Papers Relating to the Foreign Relations of the United States, With the Address of the President to Congress December 4, 1917

File No. 893.811/281

Minister Reinsch to the Secretary of State

No. 1759

American Legation,
Peking, November 28, 1917.

Sir: Referring to previous correspondence on the subject of the improvement of the Grand Canal, I have the honor to enclose herewith a copy of “The Chinese Government Grand Canal Improvement Seven per cent (7%) Gold Loan of 1917,” being a contract between the Republic of China and the American International Corporation, dated November 20, 1917, and signed on behalf of the Government by its Director General of Flood Relief and Conservancy, Mr. Hsiung Hsi-ling, and on behalf of the corporation by its duly authorized representative, Mr. W. F. Carey.

There is likewise enclosed herewith a copy of the endorsement of this contract signed by Mr. Carey for the American International Corporation, and Mr. Ono for the Industrial Bank of Japan.

I have [etc.]

Paul S. Reinsch

[Inclosure]

the chinese government grand canal improvement seven per cent (7%) gold loan of 1917

The Chinese Government, for the improvement of the Grand Canal in Shantung and Chihli provinces, to make a public loan for said purpose, and to provide for financing further improvement if necessary, finds the following necessary to be enacted by the Parliament of the Republic of China and to be sanctioned by the President of the Republic of China before this agreement becomes effective:

Whereas, the Chinese Government considers the Grand Canal work in Shantung and Chihli provinces as a part of national conservancy work, to wit, the improvement of that part of the Canal commencing at Pang Chia Kou and Lan huang Pa in the north and ending at Wei Shan Hu and Tai Erh Chuang in the south, such extensions as may be required, work in connection with the valleys of the Yen and Ssu Rivers, the Po River and marshes and other tributaries of the main Canal, and the improvement of the lands thus reclaimed; and oh the date that this agreement becomes effective the agreement executed between the Province of Shantung and the American International Corporation dated April 19, 1916,⁴⁵ is to be canceled.

And whereas, an extension of the work is now provided for which shall extend the North section of the Grand Canal from Tao-chen-pu on the Yellow River to Tientsin via Linching and Tehchow, and improve such extensions and tributaries of the main Canal as may be required.

Therefore, the Directorate General of Flood Relief and Conservancy is hereby authorized and empowered to enter into the following agreement with the American International Corporation and all officers mentioned therein are authorized and empowered to perform the several acts therein stipulated to be done by them.

Article I

1. For the exclusive purpose of financing the improvement work in Shantung and Chihli provinces above mentioned, the Government authorizes the Corporation as its agent to issue a gold loan of 6,000,000 dollars United States Gold Currency (G$6,000,000) on the terms and conditions hereinafter set forth. This loan shall be called the Chinese Government Grand Canal improvement seven per cent (7%) Gold Loan of 1917.

2. This loan and all advances made hereunder shall constitute a direct liability and obligation of the Government, which hereby pledges its good faith and credit for the punctual payment of the principal and interest of the loan and for performance of all undertakings on its part herein assumed.

3. The denomination, wording, design and designation of the currencies of the bonds shall be determined by the Corporation, and all expenses incurred in connection therewith shall be borne by the Corporation, but the cost of engraving and printing the bonds shall be borne by the Government, which shall furnish a facsimile of the signature of the Minister of Finance and the seal of the Ministry of Finance to be engraved on the bond. The Chinese Minister in Washington shall, previous to the issue of the bonds, also furnish a facsimile of his signature and official seal to be engraved on the bonds to signify that said bonds are the binding obligation of the Government.

4. The aggregate amount of the first issue of the bonds shall be for Six Million Dollars United States Gold Currency (G$6,000,000), at ninety per cent (90%), and shall be made en bloc or in series. Nothing herein contained shall prevent the Corporation purchasing all or any part of said bonds itself. Should the funds of this loan not be sufficient for the work the American International Corporation will be applied to for a further issue of bonds on terms to be agreed upon. The time of issue and amount of any and all bond issues hereunder, and provisions for advances and temporary financing, shall be determined by the Corporation in consultation with the Government.

5. All expenses in connection with said Six Million Dollars (G$6,000,000) bonds taken by the Corporation hereunder, or for such portion of future issues as may be taken by the Corporation such as bankers’ commissions, flotation charges, shall be borne by the Corporation.

