Papers Relating to the Foreign Relations of the United States, 1922, Volume I

893.51/3855

The American Group to the Secretary of State

New York, June 12, 1922.
[Received June 13.]

Sir: We attach for the information of the Department a copy of the report adopted on May 15th last at a full meeting of the Council of the Consortium for the assistance of China held in London. The report was duly signed by the various delegates present, as you will note.

The report was adopted for presentation to the groups and, if they approved, for subsequent publication. It is intended to set forth certain of the guiding principles of the Consortium, and to meet some of the unfounded reports recently current in China. While the substance of this report calls neither for the approval nor disapproval of the Department, you will of course understand that we shall very cordially welcome any comment that the Department may see fit to make.

Respectfully,

J. P. Morgan & Co.
For the American Group

[Enclosure]

Report of the Council of the Consortium, Adopted at a Meeting Held May 15, 1922, in the Office of the Hongkong & Shanghai Banking Corporation, London

• Present.
  • Sir Charles Addis, K. C. M. G.
    Representing the British Group
  • Monsieur E. Thion de la Chaume
    Representing the French Group
  • Mr. Thomas W. Lamont
    Representing the American Group
  • Mr. T. Okubo
    Representing the Japanese Group

• In Attendance.
  • Mr. W. E. Leveson
  • Monsieur R. Saint Pierre
  • Mr. Jeremiah Smith
  • Mr. C. F. Whigham

I. General Policy

1. The policy of the Consortium, namely the substitution of international co-operation for international competition in the economic and financial affairs of China, has now been definitely affirmed and endorsed in a larger sense by China and the Powers in the Treaty signed at Washington on February 6, 1922.³⁴

2. The Treaty is in effect an undertaking by the Powers to respect the sovereign rights of China, to preserve her territorial integrity and to provide her with a free and unembarrassed opportunity to develop her economic resources and maintain for herself an effective and stable government.

3. The Consortium is an appropriate instrument for giving effect to this policy. It is not designed as a permanent organisation, but rather as a temporary bridge by which China may be assisted to pass in comparative safety through the difficult period of transition from an unsettled to a settled state of government.

4. What has already been accomplished appears to justify the belief that the Consortium has been constructed on sound lines, and may reasonably be expected to fulfil the purpose for which it was designed with due regard to the natural susceptibilities of the Chinese on the one hand and the security of the foreign investor on the other.

5. It is popularly supposed, and occasionally asserted, that the main object of the financial Groups composing the Consortium is to harvest undue profits reaped from loans forced upon China under the protection of their respective governments. This is not the case. On the contrary it has been by their consistently refraining from lending that their principal success has been achieved in encouraging the utilisation of native savings before recourse is had to foreign capital, and in arresting the profligate expenditure which was heading the country straight for bankruptcy. It is not too much to say that the Consortium has helped to stimulate and foster a sane and independent public opinion in China, and, by putting a stop to the menace of financial penetration arising from indiscriminate and unproductive foreign borrowings, is helping to conserve the integrity of the country.

6. Much still remains to be done, and until their work has been accomplished the several Groups of the Consortium are convinced that they would not be justified in having regard merely to their own convenience by resuming their freedom of independent action. They are reinforced in this conviction by the consideration that the Consortium appears to form the chief barrier between China and the policy of Spheres of Interest which prevailed during the last decade of the XIXth century. It will be remembered that it was during that period, known as the “Battle of the Concessions,” that definite claims to exercise preferential rights over specific geographical areas of China were advanced by different Powers. If these claims had been maintained the disintegration of China must have followed. Any backward step towards the resumption of a similar policy might well be expected to produce similar results.

7. The pressure upon modern nations to discover and develop outlets for their trade is increasing, and China presents to-day by far the largest undeveloped field for commercial expansion. If the restraint at present exercised by the co-operative action of the Consortium is removed, the resort to the pressure of individual agents in competition with each other would appear to be inevitable. From that it would be but a step to the intervention of foreign governments in order to protect the vested interests acquired by their nationals in different parts of China, and Spheres of Interest, with consequences disastrous to China, would once more be established.

8. It is more in the interests of China for the Powers to deal with her as a whole rather than separately, in co-operation rather than in competition with one another. It is the aim of the Consortium to assist China in the building up of her credit until some day like other nations she can borrow for her requirements on the strength of her national credit, without the necessity of recourse to specific security or supervision of expenditure. When that day comes it will be time enough to talk of disbanding the Consortium. Until then the Consortium must remain intact and, with the approval and support of the Governments, continue to perform with patience the functions assigned to it.

II. Composition of the Consortium

(a) belgian group

9. In response to their request the conditions of membership in the new Consortium, namely (a) that each Group in the new Consortium shall be a national unit, (b) that no member of any Group shall within the scope of the Consortium represent directly or indirectly any other national interest, (c) that the Group agree to surrender all their existing agreements and options and (d) that they are assured of the complete support of their own Government, were communicated to Mr. Francqui on behalf of the Belgian Group in December, 1920.

10. No official application for membership in the Consortium has yet been received, and it is accordingly assumed that the Belgian Group find themselves unable as yet to accept the conditions laid down.

(b) italian group

11. An application by the Italian Group for admission into the Consortium was followed by a statement that the necessary formalities have been fulfilled, and that a list of the agreements and options to be surrendered by the Group will be transmitted at an early date.

