861.77 Chinese Eastern/1400

The Ambassador in Japan (Grew) to the Secretary of State

No. 1235

Sir: I have the honor to report that, at 10:15 on the morning of Saturday, March 23, 1935, at the Japanese Foreign Office the official representatives of Soviet Russia, “Manchukuo”, and Japan signed the documents for the transfer of the Soviet interest in the Chinese Eastern Railway to “Manchukuo”. Therewith control of the railway with its affiliated properties in North Manchuria finally passed out of the hands of Russia. Coincident with the legal transfer which took place in Tokyo the physical transfer of the railway began in Manchuria with a ceremony in Harbin. No unexpected development or sensation marred the culmination of the long negotiations.

The transfer documents were, as anticipated, four in number:

An agreement between “Manchukuo” and Soviet Russia for the transfer of the Soviet rights in the railway.
A subsidiary protocol relative to the same.
A protocol signed by the representatives of “Manchukuo”, Japan, and Soviet Russia concerning the payments in goods.
An exchange of notes between Japan and Soviet Russia embodying Japan’s guarantee of the payments by “Manchukuo” called for by the terms of the sale.

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The texts of the above documents, as published in the Japanese Official Gazette, are being transmitted with despatch No. 1231 of April 5, 1935.2

On the same day, March 23, the government of “Manchukuo” signed a contract entrusting the management of the Chinese Eastern Railway to the South Manchuria Railway Company. The contents of this contract, as reported by the Japan Advertiser in its issue of March 24, 1935, are set forth in an enclosure herewith.2

The points in which the actually concluded terms of the sale differ from what was anticipated in previous reports are not great. The total sum of retirement allowances is not stipulated in the agreement; they are to be made under the existing regulations of the railway, and (according to the Counselor of the Soviet Embassy)* will amount to between twenty-eight million yen and thirty million yen, depending on the extent to which the new owners will make use of their privilege of retaining temporarily certain Soviet employees. The division of payments as between cash and goods installments is also slightly different from the anticipated figures. ¥23,300,000 was paid on the day of sale, ¥23,400,000 is payable in “Manchukuo” 3% Treasury bonds falling due in four installments over the next three years, and ¥93,300,000 will be settled in the form of Japanese and “Manchukuo” goods.

The attention of the Department is particularly invited to the contrast between the Japanese Government guarantee of “Manchukuo” payments for the railway rights and the Japanese Government refusal, in the Manchurian oil monopoly dispute, to agree to any proposition which imposes on Japan responsibility for “Manchukuo” matters. According to the translation of the Japanese Foreign Minister’s note of March 25, 1935, to the British Ambassador, which according to semi-official statements will likewise serve as the basis of the Japanese reply to American inquiries on the subject of the oil monopoly in Manchuria3 (despatch No. 1226, April 5, 19352), the Japanese reply included the following statements:

“The Japanese Government cannot, at all events, agree to any proposition which imposes responsibility on it concerning the action of the Government of Manchukuo nor to any view put forward on the premise of the non-recognition of Manchukuo.”

“Although the Japanese Government is ready to do everything in its power to mediate between the interested parties to bring about an amicable settlement of their business affairs, it is not in a position to intrude in, or interfere with, such domestic affairs of Manchukuo.”

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It will be recalled that, early in the railway sale negotiations, there were assertions from Japanese sources to the effect that “Manchukuo” must, as an independent state, be treated in a manner properly respectful of her sovereignty, and that Japan could not take any step regarding the railway purchase derogatory to that sovereignty. In spite of these early assertions, and in spite of the stand assumed on the oil monopoly question, one of the notes of March 23 from Mr. Hirota to Ambassador Yurenev states that “the Japanese Government undertake to guarantee the exact fulfilment by the Government of Manchukuo, within the respective limits of time set forth by the above-mentioned Agreement, of all the obligations of payment, in money as well as in goods, which the Government of Manchukuo are under in favour of the Government of the Union of Soviet Socialist Republics as the result of such cession in accordance with Article VII of the said Agreement.” This sweeping support of the “sovereign state” in Manchuria grossly contradicts the Japanese disclaimer of responsibility, and refusal to assume responsibility in other questions in dispute.

In considering the repercussions of the sale of the Chinese Eastern railway to “Manchukuo” it may be recalled that Japan is making a financial commitment of considerable magnitude. The amount of Japanese capital involved is estimated as follows:

“Manchukuo” bonds to be purchased by the Japanese banking syndicate to finance the payments for the railway: ¥180,000,000
Estimated Cost of rehabilitation of the Chinese Eastern Railway 100,000,000
Total commitment ¥280,000,000

Actually the figure of ¥280,000,000 is a conservative estimate which may well be exceeded. Mr. H. W. Kinney of the South Manchuria Railway has estimated that the cost of rehabilitation of the Chinese Eastern Railway will be “upwards of ¥100,000,000”, while recent newspaper estimates have ranged between ¥100,000,000 and ¥150,000,000. To be sure, not all of this sum will be called for in 1935 nor will the amount of the goods payments, ¥93,300,000, affect the Japanese yen exchange. Nevertheless, the seriousness to Japan of a commitment of this size may be gauged by the steps which were taken to prevent the initial cash payment of ¥23,300,000 from adversely affecting the yen exchange rate. Although the Industrial Bank of Japan gave the Soviets a yen check for ¥23,300,000 it was arranged that this check should be endorsed over to the Yokohama Specie Bank which in turn credited the Soviets with an equivalent amount in sterling from its London account.

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There have been several other indications that the Japanese Government is concerned over the financial drain involved in such large investments in “Manchukuo”. Some weeks ago the Finance Minister, Mr. Takahashi, warned against excessive investment. Several days ago a member of the Commercial Bureau of the Foreign Office mentioned to a member of my staff that the only large Japanese investment in 1935 in Manchuria would be the investment in connection with the Chinese Eastern Railway. The implication was that the movement of Japanese capital to Manchuria is being curtailed and will not be so large as in 1934.

Aside from the degree to which the financial resources of Japan are liable to be taxed (and this is not easy to assess), the commitment is important from a political point of view. The Japanese stake in Manchuria has been measurably increased, and it has become more vital to Japan by just so much that the Manchurian venture should be profitable. Accordingly it follows that it is just so much more important to Japan to retain complete control of the administration of “Manchukuo”.

Respectfully yours,

Joseph C. Grew
  1. Not printed.
  2. Not printed.
  3. See enclosed Memorandum of Conversation, March 28, 1935, between Mr. Coville and Mr. Rayvid, Counselor of the Soviet Embassy. [Footnote in the original; enclosure not printed.]
  4. See pp. 877 ff.
  5. Not printed.