6. Immediately upon this loan agreement becoming effective, the Corporation will set aside an advancement to the Government to provide for the preliminary expense of the work pending the bond issue herein referred to.

7. The Corporation in consultation with the duly authorized representative of the Government shall decide what is the most favorable moment for the issue of bonds and the duly authorized representative of the Government will 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 and the Corporation shall agree upon a mutually satisfactory plan of temporary financing under an agreement to be negotiated at the time.

If, however, subsequent to any agreement having been reached for the Corporation to issue bonds hereunder and before the publication of the prospectus for such issue or for any series thereof, any political or financial crisis should arise affecting the money markets or the price of Chinese Government securities so as to render impossible in the opinion of the Corporation the successful issue of the bonds at the time agreed upon, then the Corporation upon consultation with the Government 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 stated should be impossible as aforesaid, then the Government and the Corporation shall agree on a mutually satisfactory plan for temporary financing to provide, as far as possible, for the uninterrupted continuance of construction.

8. Under extraordinary circumstances, should the bond issue or temporary financing or advancing be impracticable, and/or in case the Corporation has make previous advances and/or bond issues and then is unable to make further advances, after one (1) year this loan may be declared concluded and the Government will repay the advance, if any, and/or bond issues, if any, together with the legitimate interest within three (3) months, after which the contract shall become null and void.

9. All details of the prospectus for the present issue and any other issues, and of loan service, not provided for specifically herein shall be arranged by the Corporation in consultation with the Chinese Minister at Washington.

Article II

1. The rate of interest for the present issue shall be seven per cent (7%) per annum computed from the dates of the bonds, which dates shall be the dates of issue. It shall be paid semiannually in the manner hereinafter provided. Unused funds on fixed deposit in China with the International Banking Corporation shall bear interest at current rates, and the unused balance deposited in America shall bear interest at the rate of two percent (2%) per annum.

2. After the appointment of a director general for this work the Corporation will place said advancement, and after issue or issues of the bonds the proceeds thereof, to the credit of the Grand Canal Conservancy account, to be transferred to China in necessary instalments from time to time through and to be held on deposit in China with the International Banking Corporation pending their transfer to the works. When, after the appointment of the director general and the chief engineer, it shall be possible to proceed with improvement work, there shall be transferred to the International Banking Corporation at Tientsin or Shanghai and put to the credit of the Grand Canal Conservancy Account a sum sufficient to meet six months (6) estimated expenditure in advance, which sum shall be determined by the chief engineer in consultation with the contractors and submitted to the director general for approval, and shall be maintained by subsequent monthly transfers so that so far as possible there will always be six (6) months estimated expenditure in China on deposit with the International Banking Corporation.

3. Working funds transferred to the works shall be deposited in and operated through some responsible bank in China designated by the Government.

4. The cost of all transfers of all funds of whatsoever nature to, from, and in China shall be borne by the Government and included in the rate of exchange to be settled either on the date of transfer or prior thereto as mutually agreed upon between the Government and the International Banking Corporation.

5. The Government shall at all times during construction keep the contractors in funds to meet expenses under this contract; and the contractors shall, not less than seven (7) days before the end of each month, furnish the director general with a lump sum requisition showing the amounts required to be expended for all purposes of the contract work during the then ensuing month. Such requisitions shall be paid by the auditor to the contractors minus any balances then in the hands of the contractors not then expended, after they have been approved by the chief engineer and signed by the director general to signify his approval. Thereupon the contractors shall expend the same only in accordance with the plan prepared and agreed upon as stipulated in Article VI. Funds for the general expense of the Head Works Bureau hereinafter referred to shall be held by the Accounting Department of the Head Works Bureau. A budget of the general expense for each ensuing month shall be agreed upon by the Auditor and contractor and disbursed by the auditor upon requisitions approved and signed by the director general.

6. The Canal Head Works Bureau and Canal Conservancy Bureau and the contractors shall at all times keep proper and correct books in English, showing all transactions of income and expenditure in detail and by items, and both parties shall always have access to and the right to inspect such accounts.