III. Loan Policy

12. It is the settled policy of the Consortium to refrain from interference in the internal affairs of China. The present political upheaval in that country precludes the immediate hope of giving practical effect to any Consortium proposals for an administrative loan. Conditions, however, change so rapidly that the Groups must always stand prepared for action in anticipation of the time when China shall have again attained to such degree of political peace and security as to afford a reasonable prospect of a stable government.

13. Industrial Loans, in which railway loans are included, are in a different category. Provided adequate security can be obtained there seems to be no reason why the further development of railway communication in China, in itself a potent means of unification, should wait upon the solution of her administrative problem.

14. It is recognised that an essential part of any scheme for the financial reorganisation of China is the consolidation of the floating debt.

15. A certain portion of the Chinese public appears to be under the delusion that in some way or other the object of the Consortium is to obtain control of China’s finances and railways. If such a delusion really exists, it can only be due to a mistaken reading of every public announcement which has been made on the part of the Groups.

16. It has repeatedly been stated that interference with the domestic politics of China has no part in the programme of the Consortium, that the reorganisation of China’s finances must come from China herself, and that the role of the Consortium is limited to an endeavour to assist the Chinese Authorities, if requested to do so, in re-establishing economic and financial equilibrium.

17. It would be futile to ask the foreign investor, to whom the Consortium stands in the relation of quasi-trustee, to subscribe to a Chinese loan until he is satisfied that its proceeds will be properly expended and his capital duly returned to him at maturity. It is indisputable that this necessitates some measure of supervision, but no more control than the minimum actually required to provide the adequate degree of security without which it would be impossible to issue a foreign loan.

18. It is the policy of the Consortium to assist in building up the general credit of China on such secure foundations that all outside intervention may be gradually eliminated and the entire control of loan service and expenditure may finally pass into the hands of China herself.

IV. Railways

(a) german-issued bonds of the hukuang and tientsin-pukow railway loans

19. In the general interests of Chinese Railway finance it is imperative that the Chinese Government should announce without further delay the conclusion which they have reached with the German Government with regard to outstanding German-issued Railway Bonds.

20. The successful flotation of any further railway loan in foreign markets will be endangered unless the whole of the outstanding bonds of the Hukuang Railways Loan are recognised.

21. The Chinese Government should also state their intentions with regard to the un-issued German portion of the Tientsin-Pukow Supplementary Loan amounting to £1,134,000, and the advance by the Deutsch-Asiatische Bank to this railway of£900,000.

22. This should be followed by a statement of the number of bonds of both of the above-mentioned Railway Loans paid by Germany to China under the Treaty of May, 1921.

(b) options not specifically pooled

23. Referring to Article 2 of the minutes of the Paris Conference of May 11, 1919, although it is recognised that options arising out of agreements in possession of the groups at the time of the New York Conference, which for any reason were not included in the list of those offered for pooling on October 13, 1920, and particularly such options as arise out of old contracts for completed railways, are technically outside the scope of the Consortium, nevertheless, in accordance with the general principles of co-operation inherent in the Consortium, it is hoped that they may be offered by the member groups as an act of grace for participation on pooling terms.

(c) unification

24. The unification of Chinese Railways under the Chinese Board of Communications having been recommended by the Consortium as the policy China ought to pursue, it may be expedient to recapitulate some of the reasons which have led to this view.

25. Central financial and engineering organisation would facilitate a reduction of staff at every railway head office, simplify the keeping of railway accounts, and generally tend to economy.

26. Control of personnel and material by a Central Board should lead to uniformity and standardisation of rolling stock and equipment and the establishment of a properly trained and efficient railway service.

27. Pooling of railway earnings would tend to harmonise the market quotations for railway bonds, and might materially facilitate the making of new issues.

28. Interference with railway funds by parties having special interests in any particular line, or by local authorities in the lines feeding particular districts, would be estopped by unification of the railway system.

29. It is, however, clearly recognised that public opinion in China must have pronounced in favour of the change before any definite advance is made. Meanwhile unification should be kept steadily in view as the ultimate end to be achieved, and care taken to avoid any steps likely to delay its realisation or which might tend to perpetuate the present separatist uneconomical system.

(d) open tenders

30. It is an essential part of the Consortium programme to ensure for China the full advantage of world competitive prices by stipulating that all goods on which loan funds are expended shall be supplied by tender open to the nationals of any country, whether a member of the Consortium or not, and with no advantage to the Consortium Groups which supply the money other than that they shall have a preference upon equally favorable terms. This policy should be a sufficient answer to the charge that the action of the Consortium is unduly monopolistic in its tendencies.

V. Land Tax

31. There appears to be some misunderstanding in China with regard to the suggestion that the Land Tax might at some future date be utilised as a source of security for a supplementary administrative loan should the other revenues of the country prove insufficient for that purpose, or be already fully pledged. That the collection of Land Tax should be remodelled on the lines of that of the Maritime Customs, i.e., placed under foreign supervision, formed no part of the suggestion, and was not even discussed. Neither the application of foreign control to the collection of Land Tax, nor specific hypothecation of that security, came within the scope of the conclusions reached at the Consortium Conference at New York in October, 1920. The project of a loan secured on the Land Tax was not then and is not now under consideration by the Consortium.

• C. S. Addis
• R. Th. de la Chaume
• Thomas W. Lamont
• T. Okubo

34. For text of treaty, see ante, p. 276.