Papers Relating to the Foreign Relations of the United States, 1918
File No. 893.00/2925
The Minister in China ( Reinsch) to the Secretary of State
Sir: I have the honor to enclose herewith the third quarterly report of conditions and events in China, for the period from July to September 1918, inclusive, prepared by Mr. MacMurray, who was in charge of the Legation during that period. …
I have [etc.]
Third quarterly report of conditions and events in China
I. Political Information
a. domestic
1. Political observations and developments
The quarter under review represents what, it is to be hoped, will prove the lowest ebb in the national and political life of China; in it, the disintegration of governmental authority, and its perversion to the profit of a small clique of military leaders, reached a development that was a reductio ad absurdum of the [Page 122] whole practice of government in China at the present time. As was pointed out in the Minister’s second quarterly report, there is a type of military leaders to whom war is a pecuniary business rather than a profession. To the tuchuns of this type, the possession of armed forces is an asset in the nature of a claim upon the Government for the maintenance of those forces as well as a means for impressing upon the Government the urgency of such claims; in general, their troops are neither in actual numbers so considerable as represented by the respective leaders, nor are they in training or equipment adequate for serious military operations, but by their mere existence in readiness for a hypothetical military purpose, they contribute to the political prestige of their respective leaders, in addition to being of financial profit. It is, of course, necessary as a warrant for their existence, however, that there should be some plausible military objective in view; and for this purpose the war between North and South has for the leaders of this type on both sides constituted the most acceptable and satisfactory occasion to warrant the continuance of the system which has, during the past few months, so greatly developed and increased its influence in the politics of China. The civil war has, therefore, become in the minds of most of the tuchuns a vested interest which they have not been prepared to relinquish for the sake of national unity or for the sake of saving their country the enormous waste of money and resources and the even more serious disadvantage of having to obtain the necessary funds, by the only means immediately available, from foreign interests which have exacted rather far-reaching political commitments in exchange for such accommodation.
The continuance of the civil war has not, however, involved any very considerable military operations during the period under review; except for operations of no great significance in Szechwan, Hunan, and Fukien, there has throughout this period been a virtual truce between the contending armies.
While this somewhat technical condition of war suffices as an occasion for the tinsel militarism which the tuchuns make their trade, it is of course impossible for that trade to thrive solely upon local perquisition, and the means for carrying it on must therefore necessarily be found elsewhere. It is generally reckoned that during the summer, the maintenance of the forces commanded by the tuchuns ranged on the Northern side has cost between $10,000,000 and $15,000,000 per month in excess of the available revenues of the Peking Government. The deficit has, of course, had to be made up by foreign loans, and for the time being no loans for that purpose were available from any but Japanese sources; and even as among Japanese sources, the official group (represented by the Yokohama Specie Bank) was precluded from making independent loans to the Chinese Government for political purposes, by virtue of the interbank agreement of 1913 by which the British, French, Japanese, and Russian financial groups (formerly, also, the German group) associated themselves in the consortium for China business. The military group in control of the Peking Government, therefore, found itself compelled to deal with the recently formed Japanese syndicate, including the Industrial Bank, the Bank of Taiwan, and the Bank of Chosen, represented in Peking by Mr. Nishihara, who was understood to be a personal representative of the Japanese Prime Minister (Count Terauchi), and who in his various loan negotiations with the Chinese Government acted at least ostensibly in entire independence both of the official Japanese banking group and of the Japanese Legation in Peking. A somewhat confusing element was introduced by this dualism of Japanese activity, inasmuch as the diplomatic mission on several occasions denied the progress of any negotiations, even after the time when (as subsequently appeared) those negotiations had led to an agreement; and the Yokohama Specie Bank, representing the official group, at least once had occasion to join with the other consortium banks in a protest against the infringement of their rights by action taken by the Chinese Government in pursuance of arrangements made with Mr. Nishihara. It nevertheless appears from an official report issued in August by the Japanese Ministry of Finance, on the subject of the financial activities of the Japanese Government in China, that the various transactions conducted by Mr. Nishihara had been approved and carried out with the cooperation of that ministry; and certain contracts for railways in Manchuria and in Shantung, and projects in connection with the development of the iron industry, subsequently dealt with by him, were recognized and adopted in an official statement issued early in October by the Ministry of Finance after the Hara Cabinet had replaced Count Terauchi’s. It was the peculiarity of a number of the loans thus made to the Peking Government that, while contracted ostensibly for industrial purposes, such as the construction of railways, and the development [Page 123] of timbering and mining industries, they contained none of the usual provisions to assure that the proceeds should be devoted to the purposes specified, but on the other hand provided for very considerable advances to be made immediately; and in each of such cases, the money advanced has been found to have been spent in meeting the demands of the several tuchuns for military expenses, the contemplated industrial development has made no progress towards a beginning, and the projected enterprise is burdened in advance with heavy obligations for the funds already misspent, with the result that its possibilities of success as a commercial undertaking are so seriously compromised as to raise the question whether the Chinese negotiators themselves foresaw any prospect other than eventual foreclosure by the Japanese lenders.
