893.51/3030: Telegram
The Secretary of State to the Minister in China (Crane)
315. Following from American Group to its representative in Peking:
“1. The Finance Minister has sent us unofficial message through Hsu Un Yuen that he would appreciate temporary advance of $5,000,000 to tide over present difficulty. We have explained to Hsu and should be glad to have you inform Finance Minister verbally that Consortium cannot consider piecemeal business and that any loan to be successfully offered on American market must form part of comprehensive plan for constructive effort in China; otherwise public will not subscribe. During all of the Consortium meetings there was evident the greatest wish to assist the Chinese Government along constructive lines looking to the development for China’s benefit of her great resources. Nevertheless in view of limited amount of funds available for China in near future because European markets are largely closed to any outside investments, and Japanese market has been undergoing difficulties and American market [Page 667] is not yet acquainted with Far Eastern issues, Consortium considers that loan should be raised only for constructive purposes, particularly railways.
2. After having discussed this matter informally with British. French and Japanese representatives of Consortium in New York, we are sending this cable to advise Minister of Finance and other Group representatives in Peking through you that we have been considering means whereby Consortium can be of early practical help, and that, subject always to market conditions, we believe it would be possible to consider a loan looking towards completion Canton-Hankow Railway and, when additional funds become available, for the further development of the Hukuang Railway system.
Conditions precedent would be:
(a) Complete recognition by Chinese Government of liability of complete original issue of Hukuang bonds without distinction. On this point Consortium adopted the following resolution:
‘It was resolved, without questioning that the course hitherto pursued by the Chinese Government has been followed in good faith, that it is now manifest that the successful flotation of further Chinese loans in foreign markets, which are necessary if the work of the Consortium for the benefit of China is to be carried out, imperatively requires a public announcement by the Chinese Government with reference to the German issue of bonds forming part of the Hukuang Loan, to the general effect that after consideration of all the facts and the unprecedented conditions involved, and resolving all doubts in favor of the holders of such bonds, the Chinese Government has determined to recognize the entire issue without distinction.’
(b) Provision for separate security for proposed loan operation. In this connection Pacific Development Corporation seems willing to give American Group for benefit of Consortium an option on its entire position under its loan agreement of November 26, 1919. Present contract specifies neither objects for which loan shall be devoted nor provides any measure for supervision of expenditure of loan proceeds. Both these are cardinal principles in new Consortium’s policy, and accordingly if Chinese Government is prepared to approve transference of contract to us Consortium will need to revise the existing agreement with provisions specifying objects of any loan to be raised on the security of the wine and tobacco tax, the Chinese Government accepting frankly the principle of reasonable supervision along lines of salt service and expenditure of proceeds for purposes agreed upon, as well as the continuation in office during the full period of any loans made, of the present associate inspector or a successor approved by the Consortium.
(c) Development of the Hukuang Railway Loan Agreement along lines covered in letter addressed to the Minister of Communications by Peking representatives under date of April 28, 1920.28
3. On the foregoing basis we should hope it would prove practicable to proceed before long with a first issue of a loan of which total could be fixed at $100,000,000 gold, all of such loan to be equally secured by a lien on revenue of Wine and Tobacco Administration pari passu with existing loans so far as practicable and prior to any future charges, the loan to cover also the revenues of railways to be constructed. The first issue we would anticipate might be for [Page 668] the equivalent of $20,000,000 gold, or possibly $25,000,000 gold, depending upon what share could be absorbed by London and Tokyo markets. Present conditions in American market would call for an 8% bond, running for twenty or twenty-five years and sold publicly at perhaps 96 or 97, thus realizing in the neighborhood of 90 net to China, the service of the loan to include a sinking fund sufficient to retire, say, not less than 5% of the issue each year either by purchase in market at lowest possible price or by call at, say, 115 along lines of Belgian and other foreign government loans recently issued in America. Out of the proceeds provision would be made for paying Pacific Development Loan and providing for Chinese requirements for Hukuang coupons and bonds now in default, the balance being earmarked for Canton-Hankow line. Future issues would contain such terms as the then conditions would require, and would be subject to the fulfillment of the condition that the then annual revenue of Wine and Tobacco Administration for a period of, say, three consecutive years should not be less than, say, twice the annual service on all outstanding loans secured thereon and on bonds proposed to be issued.
4. You will understand that the carrying out of any such plan as this is subject to all possible modifications required by changing market conditions; in fact, ordinarily we should delay making any concrete proposal but owing to the conditions which it is necessary for the Peking Government to meet in order to clear up their own situation, we think it wise to lay our tentative views before you for informal discussion with the Minister. If such a plan could be carried out, we should expect as part of the program that Chinese Government would authorize an issue of silver bonds to be issued in China, through the banks for subscription locally, under such terms as may be agreed upon between Chinese Government and representative banks, but not more favorable to the investor than terms proposed for the foreign loan.
5. The entire plan is based on our assumption that present charges on Wine and Tobacco Administration are limited to the following:
- Frs. 100,000,000 Pukow Industrial Loan of 1934 [1914?];
- £500,000 Chihli Provincial Loan due—date unknown;
- $5,500,000 Continental and Commercial Loan due November 1, 1921;
- $5,500,000 Pacific Development Loan due December 1, 1921.
Please confirm our understanding in this respect, and that charges on Communications Loan of £5,000,000 will continue to be paid out of revenue of Peking-Hankow Railway, and such revenues are sufficient therefor. If, as we understand, no work has been done on Pukow Industrial project and proceeds of loan are on deposit in France, we recommend paying off this loan because of exchange situation.”
Mr. Lamont of the American Group asks that in transmitting the above message to the representative of the American Group in Peking, you will be good enough to explain to him that he will of [Page 669] course confer with his colleagues of the other groups as to the manner of presentation of this tentative plan, which has the approval of the Consortium as a whole.