File No. 893.77/1569

Minister Reinsch to the Secretary of State

No. 1244

Sir: In continuation of my despatches Nos. 1082 and 1118, of May 17 and June 14, respectively, I have the honor to report further concerning the agreement between the Chinese Government and the American firm of Siems-Carey Company for the construction of railways. I am herewith transmitting a copy of the original agreement, with annexes, signed May 17 last,20 as well as a copy of the supplementary agreement, signed on the 29th ultimo. The conclusion of the original contract was formally notified to the Legation, on June 10 last, through the Foreign Office.

There is also enclosed a translation of the mandate, issued on the 20th instant, by which the President gives his approval to the supplementary agreement of September 29.

While the contract had been completed and formally sanctioned, as well as notified to the Legation by June 10, when the last Cabinet under President Yuan Shih-kai was still in existence, the changes in the political situation consequent upon the death of President Yuan rendered it questionable whether the contract would be executed promptly and without considerable opposition. While his excellency Tsao Ju-lin was still holding office as Minister of Communications and Acting Minister for Foreign Affairs, the American International Corporation, acting as the partners of Siems-Carey Company in this matter, undertook to finance the contract and to make a preliminary advance of G$500,000. The subsequent acceptance of this advance by the Minister of Communications, made at a time when the complexion of the Cabinet had already changed, marked the acceptance of the contract by the first Cabinet of President Li Yuang-hung. While the contract was considered absolutely [Page 193] binding with its communication to the Legation by the Foreign Office on June 10, nevertheless the question of its execution had been taken up by the new Cabinet, of which his excellency General Tuan Chi-jui was Premier and in which his excellency Dr. Chen Chin-tao filled the position of Minister of Finance. During this transition period and subsequently, the good will borne towards American interests by both of these high officials counted for a great deal in bringing about the rapid conclusion of the supplementary arrangements necessary for the smooth execution of the contract.

On June 30 the appointment was announced of his excellency Hsu Shih-ying, as Minister of Communications, in place of his excellency Tsao Ju-lin. The Cabinet had now been more radically constituted through the entry of Messrs. Sung Hung-yi, Ku Chung-hsiu, and Chang Yao-tseng. The attitude which these new men would take towards the execution of the contract was uncertain; the new Minister of Communications, however, showed himself friendly from the start. He stated that in order to assure the smooth working of the contract, he would, acting under Article 17 of the original Agreement, suggest certain modifications. In three interviews with the American Minister in July and August—particularly in the interview of August 22—the Minister of Communications admitted that the contract was complete and binding in its form at the time; but he took the ground that obstruction would be avoided and smooth working assured if certain concessions were made. The chief concessions asked for by the Minister of Communications were the reduction of mileage of the first allotment from fifteen hundred to eleven hundred miles, and reduction of the percentage of participation of the company in the revenues of the railway from twenty-five to twenty per cent. After negotiations extending through the months of August and September, the supplementary agreement of September 29 was concluded in which the concessions asked for were made by the American company, and by which certain matters relating to the financial operations and to the appointment of officials were settled to the satisfaction of both parties.

An agreement had been reached by September 21, at which time I directed to the Minister of Communications a note, of which a copy is herewith enclosed.

There had been some discussion as to whether the contract would have to be submitted to Parliament for its approval. On this point the Legation took the position that as the contract had in its original form being entirely completed before the reconvocation of Parliament, it could not be singled out from all the treaties and agreements, more than sixty in number, concluded without the consent of Parliament since the formation of the Republic. A list of these treaties, contracts, etc., is forwarded with my No. 1243 of today’s date to the Department.2

While there were some voices in the Cabinet which demanded a submission of the contract to Parliament, ministers like General Tuan Chi-jui and Dr. Chen Chin-tao took the positive ground that such a submission could not be made without bringing before Parliament the question of all contracts made before its reconvocation. [Page 194] The contract was therefore not submitted to Parliament, the Minister of Communications only holding himself ready to answer questions in respect to it should they be asked. Parliament having been very busy with questions of internal politics and with such matters as the Japanese inroads in Manchuria, and the forced extension of the French settlement in Tientsin, the contract has thus far not been mentioned in Parliament.

With respect to the approval of His Excellency the President, the Minister of Communications stated to me that he had requested this in order that there might be no doubt of the active approval by the President of an agreement originally made in the time of his predecessor.

While the negotiations for this contract were beset with perhaps unequalled difficulties from the beginning, on account of the disturbed and shifting political situation, the details of the matter were handled with great ability by Mr. Roy S. Anderson, the representative of the Siems-Carey Company, under the personal direction of Mr. W. F. Carey himself, who impressed the Chinese particularly with his sense of justice and fair play. It is the object of Mr. Carey to create an American enterprise which will take advantage of American methods and experience in solving problems of construction, development and management, similar to those which have been encountered in America. It is not his idea to aim purely for construction profits, but to create an undertaking which in all its parts will be permanently successful. He was therefore willing to stake the second allotment of fifteen hundred miles upon the success of the first alignment. Mr. Carey acts on the principle that in enterprises of this importance, everything depends upon the efficiency of the human organization created; he has therefore spared neither pains nor expense to gather in the United States a group of construction and railway experts of the highest order, who are to carry out this work. The general manager for Siems-Carey Company is Mr. Frederick C. Hitchcock, formerly of Messrs. McArthur Brothers and Company.