The titular head of the Northern Government, Acting President Feng Kuochang, remained a political nonentity, restive under the control actually exercised by the military clique, and frequently taking private occasion to deprecate their activities, but invariably yielding and excusing his weakness on the ground that it would only lead to greater trouble if he were to assert himself during his remaining tenure of office (expiring on October 10). The Premier, General Tuan Ch’i-jui, continued to exercise all such authority as remained in the Peking Government, although in fact he was less active than obstinate in his subserviency to General Hsü Shu-cheng, who controlled in his behalf the politics of the Northern military party—apportioning appointments and funds among the several tuchuns in such a manner as to reconcile so far as possible their personal interests with the corporate interests of the clique; and his manipulations throughout this period were successful in preventing any open break among the principal members. He was not successful, however, in reconciling the group of Yangtze tuchuns under the leadership of General Li Shun of Nanking, who maintained their attitude of somewhat critical aloofness from the other Northern leaders. In the meanwhile, the provider of the necessary funds was Mr. Ts’ao Ju-lin, Minister of Communications and concurrently Acting Minister of Finance, who, either alone or in association with Mr. Lu Tsung-yü, negotiated—in most cases without the knowledge even of the subordinates in his own ministries—the various loans upon which the Government subsisted.
The so-called Canton Government, reconstituted under a military directorship as described in the Legation’s second quarterly report, maintained its hold upon the southern Provinces, and somewhat strengthened its military position in Hunan and in northern Kwangtung and Fukien. The old Parliament, which had been ousted from Peking in June 1917, obtained a quorum during the summer, and convened as the authoritative legislative body of the Republic, still professing to recognize ex-President Li Yuan-hung as being the actual President although prevented from exercising the functions of that office.
During the summer there developed among all classes of the Chinese people, apparently in the South no less than in the North, a deep and resentful realization that the civil war was a political unreality, a quarrel involving no essential difference of principles or purposes, but kept alive solely as an occasion for the advantage of those in a position to profit by the borrowing of funds for the upkeep of military contingents. Public opinion in China is a thing hard to estimate; but it would seem that even among the usually apathetic majority of the Chinese people there was at last generated a feeling of bitterness at the way in which everything was being sacrificed for a purposeless continuation of strife. This resentment was, of course, more keenly felt among the more intelligent minority, and was perhaps strongest among the younger men in the various ministries and boards of the Government, almost without regard to their antecedents or political affiliations. It would seem that the weight of public opinion eventually made an impression even upon the more reactionary of the military leaders, and convinced them that they were overdoing the profitable system which they had developed, and must at any rate make some concession to appearances by uniting and supporting the election to the presidency of someone outside their own clique. In a conference held at Tientsin early in August they therefore determined to support ex-Premier Hsü Shih-ch’ang (to be carefully distinguished from General Hsü Shu-cheng) an old civil official of fine reputation as a scholar, and commanding possibly more general respect in China than any other man in public life. It is to be feared, however, that in agreeing to support a candidate of such deservedly high repute, the tuchuns’ conference was not unmindful of the fact that despite his really fine attainments and high-mindedness, Mr. Hsü is not considered a man of energy or of forceful character; so that the military [Page 124] leaders perhaps reckoned upon the possibility either of bringing him completely under their influence, or setting him aside—as they had been able to set aside ex-Presidents Li Yuan-hung and General Feng Kuo-chang—in case he should prove intractable. There was also some reason to believe that among the tuchuns were some who counted upon the possibility that in the latter event it would be possible to bring about a restoration of the Manchu Dynasty with the acquiescence of Mr. Hsü, who has been a guardian of the deposed Emperor, and who is believed to be sympathetic and loyal to the Imperial house.
The decision as to the candidate to be supported for the Vice Presidency proved more complicated, as General Hsü had unfortunately found it convenient at various times to promise this office both to Ts’ao K’un (Tuchun Chihli) and to Chang Tso-lin (Tuchun of Fengtien, or Mukden). In some way not generally known, the claims of General Chang were satisfied or disposed of; and the choice of the conference fell upon General Ts’ao K’un—on the condition that he would make merit by undertaking to pursue actively the war against the South, he being generalissimo of the Northern forces; and General Ts’ao undertook to meet this condition if furnished with $8,000,000 for necessary military expenses. Various installments (perhaps amounting to $6,000,000) have been paid for this purpose to Ts’ao K’un, from time to time, as he found himself more and more nearly ready to leave his capital at Paotingfu and proceed towards the fighting front in Hunan; but he has not yet gone beyond his province and has not yet been elected to the Vice Presidency.
The decision of the conference of military governors at Tientsin, as to the election of Mr. Hsü to the Presidency, was in fact if not in theory conclusive; for the Parliament which convened in August, after election in pursuance of the law of January last, was of course dominated by the military party, and could be relied upon to carry its decisions into effect. Mr. Hsü was accordingly elected to the Presidency by the Peking assembly on September 4, by an almost unanimous vote, to assume office on October 10. In this election he was supported not only by the military element, but also by the Chiaotung party, which hoped that his personality might be a compelling factor in bringing about a reconciliation in the country, and make possible a gradual transfer of authority back to the civil officials from the hands of the military group which has of late been in control. This same element likewise opposed the election of Ts’ao K’un, or indeed of any vice president, in the hope that by leaving this office vacant there would be a greater possibility of accommodating the ambitions of the Southern leaders; and in view of the divergence among the partisans of the military party as to the candidacy of Ts’ao K’un, the Chiaotung faction have exercised the balance of power in preventing an election.
