engineer-in-chief who shall then assign works to them. Whenever functions of engineering employees, whether Chinese or foreign are to be defined, as well as in the case of their dismissal, the engineer-in-chief shall be empowered to take the necessary action by the directorate general of railways of the Ministry of Communications and/or the managing director or his duly authorized representative. The services of the British engineer-in-chief will be retained during the currency of the loan.

As and when any section of the line is constructed and ready for traffic it will be handed over by the engineer-in-chief to the managing director who will, as far as circumstances permit, open such section to traffic, and the directorate general of railways of the Ministry of Communications will select and appoint a duly qualified British traffic manager acceptable to the Corporation who will be charged during the currency of this loan with the operation of the railway under the orders of the directorate general of railways of the Ministry of Communications and/or the managing director or his duly, authorized representative. The expenses for training a reasonable number of Chinese students in the engineering accounts or traffic departments shall be defrayed by the railway administration.

The railway may maintain a force of Chinese police with Chinese officers, their wages and maintenance to be wholly defrayed as part of the cost of construction and maintenance of the railway. In the event of the railway requiring further protection by the military forces of the Central or Provincial Governments, the same will be duly applied for the railway administration and promptly afforded, it being understood that such military forces shall be maintained at the expense of the Central Government or the Provinces.

Article 17. All receipts and earnings of the line shall be regularly paid into the railway’s account with the Hongkong and Shanghai Banking Corporation, interest on such funds being allowed by the bank at rates to be arranged for current account or fixed deposit as the case may be.

All expenses of working and maintaining the line shall be paid from the receipts and earnings and any remainder thereof shall be charged with the service of the loan. It is hereby agreed that as soon as such surplus receipts suffice to meet the payments of interest and repayments of principal they will be paid to the Hongkong and Shanghai Banking Corporation in equal monthly instalments commencing six months before such payments fall due. If, after payment of working expenses, and making due provision for payment of interest on the bonds, and for repayment of principal due in accordance with the amortization schedule hereto attached, there remain surplus funds unappropriated and properly available for other purposes, such funds shall be at the disposal of the Chinese Government to be used in such manner as the Ministry of Communications may decide.

In the event of there being no surplus funds available as aforesaid from the earnings of the railway the amount required for payments of interest and repayments of principal shall be provided in accordance with the conditions of Article 8 hereinbefore.

Article 18. The corporation will act as agents for the railway and administration during construction for the purchase of all materials, plant and goods required to be imported from abroad. For all important purchase of such materials tenders shall be called for by the directorate general of railways [Page 162] of the Ministry of Communications and/or the managing director, or his duly authorized representative: in the case of all tenders indents and orders for the importation of goods and materials from abroad, the said agents shall purchase the materials required on the terms most advantageous to the railway, and shall charge the original net cost of the same plus a commission of five percent. It is understood that no orders for materials shall be executed or any expenditure incurred without the approval of the managing director or his duly authorized representative, to whom the engineer-in-chief shall apply for sanction.

In return for payment of commission as above stated the Corporation shall be prepared to superintend the purchase of all foreign materials required for the construction and the equipment of the railway, which shall be purchased in the open market at the lowest rate obtainable, it being understood that all such materials shall be of good and satisfactory quality, and that the railway administration shall have the right to reject on arrival in China materials which do not come up to specifications. At equal rates and qualities goods of British manufacture shall be given preference over other goods of foreign origin.

Original invoices and inspectors’ certificates are to be submitted to the railway administration: all return commissions and rebates of every description shall be credited to the railway: and all purchases made by the agents on behalf of the railway shall be supported by manufacturers’ original invoices and inspectors’ certificates.

No commission shall be paid to the agents except as above provided: but it is understood that the railway administration shall provide out of railway funds for the remuneration of consulting engineers, whenever their services are engaged.

With a view to the encouragement of Chinese industries preference will be given, at equal prices and qualities, over British or other foreign goods, to Chinese materials and goods manufactured in China. No commission will be paid to the Corporation on purchases of such materials and goods.

It is understood and agreed that after completion of construction of the railway the Corporation will be given the preference for such agency business, during the currency of the loan, for the supply of foreign materials as the railway administration may require, on terms to be hereafter mutually agreed upon.

Article 19. A branch line from a point on the main line at or near Hweichowfu, passing through Yu Chien, to Hangchow, and a connecting line from the Nanchang Pingshiang section to a point on the Hupei section of the Hukuang Railway, if found by the Chinese Government to be profitable or necessary later on, shall be built by the Chinese Government with funds at their disposal from Chinese sources, and if foreign capital is required preference will be given to the Corporation. The length of such lines shall be determined by the Chinese Government.

Article 20. The Corporation is hereby appointed trustee for the bondholders, and in any future negotiations respecting this loan or matters arising in connection therewith, which may take place between the railway administration and the Corporation, the latter are hereby empowered to represent the bondholders and to act on their behalf.

Article 21. If after the signature of this agreement and before the publication of the prospectus for the issue of the loan, any political or financial crisis should take place by which the market and the prices of existing Chinese Government stocks are so affected as to render, in the opinion of the Corporation, the successful issue of the loan impossible on the terms herein named, the Corporation shall be granted a reasonable extension of time to be mutually agreed upon for the performance of their contract. If within the time limit then determined the loan shall not have been issued, then this contract shall become null and void, and any advances made by the Corporation under the provisions of Article 3 of this agreement shall be repaid by the Chinese Government with accrued interest, but without any other compensation or remuneration whatsoever.

Article 22. The Corporation may subject to all its obligations under this agreement, transfer or delegate all or any of its rights, powers and discretions thereunder to any British company, directors or agents with power of further transfer and subdelegation: such transfer, subtransfer, delegation or sub-delegation to be subject to the approval of the Ministry of Communications.

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Article 23. This agreement having been signed and sealed by the contracting parties will be officially communicated to the Minister of Great Britain in Peking by the Waichiaopu after having been approved by the President of the Chinese Republic.

Article 24. Three sets of this agreement are executed in Chinese and English, two sets to be retained by the Chinese Government and one set by the Corporation.

In the event of any doubt arising regarding the interpretation of the contract the English text shall rule.

Signed at Peking by the contracting parties this thirty-first day of the third month of the third year of the Chinese Republic, corresponding to the thirty-first day of March 1914, Western Calendar.
Chu Ch’i-Ch’ien
,
Minister of Communications
Chou Tzu-Ch’i
,
Minister of Finance
[seals of the ministries of communications and finance]
S. F. Mayers
,
For the British and Chinese Corporation Limited (Seal)