With respect to the alignments of railway agreed upon, they do not, of course, equal in attractiveness such great trunk lines as the Peking-Hankow Railway and the Shanghai-Nanking Railway. When all the mileage already assigned to Great Britain, France, Germany, Belgium, etc., on which construction is now indefinitely postponed on account of the war, is considered, it may seem as though only lines of decidedly minor attractiveness could be left. This would indeed be true should the nations to whom concessions have been made be permitted to claim very broad rights of excluding other railway enterprises in the same general regions where their concessions are. It may be necessary at this point to establish a criterion as to what shall be considered undue paralleling of a railway such as could be justly objected to by a country to whom the prior concession has been made.

In connection with the above matter, the character of the American enterprise is of much importance; it must be remembered that the sole security of the American company is the railway itself—no additional securities have been assigned; moreover, as pointed out above, the enterprise is not confined to construction, but includes [Page 195] a share in the operation and management after the lines are completed. For these reasons, the American company will not consider building a railway which is not commercially sufficiently promising to afford both adequate security and assurance of profitable operation. These facts are in themselves a sufficient safeguard against a duplicating of the existing or ceded lines, which might be undertaken if the American corporation were assured of construction profits wherever, no matter where, the lines might be built. Should, therefore, protests be made on the ground of duplication, it would appear to be just and sound to take the position that the commercial prospects of any given line should control.

Returning now to the alignments enumerated in the agreement, no doubt is entertained here concerning the importance and the profitableness of the railway from Hengchow (Hunan) to Nanning (Kwangsi). With respect, however, to the other railways, the question of commercial soundness can be determined only through preliminary surveys, which are presently to be undertaken. Other lines are under consideration for substitution should, upon due investigation, it appear inadvisable to proceed with the construction of any of the lines enumerated.

The conclusion of so favorable a contract at this time, without obstruction or delay, is eloquent evidence of the good will which the Chinese people and officials bear toward American enterprise. Aside from the high officials mentioned above, among whom his excellency Tsao Ju-lin showed special readiness to take responsibility for advanced action, all the minor officials who were concerned in the negotiations showed a friendly and helpful spirit. This is true particularly of Mr. Chuan Liang, counsellor, and Mr. Jen Chuan-pang, confidential secretary, in the Ministry of Communications.

I have [etc.]

Paul S. Reinsch
[Inclosure 1]

Minister Reinsch to the Minister of Communications

Excellency: I have been informed by Messrs. Siems, Carey and Company that this corporation has accepted the modifications which were suggested by your excellency to be made in the contract signed between the Chinese Government and the said corporation on May 17, 1916, and communicated to me by the Ministry of Foreign Affairs on June 10 last.

I am gratified that the American corporation has found it possible to make this arrangement as desired by your excellency, in the spirit of fostering the most complete cooperation between your excellency’s Government and the parties to the contract.

It is also gratifying that now the work on this important enterprise will be immediately commenced, according to the assurances given to me by your excellency personally.

I avail [etc.]

Paul S. Reinsch
[Inclosure 2]

Supplementary Agreement

This supplementary agreement is made according to Article Seventeen (17) of the original agreement, signed May 17th, 1916, between the Government of the Republic of China, represented by its Minister of Communications, and [Page 196] Siems and Carey, represented by Mr. William F. Carey, and it is hereby agreed as follows:—

1. —Article One (1) of said agreement which provides that fifteen hundred (1500) miles of railway be constructed shall be amended so that wherever said mileage appears as fifteen hundred (1500 miles, it shall be eleven hundred (1100) miles.

2. —In the second article of the supplement to said agreement addressed to the Minister of Communications of the Republic of China dated May 17th, 1916, and also in any other part of said agreement or its supplement where the percentum of the net profits derived from operation of said railways to be paid for handling bonds is fixed at twenty-five (25) percentum, the same shall be amended and reduced to twenty (20) percentum.

3. —The first paragraph of Article Four (4) of the original agreement, shall be modified and reformed to read as follows:

So soon as the Government of the Republic of China and Siems and Carey, or their assigns, shall have determined any line that shall be first constructed, estimates of the cost of constructing and equipping such line shall be agreed upon between them and the Government, and gold bonds of the amounts required by such estimates shall be issued. As soon as the authority to issue such bonds is given by the Government of the Republic of China, Siems and Carey, or their appointees or assigns, on behalf of and as agents for the Government of the Republic of China in this matter, shall issue such bonds as hereinafter provided, such issue to be either en bloc or in series as may be mutually agreed upon.