At the time of the tuchuns’ conference in Tientsin, when their insistence upon the prosecution of the civil war gave emphasis to the partisan and personal character of their influence in the Government, there was an important defection from their own ranks: General Wu P’ei-fu, commanding the Northern invading forces in Hunan as second in command to General Ts’ao K’un, began to issue circular telegrams advocating the cessation of hostilities and the settlement of the contest with the South; and during the latter part of August he actually ordered the troops under his command to cease fighting, and withdrew them out of touch with the opposing Southern forces. For these pacific tendencies he was, of course, reproved by his superiors and denounced as disloyal by the other militarists; but he was not relieved of his command. Although there is obviously room for the supposition that General Wu had disloyally entered into an intrigue with the Southern leaders, it is by no means certain that that is the case; impartial opinion is inclined to credit him with having acted courageously and patriotically in the hope of turning his military associates from the insensate policy which they were pursuing. Whatever may have been his motives, his action brought about the cessation of the desultory military operations, and presented sharply the issue whether the Northern Government should persist in its wasteful and ineffectual attempt to subdue the South. And upon the election of Mr. Hsü to the Presidency, it became clear that he was whole-heartedly in favor of a reconciliation and proposed to exert himself to find some acceptable basis of compromise. As against this intention, however, there was the strong pressure of the militarists who occupy positions of controlling influence in the Government, and the lack of funds for the paying off and disbandment of the armies and for the settlement of the expenses incurred by the Canton Government.
The Southern Government had in fact been in a financial situation even more desperate than that of the North. Of the national revenues levied within the [Page 125] provinces controlled by the Southern troops, the Canton Government had indeed possessed itself of the salt taxes; but the customs revenues were beyond its reach by reason of their being pledged as security to the foreign powers for the payment of the Boxer indemnity and of various international loan obligations. Early in September, the authorities in control at Canton did inform the commissioner of maritime customs at that port that they proposed to take possession of the customhouse and administer the customs revenues; but upon intimations being conveyed to them, in behalf of several of the Legations, that any foreign sympathy for the Southern cause would be alienated by the seizure of revenues pledged to meet obligations for which the Peking Government was internationally recognized as responsible, the Canton leaders took occasion to deny that they had ever entertained such an intention. There have from time to time been reports of loans made by the Southern Government from Japanese sources, but it has thus far been impossible to verify them. During this quarter, the political situation in China was much affected by conditions in Siberia. On July 9, General Horwath, the manager of the Chinese Eastern Railway (the Russian-controlled link, through Manchuria, in the Siberian railway system), proceeded from his headquarters at Harbin into Russian territory, and just across the frontier, at Grodekovo, declared himself dictator of Siberia if not, in fact, of all Russia. This action was considered by several of the Allied Ministers in Peking, who, by reason of there being no diplomatic representatives of their Government in Siberia, were at that time entrusted with the management of Siberian questions, as introducing a further complication into a situation which was already very delicate and dangerous. On July 12 they accordingly transmitted, through the Russian Legation, a joint representation in behalf of the British, French, and Japanese Ministers, urging General Horwath to withdraw his proclamation and return to Harbin, a representation to which General Horwath returned a negative answer after a fortnight’s delay. The Chinese Government likewise took the attitude that by undertaking this political venture, General Horwath had foregone his position as manager of the Chinese Eastern Railway, and could be recognized only as a private Russian citizen in the event of his returning to Chinese territory; but this position was tacitly abandoned when the Horwath movement attained a certain measure of success. Early in August General Horwath proceeded to Vladivostok and for a time exercised a certain measure of control in Siberia but the subsequent development of his movement had no further direct effect upon the situation in China.
A phase of the situation in Siberia which more directly affected China began when the American and Japanese Governments agreed upon military cooperation at Vladivostok in the latter part of July. At that time the British, French, and Italian Governments arranged to dispatch contingents of from 800 to 1,600 men, partially made up from their Legation and railway guards in China, to join in these operations; and the Chinese Government also prepared a force of some 2,000 specially selected troops, and after some delays incident to the difficulties of transportation through Manchuria, placed them in the neighborhood of Nikolsk, somewhat west of Vladivostok. The northern (Amur) line of the Siberian railway between Lake Baikal and Vladivostok was in the hands of Bolsheviks and liberated enemy prisoners of war; the Chinese Eastern Railway (i. e., the southern section, passing through Chinese territory) was therefore the only means of rail communication between Vladivostok and the region in which Semenoff was operating more or less independently against Bolshevik forces just west of the Russo-Chinese frontier at Manchuli. The military importance thus accruing to this line occasioned several suggestions that it should be controlled by Allied forces with a view to the extension of operations westward into the region of Lake Baikal. The arrangements for eventual military cooperation between Japan and China, concluded in March last, provided that such cooperation should be undertaken only if and when it should become an actual military necessity. At the end of July, in response to somewhat insistent urging by the Japanese military representatives and advisers to the Chinese Government, the Chinese concurred in a formal statement that such a necessity had actually come to exist. On August 14 the Japanese Legation announced to a representative of the Premier that his Government proposed to dispatch 5,000 men to northwestern Manchuria to oppose the German-Bolshevik menace, and inquired whether the Chinese Government would be prepared to cooperate under the terms of the existing arrangement, the condition precedent to whose effectiveness had now been recognized; the Chinese authorities at once undertook to dispatch a force of 10,000, but were informed [Page 126] that in view of the shortage of rolling stock on the Japanese-controlled South Manchuria Railway, it would be impossible to convey the Chinese forces over the section from Mukden northwards until the Japanese expedition had been transported. To their considerable chagrin, therefore, the Chinese authorities were unable to dispatch to Manchuria for a fortnight or so the troops destined to cooperate with the Japanese. In the meanwhile, the Japanese troops had occupied the railway westward from Harbin, in some cases displacing from their barracks the Manchurian provincial troops already stationed along the line, and ousting Chinese patrols from the guarding of bridges and other strategic points. Though it would perhaps be easy to exaggerate such incidents, there does in fact seem to be more than sufficient evidence that in constantly recurring cases the Japanese forces by their high-handed and overbearing conduct antagonized not only the Chinese but such other foreign forces as were later dispatched to that region of Manchuria. The Japanese forces were subsequently greatly increased to a number variously estimated but perhaps as high as 40,000. In addition to guarding the line of railway, they also dispatched expeditions northward to Heiho (on the Amur River opposite Blagovyeshchensk) and westward into Outer Mongolia. Throughout the region in which they operated, the Japanese forces made use of military notes, in terms of Japanese gold yen instead of local currency, in payment of requisitions for supplies, a practice resented by the Chinese as introducing a further complication into the difficult problem of Manchurian currency.
