893.51/2852
Mr. Thomas W. Lamont to the Chinese Minister of Communications (Tsang Yuh Tsewi)98
Memorandum
The question of the payment of the coupons on the bonds of the Hukuang Railway loan affects seriously the sale of any future bonds of the Chinese Republic in the markets of New York and London. Payment on the coupons attached to the bonds which were originally issued, payable to bearer, has been refused by the Chinese Government, unless the holder can prove that he purchased the bonds prior to the date when war was declared between China and Germany. It is believed that the Chinese Government does not fully appreciate the importance of this question, or the effect of its decision upon any future offering of bonds of the Chinese Government in the western money markets. Accordingly this memorandum is submitted in order to bring the matter to its attention for further and immediate consideration.
In western countries bonds and coupons which are issued payable to bearer are treated by common commercial custom almost in the same manner as bank notes. In order to secure a ready market, they must be transferable almost in the same manner as bank notes or [Page 641] other money. By the western custom of bankers (which has been adopted by laws which have been passed), the purchaser in good faith of a bond, or coupon, “payable-to-bearer”, acquires a good title to it, and an absolute right to receive the money, unless, perhaps, some third person can prove that the bond was his and was stolen from him. This is one of the principal elements that gives value to a bond payable to bearer. Any interference with this custom and any hesitation on the part of a Government which issues bonds to pay them or their coupons to the bearer when presented, makes the bond unmarketable in such money centers as New York or London. It is of the greatest importance that the Chinese Government fully appreciate this custom, because the securities of any Government which fails to observe this custom will become unsalable on the great western Stock Exchanges.
When an issue of bonds is made, it is not possible to make any distinction between one bond and another bond of the same series. If part of the bonds will be paid and part will not be paid, the value of every bond of such an issue is affected, because no one will purchase a bond of an issue part of which is good, and part of which will be refused payment. In all great western Stock Exchanges, there are many bonds offered for sale of all the countries of the world, and if purchasers learn that any one Government refuses to pay some of its bonds which are payable to bearer, they will not buy the bonds of that Government, but will in preference buy the bonds of Governments which make no such distinction. It should therefore be fully appreciated that a refusal to pay any securities by a Government affects all its securities, and will eventually result in that Government being unable to obtain any substantial credit.
In the case of the Hukuang Railway, the bonds and coupons are all alike, and are payable to bearer in Sterling. Since these bonds were sold, many of those originally issued in Berlin have been bought in good faith by the citizens of allied countries, the United States, Great Britain and France. Since war was declared between China and Germany, bonds, no doubt, have been sold through neutral stock exchanges, and have been purchased by citizens of the allied and of neutral countries in perfect good faith. The Chinese Government is now refusing to pay the interest on any bonds originally issued in Germany, unless the holder can prove that he purchased the bonds before the date of the declaration of war between China and Germany. This causes great inconvenience, and in many cases, the bonds have changed hands more than once, so that it is impossible for the holder to prove that they were not owned by Germans on this date.
The result of this action on the part of the Chinese Government has been to create the impression that no one is safe in purchasing [Page 642] a Chinese Government bond, because when he attempts to collect the interest he may be required to prove that these bonds were not owned by Germans in August, 1917, and in some cases, he is unable to prove who owned the bonds on this date, as bearer bonds pass from hand to hand like bank notes, and the holder will therefore lose all that he paid for the bond. Any hesitation in the payment of bearer bonds creates an impression that no one is safe in buying bonds issued by the Chinese Government, and such an impression makes it impossible to offer Chinese securities for sale on the western money markets.
During the war, this question was not considered a vital one, because it was recognized that the Chinese Government might properly require evidence that the holder[s] of bonds were not Germans, so that it would not be compelled to pay money to citizens of an enemy country. The war is over. The fact that China has not signed the Peace Treaty does not affect this question, because it is a fact that the war has stopped, and the signature to a Peace Treaty is not always necessary to declare war ended, but it is only one method of making a peace. Debts due to enemies during the war are not cancelled or extinguished by the war, but only suspended, and are revived when the war is over. If, therefore, the Chinese Government continues to take the position, now that the war has ceased, that it will not pay the coupons on the bonds of the Hukuang Railway loan issued in Germany, unless the holder can prove that they were not owned by Germans during the war, the credit of the Chinese Government, already seriously affected in New York and in London, will be brought so low that purchasers cannot be found for future loans of this Government in the western markets, because, as already explained, one of the principal elements giving value to securities payable to bearer is the fact that the bearer is entitled to an absolute right to receive from the Government issuing the bond, the amount of it. Any action by the Chinese Government in violation of this custom of the western banking communities will permanently render its securities unsalable.
Purchasers of these bonds who have been unable to collect the coupons have complained to the Stock Exchange in New York that the Stock Exchange is permitting the sale of securities payment on some of which is being refused, and have demanded that the Stock Exchange prohibit all further dealings in these securities, on the ground that this Exchange cannot permit securities to be sold to the public when it knows that there is any question about the right of the purchaser to collect payment on part of the securities issued. Action on this complaint has been delayed only pending representations to the Chinese Government, in the belief that that Government, when the facts are fully presented to it, will recognize the [Page 643] custom of the western bankers, but it is impossible to delay action longer. If the Chinese Government should fail to recognize its larger interests in this situation, and decline to reconsider the matter, now that the war is ended, it will be impossible for the American—and for the British—Groups of bankers to make any successful offering of Chinese Government securities in their own markets.
- Copy of this memorandum reached the Department in June 1920; the exact date and manner of receipt not definitely indicated.↩