The same procedure shall be likewise followed as to the issuance of bonds to provide funds for the construction of all other lines which it shall be mutually determined to build. The Government of the Republic of China and Siems and Carey, or their appointees or assigns, as its agent, will at the time of the first issue and of every other issue, enter into such necessary further and supplementary stipulations and agreements regarding the character and issuance of such bonds and also the deposit and transfer of the loan proceeds as the exigencies of the financial situation may at the time require for the proper economical and successful flotation of the bonds.

Such bonds or other obligations hereinafter provided for shall be issued at such time, and in such amounts as will insure the continuous economical construction of the railways until the same are completed.

4. —To the article numbered five (5) of the original agreement shall be added the following amendments:

The bonds provided for in article numbered four (4) hereof shall be issued by Siems and Carey, or their appointees or assigns, for and in behalf of, and as agent for the Government of the Republic of China at a price to be fixed by said agent upon consultation with the duly authorized representative of the Republic of China, and said Siems and Carey shall use their best efforts to have said bonds sold for the highest possible price.

When the construction and equipment of a line of railroad has been determined upon, and the estimates covering such construction and equipment have been agreed to as hereinbefore provided, said agent in consultation with the duly authorized representative of the Government of the Republic of China, shall decide what is the most favorable moment for the issue of the bonds, and the duly authorized representative of the Government of the Republic of China shall give the necessary instructions to the Chinese Minister in Washington. If at such time so determined the issue of such bonds on the terms named herein or agreed upon would be impossible, then in such case the Government of the Republic of China and said agent shall agree upon a mutually satisfactory plan of temporary financing through the issue of Chinese Government 5-year Treasury bills at the rate of interest and discount to be agreed upon. Such notes shall be repaid from the proceeds of the sale of bonds to be issued, when the conditions for the sale of Chinese long-term obligations shall have sufficiently improved, such long-term obligations to be issued under an agreement to be negotiated at the time.

If, however, subsequent to an agreement having been reached, it issue bonds hereunder before the publication of the prospectus for such issue, or of any series thereof, any political or financial crisis should arise affecting the money markets or the prices of Chinese Government securities so as to render impossible, in the opinion of the agent, the successful issue of the bonds at the time agreed upon, then the said agent upon consultation with the Chinese Government [Page 197] respecting the period of time, shall be granted a reasonable extension for the performance of its contract. If within the time limit to be arranged, the issue of Chinese bonds on the conditions hereinbefore set forth should be impossible, then the Government of the Republic of China and its said agent, shall agree on a mutually satisfactory plan for temporary financing to provide as far as possible for the uninterrupted continuance of construction.

5. —After the first paragraph of article numbered eight (8) of the original agreement the following paragraph shall be inserted:

Of the three (3) officers, the engineer-in-chief shall be appointed immediately, the auditor as soon as required, and the traffic manager when required for operation. Their terms of office shall be during the life of the loans. With regard to the employment of all other officers, the number of them, the scale of their salaries, and the method of appointment, the director general or managing director shall in consultation and mutual agreement with said three heads of department respectively decide upon a plan. Which plan shall be followed.

The director general or managing director shall reserve the right to employ his own office staff.

6. —The Government of the Republic of China undertakes during the life of the bonds to be issued hereunder to treat the railways contemplated under this agreement in the same spirit of fairness in which all other Chinese Government railways are treated.

7. —All bonds and coupons and all payments made and received in connection with the service of any and all bonds issued hereunder, shall be exempt from all Chinese taxes and imposts of whatsoever nature during the life of said bonds or of any of them.

8. —All of the uniform laws, by-laws, rules and regulations applicable to all Government railways in China promulgated by the Ministry of Communications, shall be observed by the railways built under this agreement.

9. —The rights and duties of the Government of the Republic of China and of Siems and Carey, their appointees or assigns, shall be effective upon the day on which the agreement and all supplementary agreements are contracted and until complete redemption of all bonds.

10. —After any line of railway has been agreed upon the survey thereof will be immediately made. All necessary expenses thereof will be paid out of the advancement already made. If after the survey is completed neither the bonds can be issued hereunder, nor funds for temporary financing according to this supplemental agreement are available within one (1) year, the contract may be cancelled. In that event said advancement shall be repaid with interest stipulated, unpaid up to that time, by the Government of the Republic of China, before cancellation thereof.

Signed and sealed at Peking by the contracting parties this twenty-ninth day of the ninth month of the fifth year of the Republic of China, being the twenty-ninth day of September, 1916, western calendar.
The Government of the Republic of China,
By—— ——, Its Minister of Communication
Siems and Carey,

By —— ——, One of the Partners
—— ——
———— ————
[Inclosure 3]

Presidential Mandate, Published in the Official Gazette, Sunday, October 22, 1916.

Hsu Shih-ying, the Minister of Communications, reports that he has made an agreement with American merchants for the construction of railways. In accordance with the terms of Article 17, certain additions have now been made. Also a supplementary agreement has been submitted for approval.

The agreement which has been entered into is approved and action should be taken in accordance therewith. Let the Ministry concerned notify the Ministry of Foreign Affairs and the Ministry of Finance.

Seal of the President
  1. Printed ante, p. 183.
  2. Not printed.