During the first week of September, the Czechoslovak forces in western Siberia succeeded in possessing themselves of the main line of the Siberian railway system eastward from Lake Baikal, thus opening communications from European Russia to the Far East. The German-Bolshevik forces thus dislodged from the Trans-Baikal section of the railway retired to the line of the Amur Railway, concentrating at Blagovyeshchensk, where eventually they were defeated and dispersed by the Allied expedition advancing from Vladivostok. The Japanese expedition in Manchuria advanced westward along the railway into Russian territory, to Chita; the Chinese forces, however, did not proceed beyond their own territory.
Throughout the Allied operations in Siberia and Manchuria, the question of the control of the Chinese Eastern Railway was of paramount importance. The right of constructing this line through Manchuria had been conceded by the Chinese Government in 1896 to a railway company formed for the purpose, an organization nominally private but actually under the complete control of the Russian Ministry of Finance, and by Russian law assimilated to the status of a Government institution. The concession reserves to the Chinese Government not only a right of repurchase or of eventual reversion, but also a right of participation in the management of the road. Despite this fact, however, the Russian rights had in practice been extended further and further, and Chinese control minimized, until it was at any rate the contention of the Russian authorities that for all practical purposes the railway was a Russian institution and the railway zone a portion of Russian territory. After the revolution in Russia, the Chinese had again made effective their right of participation in the management; and there may well have been some foundation for the report which became current early in July that the Government proposed to take advantage of General Horwath’s political venture to take into its hands the full control of the railway. Such an intention was promptly denied by the Foreign Office; but it was at any rate clear that the Chinese fully realized that the railway concession constituted the basis for the whole fabric of economic and political interests which the Russians have built up in North Manchuria, and were apprehensive lest in the weakening of Russian control Japan should be tempted to substitute itself for Russia in the control of the railway, and thus extend its present claim to a sphere of influence in South Manchuria.
Under these circumstances, the proposal made by the American Government in the middle of September to place the whole Siberian railway system, including the Chinese Eastern Railway, under the control of Mr. Stevens and the Russian Railway Service Corps as agents and trustees of the Russian Government was received with obvious gratification by the authorities of the Chinese Foreign Office; for they readily perceived that the establishment of such a commission, acting under the guarantee of our Government that none of the various rights involved would be impaired thereby, would at least prevent any fundamental alteration of their position in reference to the railway. From [Page 127] the first, however, it was manifest that those Chinese who most clearly recognized and most heartily welcomed the American proposal were apprehensive that it would be regarded by the Japanese as an attempt to curb their activities in Manchuria, and would in consequence be resented by them. This became more and more evident as the Chinese continually inquired what response the proposal had received from the Japanese Government; and by the time that it was possible to reply that Japan had notified its acceptance of the American proposal, several of the Chinese Ministries and military boards had been advised by Japanese representatives, both civil and military, that their Government did not in fact approve of the project and desired the Chinese authorities to withhold their consent to it. Under these circumstances, the Chinese Government has given no reply to the American proposal.
In the meanwhile the management of the railway has remained in the hands of General Horwath and his organization, although from time to time both the Czechoslovak and the Japanese forces have undertaken to exercise police powers within the railway zone, notably in the suppression of a strike among the employees of the railway early in September.
The embargo which the Chinese Government had placed upon the exportation of Manchurian products into Siberia had been removed before the commencement of the period under review and on the part of certain of the Allied Legations there was an effort to have it again brought into effect in order to prevent supplies coming into the hands of the Bolsheviks; but this was opposed by our Government. When, however, there was a concentration of German-Bolshevik forces at Habarovsk, the Allied Legations all united in obtaining the consent of the Chinese Government to a prohibition upon the export of foodstuffs by the Sungari River (August 30).