Article III

1. The term of this present issue shall be twenty (20) years. This issue shall be redeemed in fifteen (15) equal, annual installments, dating from the expiry of the 5th year of the issue, by drawings which shall be held in New York at the National City Bank of New York, which is hereby appointed trustee for the bondholders, in conformity with the amortization table annexed hereto. The serial numbers of bonds drawn shall be published in four (4) daily newspapers at the cost of the Corporation. All interest and amortization payments shall be made in gold, by the National City Bank, and at such places as may be designated by it in such public notice. Bonds presented for payment must be surrendered together with their proper coupons, if any. Interest on drawn bonds ceases on the day of drawing.

2. For reimbursement in connection with the payments of interest and repayments of principal of the loans the National City Bank of New York shall receive a commission of one-quarter of one per cent (¼%) from the Government on the annual loan service, such commission to be paid half-yearly simultaneously with the interest payments and repayments of principal in accordance with the amortization table hereto annexed.

3. If after five (5) years from the respective dates of these loans the Government should desire to redeem the whole or any portion thereof not then redeemed it may do so by paying an addition of one and one-half per cent (1½%) on the par value of the bonds not then redeemed. But in each and every case of such extra redemption the Government shall give six (6) months previous notice in writing to the trustee, and such extra redemption shall be effected by additional drawings, as provided for in the prospectuses of the loans. The redeemed bonds and interest coupons, if any, will be received and canceled by the trustee when they shall be presented for payment at the place designated by the trustee.

4. A Loan Service Account shall be established and maintained in the International Banking Corporation, Peking, during the life of the loan subject to the order of the auditor. In this account shall be deposited from the Special Revenue Account hereinafter referred to fifteen (15) days before each due date, amounts in silver sufficient to meet the interest and amortization payments in gold dollars in New York, or in gold of the national currency of such other places as may be designated by the trustee, which shall be transferred to place of payment through the International Banking Corporation. If the funds of the Special Revenue Account should be insufficient, the deficiency will be made up by funds transferred from the stamp duties, or in defect thereof from other sources. Said Loan Service Account shall at all times be sufficient in amount for six (6) months’ use.

Article IV

1. This loan and all advances and temporary financing are hereby secured by—

(a) The lands to be reclaimed by the work done hereunder owned by the Government, which the Goverment declared to be approximately three hundred thousand (300,000) mow; and all revenues derived or to be derived by the Government from Government lands affected by the work; also all proceeds from the sale, lease, and/or taxation of all reclaimed and/or improved lands, as well as any special taxes which may be levied by the Government on lands benefited by this work.

(b) All taxes derived or to be derived from all other lands affected by this improvement, which the Government estimates to be an approximate area of five hundred thousand (500,000) mow.

The Government hereby certifies that the estimated area of the above-named districts amounts approximately to eight hundred thousand (800,000) mow, and the area is to be confirmed by a map after an actual survey and furnished the Corporation.

(c) All tolls and taxes derived or to be derived from the use of the section of the Grand Canal improved under this contract, during the life of this loan.

(d) All property purchased or constructed with loan funds.

2. The foregoing property and revenues are not now pledged for any other loan or financial obligation; and so long as this loan or any part thereof shall remain unredeemed, it shall have priority both as regards principal and interest over all future loans and obligations charged thereon and said security shall not be impaired or injured by taxes, likin, imposts, royalties, or in any other manner.

3. All receipts in connection with the securities above mentioned shall be handled by the Head Works Bureau during construction and by the Conservancy Bureau hereinafter mentioned, during the remainder of the life of the loan, and shall be transferred by the Bank of China, if practicable, to and be deposited in a Special Revenue Account in the International Banking Corporation, Peking, Shanghai and/or Tientsin, pending transfer to the Loan Services Account as above-mentioned on the order of the auditor to meet payments due for interest and amortization. After providing for said Loan Service Account, any surplus left from said receipts shall be used, first for the maintenance of the Canal, which shall be maintained in good condition, and second, to be placed at the disposal of the Government.

