File No. 893. 77/1640
Minister Reinsch to the Secretary of State
Peking, October 13, 1917.
Sir: Referring to previous correspondence in reference to the Hukuang Railways, I have the honor to enclose herewith a copy of a letter under yesterday’s date in which Mr. R. St. Pierre, the Peking representative of the Banque de l’Indo-Chine, suggested cooperation between American and French interests with a view to an arrangement by which they might obtain from the interested British Group a relinquishment of all its interest in the proposed Szechuan section of the Hukuang Railways, thus giving the Americans and French a free hand to construct the section from Hankow to Chengtu, save in so far as it might be deemed that the Germans retain their rights, under the Loan Agreement of May 20, 1911, in that portion of the line from Hankow westward to Ichang.
In conversations with me and with the Secretary of the Legation, Mr. St. Pierre has made clear his view that the existing arrangement for the construction of the Hukuang Railways is in practice unsatisfactory, if not actually impracticable, particularly in respect to its provisions for “impartial preference” in the furnishing of materials, which are in contradiction to the terms of the inter-Bank agreement, and which have already led to serious differences between the American and the British interests concerned; and he has intimated that he considers that a practical solution of the difficulties inherent in the project is to be found only in the abandonment of the unworkable principle of free competition for the supply of materials on all sections, and the reversion to the Tientsin-Pukow system of definite allocations of mileage to each national group, each group to deal as it thinks fit with the section entrusted to it.
[Page 201]So far as concerns American interests, it must be acknowledged that the attempt to establish an indiscriminate joint interest in all of the several sections of the Hukuang Railways has proved disappointing and even humiliating. It will be recalled that, under the original loan agreement, the engineering rights of the French in the western portion of the contemplated Szechuan extension were postponed to the occasion of a supplementary loan which has, of course, not yet been, issued; the American rights in the I—Kwei section have, in the event, been postponed to the necessity of concentrating the American funds upon the completion of that portion of the so-called British section between Hankow (Wuchang) and Changsha; the British section has absorbed the majority of the total proceeds of the loan, in constructing rather less than half of the contemplated line, and has in doing so violated its express obligations to afford American markets an equal opportunity, and contrived to introduce British standards for locomotives even where they had to be obtained from America at a higher cost; and the Germans, until the severance of diplomatic relations by China, went on building their section northwestward from Hankow towards Hsianfu, with little relation to the general Hukuang project, and now, as I have just learned, the Chinese director general of the Hukuang Railways (Dr. Jeme) is proposing to entrust to Mr. Cox—the British engineer-in-chief who has so contemptuously ignored the principle of “impartial preference” and the specific recommendations of the Engineers’ Conference39—the functions of acting engineer-in-chief of the German section. In actual experience, the elaborate internationalization of the Hukuang Railways has thus far resulted in their coming under the preponderant influence of the British; and except for the bankers’ profits on the loan transaction, the advantages expected to accrue in favor of American interests have proved almost wholly illusory. Under these disappointing conditions, it must be acknowledged that it is at least alluring to consider such a proposal as that of Mr. St. Pierre, by which American interests would have determinate and enforceable rights in a section of the very attractive line between the province of Szechuan and navigable water on the Yangtsze River. And this suggestion seems the more fair in that it contemplates the surrender by the French Group of some two hundred kilometers of railway rights to which it is entitled (as against the British) by reason of the violation by the British and Chinese Corporation of the former’s right of participation in the Pukow-Sinyang Railway whereas American interests are called upon only to join in the effort to influence the Chinese Government to arrange for the transfer to British control of the provincial railway from Canton to Shiuchow.
Whether the proposed American and French line into Szechuan should eventually run from Hankow, or from Ichang, to Chengtu, depends upon the question of the validity of German rights in the section from Hankow to Ichang. It would appear that the German rights derivable from the Hukuang Loan Agreement of 1911 may be summarized as follows:
- (a)
- Bankers’ right to participate in the loan, and to issue bonds secured upon the whole property of all sections of the Hukuang Railways. Subject to certain adjustments, indicated by Mr. St. Pierre, in regard to retained proceeds of the loan, this right would appear to remain unimpaired in essence—although presumably all questions of [Page 202] payment on the German issue of bonds, and of security therefor, are postponed until the conclusion of the war.
- (b)
- Engineering rights in respect to the Hankow-Ichang section, during the period of construction. This right in favor of the Germans would perhaps be the most tangible legal obstacle to the taking over, by the Americans and French, of the section between Hankow and Ichang. It may nevertheless be argued that the Germans have exhausted such rights by the expenditure of their portion of the loan funds upon the incomplete construction of a line which in fact only partially conforms to the project contemplated by the agreement. And it may be further urged that the state of war in itself warrants the Chinese Government in assigning to others the execution of the project.
- (c)
- Bankers’ option to participate in a supplementary loan of £4,000,000 for the purposes of the Hukuang Railways. Apart from any question of the extinguishment of such rights by virtue of the existing state of war, it is the fact that the Chinese Government has repeatedly offered to “the Banks”—i. e., to the particular partnership of American, British, French and German Banks—the opportunity to take up this option; and that that combination of interests, as such, has of necessity declined that offer, however willing certain of its individual constituent groups may have been to take it up. I venture to state that it seems to me not merely an arguable thesis, but an irresistible conclusion that, as a legal fact, the option offered to and declined by the consortium of interests in whose favor it was reserved by the Agreement of 1911 is now exhausted and void, so that the Chinese Government would be, from the merely legal standpoint, entirely justified in offering it to anyone whatsoever—although as a matter of obvious policy it would be presumed that the Chinese Government would first consult the representatives of such nationalities as are friendly, which were originally interested in the project.
I beg to request an early expression of the Department’s opinion as to the points of law thus presented in regard to such rights as may be deemed to persist in favor of German interest in the Hukuang Railways.
I beg also to request an opinion as to the legal status, in this matter, of any American organization which might be requested by the Chinese Government to participate with the French (and perhaps British) banking interests in the construction of the Szechuan extension which was originally reserved in favor of “the American Group” jointly with the French and British.
These questions are in a measure hypothetical; but a determination seems necessary for the purpose of effecting some satisfactory arrangement for the realization of the project contemplated by the Hukuang Railroad Agreement of 1911.40
The question of policy involved will be evident, and I venture to hope that the Department will see its way to give such instructions as will enable the Legation to take a definite position in respect to Mr. St. Pierre’s proposal for cooperation between the French Group and American interests in the construction of the section westward from Hankow (or from Ichang) to Chengtu.
I have [etc.]