2. Attitude toward the war
The attitude of the Chinese people remained sympathetic towards the Allied cause, although not well-informed or generally enthusiastic. The attitude of the Government itself may perhaps be considered disappointing. It was indeed in support of Allied interests that the two Chinese expeditions were dispatched to Nikilsk and to northwestern Manchuria; but in other respects the Government, or individual officials, were apathetic or even lax. The project of interning the most dangerous of the German residents in China, which has been suggested by the Chinese Government to the Allied Legations after the failure of the plan to deport enemy residents to Australia, was treated in a dilatory spirit, and had not been carried into effect at the close of the quarter under review. A project for the establishment of a system of passport control upon all railways and steamships in China was likewise treated dilatorily. The regulations which had been enacted in restriction of trade with enemy subjects were left unenforced. The liquidation of the Shanghai branch of the Deutsch-Asiatische Bank, which had been entrusted to an Italian financial adviser of the Government, was hampered and circumvented under conditions which strongly suggested connivance between certain of the Chinese authorities and the former German agents of the bank. Although the facts are obscure, there is some reason to believe that the German share in the Ching-Hsing Coal Mining Company was taken over by the controlling coterie in the Ministry of Finance, upon an understanding as to its eventual return to the German interests involved. There seems to have been well-grounded cause of complaint against the Chinese authorities at Manchuli and at Heiho for having permitted or even assisted in supplying provisions to the German Bolshevik forces. The Military Governor of Chahar, while compelling an American company to discontinue its automobile service between Kalgan and Urga, nevertheless permitted an Austrian subject to operate a car; and several German agents were allowed to pass through his jurisdiction and were arrested only upon their reaching Mongolian territory. In a number of cases the Chinese Government, having arrested enemy agents upon the complaint of Allied authorities, took occasion to thwart the prosecution of them by insistence upon a strained construction of the treaties providing for the presence of foreign assessors in the Chinese courts at the trial of cases involving foreign interests. In one conspicuous instance, also, the chief of police of Tientsin refused to cooperate with the Allied authorities in raiding certain places in the former German concession where there was good reason to believe that apparatus for the forging of passports was stored by a German organization there.
[Page 128]While the Chinese Government may be judged remiss in these instances, it may be urged that its passivity was the result not of intention but of sheer weakness and of fear of antagonizing certain corrupt officials who were influential in the military clique temporarily controlling the Government. All activities of the Chinese Government in reference to the war had been placed more or less directly under the control of the War Participation Bureau, an organization created with apparently unlimited powers for the ostensible purpose of carrying out Chinese obligations in respect to military cooperation with Japan: but this bureau, placed under the control of General Hsü Shu-cheng, was used by him primarily as a means of furthering the interests of the tuchuns’ clique. The forces and the funds at its disposal were to a large extent devoted to the civil war, and its activities and its control over the action of other organizations of the Government were to a large extent subordinated to the intrigues of the military faction.
b. foreign
1. Relations with foreign countries
During the period under review, there was little of interest in the relations of the Chinese Government with foreign countries, save for such matters as were incidental to the prosecution of the campaign on the Siberian border (as outlined above) and the conclusion of a series of loans from the Nishihara banking group supported by the Japanese Government, which in spite of its political aspect may best be discussed under the heading of “Financial Information.”
In July announcement was made to the effect that a treaty of amity had been concluded with Switzerland. This treaty had been signed in June at Tokyo by the Chinese and Swiss Ministers, and subsequently ratified by the Chinese Government; but its terms have been withheld from publication pending its ratification on the part of Switzerland.
In August it became known that the Chinese Government had arranged for the exchange of diplomatic representatives with the Vatican. Not only was this viewed by the French as an unfriendly disregard of their traditional claim to jurisdiction over Catholics in China, but in view of the indications of German influence in connection with the appointment of the nuncio selected to represent the Pope in China, several of the Legations united in persuading the Chinese Government to withdraw the agrément already given by it. The Vatican thereupon named another nuncio who proved likewise to be under suspicion of enemy connections; and the Chinese Government was then induced to take the attitude that the question of diplomatic representation between it and the Vatican should remain in abeyance until after the conclusion of the war.
A very perplexing question was raised in regard to the status of Poles who before the war had been of German or Austrian nationality. While it was felt that, in the interests of the Polish nation to be created hereafter, its citizens should be entitled to the privilege of extraterritorial jurisdiction in China, the difficulty of distinguishing between those who were and those who were not loyal to the Allied cause, and still more the difficulty of finding a legal basis for the exercise of such jurisdiction in their behalf by the representatives of the treaty powers, pending the establishment of the Polish Government, proved impossible of solution.
2. Attitude toward the United States and Americans
Among the Chinese people there was no alteration of the traditional feeling of friendship and trustfulness towards the United States; nor was there any diminution of this feeling on the part of the great majority of the officials of the Government. There were, however, several questions in which the coterie controlling the Ministries of Finance and Communications supported monopolies directly infringing American rights. One of these cases, to which reference has been made above, was that of a monopoly claimed in favor of a Chinese company for the operation of automobiles across the Gobi Desert between Kalgan and Urga; and although upon the advice of the Legation the American company concerned (the Mongolian Trading Company) consented to reserve the question of its conducting a common carrier service, and undertook to operate its course [cars?] only for the private business of the company, the Central Government supported the Tuchun of Chahar in forcibly preventing even such [Page 129] operations. An attempt was also made to establish a so-called Chinese Trading Company which should have a preference in the furnishing of all supplies required by the Government, and a monopoly of the import and export of such articles as arms, grain, and other commodities requiring Government license.
c. activities of enemy propaganda
As reported in the case of the previous quarter, there was no systematic enemy propaganda discoverable in China, although a number of enemy agents were from time to time apprehended, and although various German and Austrian residents were undoubtedly active in exerting personal influence upon individual Chinese officials of their acquaintance to obstruct or thwart the putting into operation of the various projects for the internment of enemy subjects and for the imposition of restrictions upon enemy trade. During the quarter, evidence was received that the Hilfsaktion, an organization of German and Austrian residents originally formed at Tientsin for the purpose of alleviating the distress of the prisoners in Siberia, in cooperation with the American Red Cross and other philanthropic agencies, was engaged in the counterfeiting of neutral passports and visas for the use of enemy agents; but it appears that the personal influence exercised upon the Chinese chief of police (in control of the former German Concession) by Mr. von Hanneken, a leading German resident, sufficed to induce that official to adopt dilatory tactics which prevented the carrying out of a raid upon the suspected premises.
