File No. 893.77/1542

Minister Reinsch to the Secretary of State

No. 1082

Sir: I have the honor to send a report, in a preliminary way, upon an agreement for a railway concession concluded to-day between the Chinese Government, through H. E. Tsao Ju-lin, Minister of Communications, and Mr. W. F. Carey, of Siems-Carey and Company, Ltd. A more complete report will follow by the next mail.

Negotiations have been proceeding for some time between the Minister of Communications and Mr. Carey. Mr. Liang Tun-yen, the former Minister, who had always been favorable to granting a concession to Americans, had designated Dr. C. C. Wang to carry on the preliminary negotiations; the question of lines, the construction of which might profitably be undertaken, was discussed with him. Upon the assumption of office by H. E. Tsao Ju-lin, he immediately interested himself personally in the negotiations, which after a careful discussion of every point, were brought to a succesful conclusion to-day in the form of an exchange of letters between the Ministry of Communications and Mr. Carey, in which the conditions of the definitive contract are laid down and agreed upon.

The main conditions of the contract are as follows: Railway lines aggregating fifteen hundred miles are to be constructed and financed by the American corporation. The principal lines are: (1) from Kwei-Sui in north Shansi, up through the Hwang-Ho valley to Lan-Chow in Kansu; (2) a line connecting a number of important [Page 180] interior trade marts, between Kai-feng in Honan and Suchow in Anhwei; (3) from Hanchow to Wen-chow in Chekiang Province. It is agreed that should obstacles arise to prevent the construction of these lines, an equal mileage will be assigned elsewhere. The American interests are to furnish the capital necessary for the construction of these lines, providing that not less than $1,000,000 nor more than $10,000,000 shall be furnished per annum, according to the state of the market. The construction of the railways is to be carried out under supervision of an American construction company. The American interests are to receive 8 per cent commission on the cost of materials. With respect to the latter, a preference is to be given to Chinese and American materials, provided the price is not higher than that of materials from other sources. When construction is completed, the railways are to be operated under an American engineer in chief, traffic manager, and auditor; and during the life of the bonds, which run for fifty years, the American corporation is to receive participation in the income of the railways to the extent of one-quarter of the net revenue, after a deduction of all charges, expenses, and betterment funds.

The contract constitutes a new departure in the practice of Chinese railway agreements on two very important points. The method of putting the construction in charge of an expert company, which is to receive a commission as its remuneration, has never been used in China, although common elsewhere, and proposed here first by Lord ffrench of the Pauling firm, and then by the representative of the Pearsons. The Chinese have hitherto not admitted that they had anything to gain by employing expert talent in this capacity. The former Minister of Communications, H. E. Chou Tzu-chi, in 1914 had practically accepted the method, when his place was taken by H. E. Liang Tun-yen, who was decidedly opposed to it. Towards the end of his term, he became more ready to discuss the matter. His successor, H. E. Tsao Ju-lin, the present Minister, takes the position that it will be advantageous for the Chinese, not only to engage the best foreign expert knowledge obtainable in the management of railway construction, but he is also in favor of interesting foreign capital more permanently in the welfare of Chinese railway enterprises, by giving them a participating interest, as well as the control of the technical management, in the operation of railways. It is believed, by thus identifying progressive foreign interests with the welfare of a certain railway line, the advantage will extend, not only to the development of the whole region served by the railway, and all its resources and activities. There has hitherto been no such concession policy of developing railway traffic through the introduction of improvements throughout the whole region.

The preliminary agreement also provides that should the method of construction prove more favorable than that hitherto employed on the Chinese railways, and should the method of operation prove more profitable, a grant of a further fifteen hundred miles shall then be made upon the same conditions. The total investment contemplated thus aggregates $75,000,000 or double the amount if the enterprise is as successful as is anticipated.

The concession offers an unequaled opportunity for the participation of American expertship, energy, and capital in Chinese railway [Page 181] building. Under the terms of the contract, the American management will actually have a free hand to introduce efficient and scientific means of management, and a real opportunity will be afforded to show what Americans, trained in handling similar problems at home, can do by way of giving China a well managed and efficient railway system.

I have [etc.]

Paul S. Reinsch