4. Should the revenue herein pledged be insufficient to meet the amounts required for interest, amortization, loan service, exchange, maintenance of the Canal, or any other obligation of this contract, the Government hereby agrees to make up the deficiency from other sources, and among them specially allocates for this purpose a sufficient portion of the stamp duties levied by virtue of an Act promulgated on October 21, 1912, called the “Yin Hua Shui” as a reserve fund which is free from all encumbrance excepting a pledge of five hundred thousand dollars (Py. $500,000) local currency which is set aside as a reserve fund secondary to the deeds tax for a domestic loan; and during the life of this loan nothing shall be done with respect to the stamp duties which will in any way impair the value or safety of the reserve fund hereby provided.

Article V

1. The Siems-Carey Railway & Canal Co. is hereby recommended and accepted as the contractor for the work of improvement of the Grand Canal provided for under this contract. It shall have charge and control of everything in connection with the engineering and construction work, shall perform the same efficiently, economically and speedily according to plans made by the chief engineer and approved by the director general who shall send them to the contractors for their approval and execution; shall make all purchases, carefully storing, protecting, and issuing for use all purchases during construction; and shall receive as their sole remuneration a sum equal to ten per cent (10%) of the total amount expended for all purposes including head office expenses, as profits, which sum shall be paid to the contractors in monthly payments at the end of each month’s work, requisitions therefore being based on accounts approved by the auditor and submitted to the director general for his approval and signature.

2. The Government will provide sufficient protection for the work and all properties of the contractors and/or Corporation as well as for Chinese and foreigners employed thereon.

3. In the purchase of materials preference shall be given to Chinese materials when price and quality are at least equal; otherwise American materials and machines may be used when the price does not exceed the price of the same quality in other foreign markets.

4. All necessary imports for the purpose of this improvement shall be exempt from duties, taxes and imposts.

5. The work on the Shantung section shall be completed within thirty (30) months from the date of payment of the first estimate to the contractors, unless delayed by some unforeseen occurrence.

Article VI

1. The director general is hereby appointed by the Government and acts as its representative respecting the work to be done hereunder. He shall, upon the commencement of this work, establish at Tsi-ning-hsien and maintain there or at such other place as may be convenient, a bureau known during construction as the Head Works Bureau and afterwards during the life of the loan as the Canal Conservancy Bureau. In this bureau there shall be three (3) responsible departments, viz:

(1) A General Affairs Department with an officer in charge appointed by the director general. This department shall take charge of all work in connection with miscellaneous affairs.

(2) An Engineering Department in charge of an American chief engineer during and until completion of construction, and afterwards during the life of any and all bonds, in charge of a Chinese engineer.

Both engineers shall be appointed, removed, and/or replaced by the director general upon consultation with and/or upon the recommenation of the Corporation, and shall always be persons nominated by the Corporation and whose professional reputation and experience are first-class.

During construction said American chief engineer shall be the inspector and consulting engineer of the Government for this work. He shall, with the approval of the contractors, make all plans of improvement and drainage contemplated. If the work planned appears not feasible or the cost not reasonable to the contractors, the director general will cause the plans to be revised to make them feasible and the cost reasonable as aforesaid. The work must be performed to the satisfaction of the chief engineer, and he shall have power to refuse his approval to lump sum requisitions until he is satisfied that the work is or will be performed according to the plans above specified. The director general’s approval and signature must be obtained by the chief engineer on all lump sum requisitions of the contractors. The director general or his representative shall have full powers of inspection of the work at any time. Upon completion of the Canal improvement work, the Chinese chief engineer will supervise the maintenance of the Canal, which shall be maintained in good condition.

(3) An Accounts Department in charge of an American auditor appointed, removed, and/or replaced by the director general upon consultation with and/or upon the recommendation of the Corporation, and who shall always during the life of the loan by [be?] an American nominated by the Corporation.

This auditor shall have charge of all receipts and disbursements in connection with the fulfillment of this agreement and shall supervise the collection of the revenues pledged excepting the stamp duties during the life of the loan. He shall attend to the transfers of funds to, from, and in China. He shall make all withdrawals of loan funds; but only upon requisitions bearing the proper signatures herein provided for. He shall, as herein stated, handle the payment of the interest and amortization charges, the payment of maintenance and operating costs, and turn over the balance of the revenue above the amount required to be kept in the Loan Service Account to the Government.

2. Should the American auditor have suggestions to make regarding the revenues he may lay them before the director general who shall, if they are practicable, put them into execution.