It appears that the main effort of the Germans and Austrians who have been active in China has been to keep open so far as possible the opportunities for a revival of enemy trade and industry after the war.
II. Economic Information
a. actual economic conditions
China was again fortunate, during the past quarter, in suffering none of the natural disasters, such as floods or drouths or bad harvests, which so often cause disproportionate misery and loss of life in this country of inadequate means of transportation, in which, moreover, the margin of bare subsistence is so small. The crops harvested during the quarter have been practically everywhere good or at least average.
These favorable natural conditions have however been offset by the disturbing effects of the civil war and by the alarming spread of brigandage. The methods of conducting the civil war have generally been, on the part of both Northern and Southern forces, ruthlessly indifferent to the welfare of the people in the area of hostilities. Then, too, the practice of enlisting bandits when soldiers were needed, and dismissing them when economy required, has spread the pest of outlawry broadcast among the provinces affected. It is therefore natural that banditry is (with an exception to be noted) most prevalent in the Provinces of Szechuan, Hunan, and Fukien, where operations have been at least nominally in progress; and that in those provinces it has in many cases been impossible to distinguish between the activities of bandits and the operations of the armed forces of North or South. Even in other provinces, however, lawlessness has grown to an unprecedented degree, apparently as the direct result of the disintegration of governmental authority which has been the corollary of the prostitution of civil power to the interests of the military leaders. But much the worst conditions of brigandage have come to prevail in the Province of Shantung. For this the blame is in large part due to the Chinese Government which permitted the western portion of the province to be overrun with the remnants of the rabble-following of Chang Hsün, upon the suppression of his abortive monarchical restoration movement in July 1917. But the evil is unquestionably encouraged and aggravated by the conditions incidental to Japan’s continued military occupation of the line of the Shantung Railway which traverses the province east and west from Tsingtao to Tsinan, the provincial capital. Not only has the authority of the Chinese been weakened by the very existence of a separate and alien administration functioning along the line and in the principal cities, and frequently contesting Chinese jurisdiction; the line itself, under such conditions, furnishes an asylum in case of need, as well as a base of operations; and there is evidence of cases in which brigands have organized and equipped their bands within the railway zone, and having captured hostages or prisoners for ransom have either kept them on [Page 130] the line or taken them along it to Tsingtao. There has, moreover, not unnaturally, been a considerable influx of rowdies and other undesirables from Japan, who have spread into the province and engaged in immoral or illegal trades, such as the exportation of salt and copper cash, and the importation of opium and morphine and arms, and in some instances have entered into close relations with brigand leaders. …
As a result of such disturbed conditions, as well as of the financial straits of the Government, no new railway enterprises have been undertaken, if we except the Japanese projects in Manchuria, to which more detailed reference will be made hereafter.
b. attitude towards the embargo
There has been during this quarter no substantial change from the attitude of acquiescence indicated in the Legation’s report for the previous quarter. There have, however, been occasional intimations of a feeling among the Chinese that in its restrictions upon imports our Government had not been quite so considerate and liberal towards the interests of Chinese as it had been towards Japanese industries.
III. Commercial Information
a. construction of shipping
No ocean-going vessels were constructed in China. A contract is understood to have been concluded in the United States in August, however, between the Shipping Board and a representative of the Kiangnan Dockyard of Shanghai for the construction of three vessels of 10,000 tons each, and a further tonnage of 30,000 if required. In order to build these vessels, which are of considerably greater tonnage than this yard has hitherto undertaken, it has been necessary to construct new slipways, the work on which has been promptly commenced and pushed forward rapidly.
b. losses of shipping
The only shipping loss to record for this period in connection with China is that of a small British coasting steamer, the Sungkiang, in a collision off Swatow on August 21 last.
c. development of foreign trade
As in the previous quarter, foreign trade remained almost stagnant except for the constantly growing trade with Japan. In that connection it is to be reported that, following the rice riots in Japan, an arrangement was made (of which, however, no details have been made public) by which the Government authorized an exception from the embargo, established by the treaties, to enable rice to be exported from Kiangsu and other Lower Yangtze provinces for the relief of the scarcity in Japan. The consequent increase of the price of that staple food in those provinces was a matter of some complaint, though fortunately not of serious character.
IV. Financial Information1
a. loans, domestic and foreign
No domestic loans were put upon the market during the period under review, except the fifth short-term loan of the Peking-Suiyuan Railway for development purposes. Subscriptions to the bonds of this loan were open from July 1 to September 30; the terms were as follows: Amount, $4,000,000 (Peking currency); issue price, par; interest, 9 per cent; amortization by lot in four annual instalments, at the end of each year, 1909–22.
This quarter was notable for the extraordinary series of loans negotiated with the Japanese interests represented by Mr. Nishihara, to which reference has been made above. These included the following:
Kirin and Heilungkiang forestry loan:2 date of conclusion unknown, but probably in July; amount, yen 30,000,000; term 10 years; interest 7½ percent; [Page 131] security, Government-owned forests and gold mines in the two provinces, together with the Government’s revenues therefrom. Kirin-Hueining Railway loan: preliminary contract signed June 18, providing for the immediate advance of yen 10,000,000, and stipulating for the conclusion of a final agreement for an amount sufficient to take up this advance and to pay for the construction of the line, upon the following terms: interest, 5 per cent; term 40 years; security, the railway itself (the construction of which is to begin upon signature of the final agreement).
In addition to these loans, which were actually concluded during this quarter, the Nishihara interests were also negotiating for the construction of five railways in Manchuria and in Eastern Mongolia and of two railways in Shantung, although these negotiations were not concluded until later. Negotiations were also carried on for a loan (understood to be for yen 100,000,000) for the development of the steel and iron industry to [of?] China. A political loan of yen 2,000,000, at 8 per cent, secured on the wine and tobacco revenues, was also under negotiation; furthermore, a credit of yen 80,000,000 to be extended by the Nishihara banks in connection with the proposal for the establishment of a gold currency system. It was also reliably reported that a military loan for the financing of the expeditions in Manchuria and Siberia was concluded; but no exact details as to the amount or other conditions are thus far obtainable.
The Kirin forestry loan created intense indignation in the two provinces concerned, whose people felt that the Government was literally selling their resources and encouraging the encroachments of Japan, with no idea of developing the lumbering or mining industries, but solely for the purpose of obtaining immediate funds for military expenses. This feeling was intensified by the publication in the Peking press of a memorandum, intended to be secret, with which this contract was submitted to the Cabinet by Mr. Ts’ao Ju-lin, baldly stating that the Government needed the money and that to get it he had been compelled to adopt the subterfuge of making a loan for nominally industrial purposes from the Nishihara group, inasmuch as the avowal of the fact that the money was for political purposes would lead to difficulties with the consortium and with the foreign Governments whose nationals participated therein. The authenticity of the memorandum thus disclosed was never denied; and the acknowledgment thus made in it by the Minister of Finance was confirmed by documents discovered by rioters who raided the offices of the local commissioner in the provincial capital of Kirin.
One of the terms of the forestry loan was that the Japanese should have a priority in the event of future loans for the development of forests and gold mines of the two provinces. The terms of the agreement as published in the press were drawn to the attention of the Ministry of Finance by the Legation with a request for an authentic text of the document by which the American Government might judge whether it infringed the right of equal commercial opportunity. The Ministry of Finance refused to communicate the text, but quoted certain provisions which clearly established the priority in favor of Japanese interests, and maintained the right of the Chinese Government to grant it. This contention, if maintained, would go much further towards restricting equality of opportunity in China than did the 1909 agreement concerning mining in Manchuria, in respect to which both the Japanese and the Chinese Governments gave assurances that the rights claimed were not general, but such as related to specific mining areas selected for development.
The Kirin-Hueining Railway1 project is one that has of course been in prospect since Japan first obtained the right of building the branch line from Changchun to Kirin. This extension from Kirin to the Korean border would connect with a railway already built from the port of Chyongjin, on the northern coast of Korea. A line connecting this point with the main Korean system at Wonsan has long been marked as projected on the maps published by the Japanese Government General of Korea. Although the country through which the Kirin-Hueining line would pass is almost unknown, there is some reason to believe that the railway would have a commercial, as well as a strategic value. It is to be regretted, however, that this otherwise legitimate project is saddled with the advance of yen 10,000,000, which has already been spent for military purposes.
The negotiations for five railways in Manchuria were at the time understood to relate to the five lines (Ssupingkai-Chengchiatun-Taonan, Changchun-Taonan, [Page 132] Jehol-Taonan, Kaiyuan-Hailung, and Hailung-Kirin) for which concessions were granted to Japanese interests by a secret exchange of notes in October 1913. From a subsequent statement made by the Japanese Ministry of Finance, it appears, however, that the negotiations also included a line from the Jehol-Taonan railway to the sea (presumably at Hulutao) which is a wholly new project and which is perhaps in conflict with the existing rights of British interests in respect to branch lines of the Peking-Mukden Railway. The railway lines in Shantung are understood to include an extension of the Shantung Railway from Tsinanfu to Shuntefu on the Peking-Hankow Railway, and a line from Kaomi (near Tsingtao) to the junction of the Tientsin-Pukow and Lung-Hai railways, at Hsüchowfu. The construction of these two lines had been conceded to German interests by a secret exchange of notes in December 1913; and it is to be supposed that the Nishihara group is seeking to obtain a reversion of those German rights in Shantung Province.
No reliable information is thus far obtainable in regard to the negotiations for the loan to be used in establishing the Chinese iron and steel industries; but it is generally understood that the plan involves placing under Japanese control the iron mines of Fenghuangshan and Molingkuan.