3. No subordinate officer shall be appointed in any of said departments until after the approval of the director general has been secured.

4. Should the Government desire to engage advisors relating to the reclaiming of land, managing reclaimed land, and developing the communication facilities of the Grand Canal, it will request the Corporation to recommend suitable persons for approval and appointment.

5. The salaries of the chief engineer and auditor shall be arranged between the director general and the Corporation.

Article VII

1. If there should be a breach of this agreement, then air the revenues pledged as security shall, upon request of the Corporation, be transferred to and administered by the Corporation or the Maritime Customs in the interest of the bondholders.

Article VIII

1. In the event of any bond or bonds issued by this loan being lost, stolen, or destroyed, the Corporation may notify the Chinese Minister at Washington who shall authorize the Corporation to insert an advertisement in four (4) newspapers stating that the payment of such bond or bonds had been stopped, and to take such other steps as may appear advisable or necessary according to the laws and customs of the country concerned. Should any bond or bonds be destroyed, or should such lost or stolen bond or bonds not be recovered after a lapse of time fixed by the Corporation, the Chinese Minister at Washington shall execute a duplicate bond or duplicate bonds for a like amount and deliver the same to the Corporation, representing the owner or owners of such lost, stolen or destroyed bond or bonds, which Corporation shall pay all expenses in connection with such delivery and execution of such duplicate bond or bonds for the account of the owner or owners of such bond or bonds.

2. All bonds, coupons and payments made and received in connection with the service of this loan shall be exempt from all Chinese taxes and imposts during the currency of this loan.

Article IX

1. Of the six million dollars (G$6,000,000) of bonds to be issued, three million five hundred thousand dollars (G$3,500,000) shall be issued in America and two million five hundred thousand (G$2,500,000) thereof may be issued elsewhere. Any portion or series thereof and any increase thereof shall be issued in the same proportion.

2. The Corporation may, with the approval of the Chinese Government, transfer or delegate any part of its rights and power hereunder, provided that the control of the Engineering Department, Accounts Department and Contracting control shall not be transferred or delegated to any foreign national other than American.

Article X

1. In the event that in the future money is to be borrowed to improve the section of the Grand Canal from Tai-Chuang to Chinkiang in Kiangsu Province, application therefor will be first made to the American International Corporation.

Article XI

1. This agreement shall be executed in quadruplicate in the Chinese and English languages, each text being a correct translation of the other. In the event of any dispute arising at any time respecting the construction or meaning of this agreement, the English text shall prevail.

2. One copy of both Chinese and English texts of this agreement shall be delivered to and held by each of the following:

(1) The Directorate General of Flood Relief and Conservancy.

(2) The Ministry of Foreign Affairs.

(3) The American Legation, Peking.

(4) The Corporation.

Article XII

1. This agreement shall take effect on the date of transmission of a copy thereof by the Ministry of Foreign Affairs of the Government to the Legation of the United States of America at Peking.

Seal of Director General of Flood Relief Conservancy.

In witness whereof, the Government of the Republic of China and the American International Corporation have caused this instrument to be executed by the Director General of Flood Relief and Conservancy and the Representative of the Corporation respectively at Peking, China, this 20th day of November, A. D. 1917.

Republic of China,

By its Director General of Flood Relief and Conservancy,

Hsiung Hsi-ling

American International Corporation

By its duly authorized representative

W. F. Carey

Witnesses:

F. C. Hitchcock

T. S. Wei

endorsement

It is mutually agreed between the American International Corporation and the Industrial Bank of Japan that the attached copy of contract between the Government of the Republic of China and the American International Corporation is in conformity to the agreement entered into between said Corporation and said Bank at New York “for cooperation, with the approval of the Chinese Government, in undertaking the improvement of the sections of the Grand Canal in the Provinces of Shantung and Kiangsu in the Republic of China” as amended by cables and by talks with Mr. Y. Ono.

Signed and sealed at Peking, China, this 20th day of November, 1917.

American International Corporation,

By its duly authorized representative,

W. F. Carey

Industrial Bank of Japan,

By its duly authorized Vice President,

Y. Ono

Witnesses:

C. C. Lincoln

K. Debuchi

45. For. Rel. 1916, p. 115.