It is still unknown whether or not the proposed credit of yen 80,000,000 to be extended by the Nishihara group for the establishment of a gold currency in China has actually been concluded; it appears certain that it was under negotiation, and that in spite of the denial of the Ministry of Finance, at least an agreement in principle had been reached, when, suddenly, on August 11, the Government promulgated regulations for the establishment of a currency bureau and for the issue of gold currency notes. Immediately upon publication of these regulations, the Ministry of Finance communicated them to the bankers’ consortium, and proposed that they be made the basis of negotiations for the loan contemplated by the currency reform loan agreement of 1911, the option under which had been from time to time renewed so as to be in force until October 14, 1918. The proposal for the immediate establishment of a system of gold currency in China must be considered fantastic; the constant opinion of all financiers who have studied the complicated problem of Chinese finance has been that the unification of the multitudinous silver currencies is a necessary preliminary step. A memorandum published by the Minister of Finance made the project appear all the more fantastic inasmuch as it indicated that the currency notes to be issued by the Government would in practice be redeemable only in produce of the country where the gold credit was held, i. e., apparently in Japan. It was felt by the consortium bankers and by the interested Legations that the proposal to negotiate for a loan on the basis of so unsound a project of currency reform was in fact a mere device by which the Minister of Finance hoped to tempt them into sacrificing their option by a refusal to negotiate on such a basis, thus leaving himself free to negotiate with the Nishihara interests. Protest was promptly made by the four Legations to the Chinese Government against its having thus adopted and promulgated the regulations in disregard of the right of the consortium to be consulted in reference to any such variation from the plan of currency reform proposed about a year previously by Mr. Liang Ch’i-ch’ao when Minister of Finance, a plan which the bankers had indicated their willingness to accept as a basis for the proposed currency loan, subject to certain further information concerning details, which was still awaited. In this protest the Japanese Legation joined with the others, adding a further protest against the adoption of so radical a measure without having consulted with Baron Sakatani, whom the Chinese Government was stated to have undertaken to engage as financial adviser.
Upon receiving from the Ministry of Finance an uncompromising reply and a request to take up negotiations on the basis of the regulations, the bankers appear to have become alarmed lest an unyielding insistence upon the protest might lead the Ministry to refuse any renewal of their option upon its expiration in October. They therefore induced the four Legations directly interested (British, French, Japanese, and Russian) to reply that their respective groups in the consortium would consent to discuss the question with the Minister of Finance. This effort to evade the issue until a renewal of the option had been obtained proved most unfortunate. It was interpreted as an indication of weakness; and not only were the Minister of Finance and his coterie induced to assume an arrogant attitude towards the banks and towards the Legations interested; the Minister himself (to carry the account somewhat into the subsequent quarter) had the effrontery to inform the Cabinet that the four Ministers had withdrawn their objections to the gold currency scheme and even expressed themselves as gratified with it, a misrepresentation [Page 133] which led to considerable difficulties before the renewal of the option could be arranged. In consequence of the withdrawal of the American group (in 1913) from participation with the other members of the consortium in business under the currency reform and reorganization loan agreements, there was no American contractual right involved; but our Government took occasion, during these discussions, to make clear once more the position it had taken a year previously, that apart from any question of the contractual rights of its nationals, the whole history of the question of currency reform in China has given the American Government a right to be consulted in reference to any solution of that problem.
The rumor that a political loan was being negotiated on the security of the wine and tobacco revenues occasioned some apprehension in regard to a direct contractual right of Americans, as the loan made by the Chicago Continental and Commercial Bank in 1916 was secured upon that revenue, and negotiations carried on during 1917 by the representative of the Chicago bank had given it a conditional option upon a priority in respect to the use of that revenue as security for further loans. The apprehension felt in regard to these rights was increased by the unwillingness of the Minister of Finance to confirm in writing an oral promise that the Chicago bank would be first consulted before the hypothecation of these revenues for other loans, and still more by his ultimately stating that the bank had waived all rights by breaking off the negotiations last year, whereas the fact was that the Chinese negotiators had asked the bank’s representative to allow them time to carry out certain preliminary arrangements, before proceeding further in the matter. It is not believed, however, that the rights of the Chicago bank have been compromised, as the rumors of the conclusion of the loan on that security have not been verified.
A loan made in April last by the Chosen Bank to the Provincial Government of Fengtien (Mukden) had during this quarter a most demoralizing effect upon foreign trade in southern Manchuria. The finances of the province have for some years been in indescribable confusion, both governmental and private Chinese banks having issued irredeemable paper currencies, on the basis of the “small-coin dollar”, which have greatly depreciated. From time to time loans have been made from the Japanese banks to redeem these issues, under conditions which encouraged speculation and facilitated the exportation of such actual silver currency as was in circulation. The loan of last April for yen 3,000,000 (issue price, 95; interest, 6½ per cent; security, the Chinese portion of the shares in the Sino-Japanese coal mines at Penhsihu) was for the purpose of such redemption, and an accompanying agreement obligated the provincial treasury to guarantee the redemption of depreciated small-coin notes for Japanese holders at a rate averaging perhaps as much as 50 per cent better than the market rate. The effect of this enormous advantage in favor of Japanese traders was to drive out of competition the branches of other foreign firms in the interior, where only the small-coin money is current, and to force them to the use of the Japanese gold yen in the towns along the railway where that currency has been largely introduced by the Bank of Chosen itself. Protest to the Chinese Government elicited only a denial by the provincial authorities of the existence of this entirely well-known arrangement. Both the American and British Governments were compelled to notify the Chinese Government that they must hold it responsible in damages for the losses of their nationals in consequence of this discriminatory arrangement; but even the payment of all direct claims on this score could scarcely compensate for the far-reaching effect of making southern Manchuria almost a closed field for foreign commercial enterprise.
b. fluctuations of exchange
Throughout the period under review, the price of silver continued to rise, with an intensification of the results indicated in the last quarterly report. The following table furnished by the International Banking Corporation gives, in Mexican (Peiyang) dollars, the highest and lowest buying rates of $100 gold during each of the three months, indicating the date of each quotation:
| Highest | Lowest | |
| July: | 121.63 (July 3) | 118.97 (July 31) |
| August: | 118.97 (August 1) | 111.49 (August 30) |
| September: | 111.44 (September 2) | 101.28 (September 20) |
Respectfully submitted,