893.51/6433: Telegram
The Ambassador in the United Kingdom (Bingham) to the Secretary of State
[Received August 12—3:30 p.m.]
535. With reference to your 342, August 9, 7 p.m.,1 I have received from the Foreign Office a confidential letter which supplements the memorandum quoted in my 394, June 24 [21], 2 p.m. The pertinent points of the letter are as follows:
- 1.
- That the Chinese authorities have been in communication with the Hong Kong and Shanghai Banking Corporation with a view to settling the terms of the 20 million pound currency loan and that the [Page 620] Foreign Office understands that the Chinese are likely to accept the conditions mentioned in its previous memorandum.
- 2.
- However, the negotiations have not progressed nearly as far as press reports imply and “it is obviously impossible that a loan should be issued during the continuance of the present state of tension in North China”.
- 3.
- Reference is made to the resolution adopted at the May 6 meeting of the Consortium Council, to the letter of July 23 addressed by the British Group to the other groups2 regarding the proposals for the Pukow–Siangyang Railway, to which no replies have been received, and in this connection it is stated that “on the 30th July an agreement was reached between the Chinese Government on the one hand and the British and Chinese and China Development Finance Corporation on the other for the issue of a pounds sterling 3 million loan for the Canton–Meihsien Railway, and on the 4th August a second agreement between the Chinese Government on the one hand and Chinese Central Railways and the China Development Finance Corporation on the other for the issue of a pounds sterling 4 million loan for the Pukow–Siangyang Railway. The latter agreement contains the following proviso: Notwithstanding any of the provisions hereinbefore contained, none of the clauses in this agreement shall become effective until the present Consortium obligations, which are now the subject of discussion between the governments concerned, cease to be binding on the British Group”.
I have also been given in confidence copy of a letter addressed by Padfield of the Hong Kong and Shanghai Banking Corporation, to Kung under date of July 30 together with the latter’s reply of August 3 which are quoted verbatim:
“I write again you this letter for the purpose of placing on record what I understand to be the conclusions to be drawn from the recent discussions with Mr. T. K. Tseng. I should be grateful if you could confirm that the following accurately represent your wishes and intentions:
- (1)
- The Chinese Government contemplate approaching the London market through the Hong Kong and Shanghai Bank for the issue of a sterling loan for an amount or amounts up to pounds sterling 20 million in all, such loan to be known as the Chinese Government refunding loan of …3
- (2)
- The proceeds of the loan would be paid to the Central Reserve Bank of China and held by it in sterling in London and used solely for foreign exchange transactions to maintain the stability of the Chinese currency as at present established.
- (3)
- The Chinese dollar counterpart would be used gradually over a period for the redemption of existing domestic bonds.
- (4)
- An adviser to the Central Reserve Bank of China would be appointed in consultation with whom the foregoing disposition of the loan proceeds would be effected.
- (5)
- The security in respect of principal and interest would be the entire revenue of the Chinese Maritime Customs Service after provision for all existing charges.
- (6)
- The administration of the Chinese Maritime Customs Service shall continue as at present constituted during the currency of loan.
With reference to the foregoing I have to say that the Hong Kong and Shanghai Bank would be prepared, subject to the security referred to under paragraph 5 above proving adequate and to there being no objection on the part of His Majesty’s Government, to give favorable consideration to the issue of such a loan provided that the current negotiations in regard to the Consortium have removed any obstacles on that account to such a sterling issue. It is understood of course that the actual time of issue and the terms on which the loan could be placed would have to be governed by the London market conditions.
I am sending a copy of this letter to His Majesty’s Treasury and to the Foreign Office.”
Kung’s reply is as follows:
“I wish to acknowledge the receipt of your letter of 30th July and to thank you for the interest you have taken in the proposed loan in London. From time to time, Mr. T. K. Tseng and Doctor P. W. Kuo have reported to me the conversations they have had with the officials of the Treasury and of your Bank regarding the matter. In general their reports correspond with your observations with the exception of article 5 which they understand to be that the proposed loan would be charged on the customs revenue, ranking immediately after the internal consolidated and recovery loans of 1936.
I assure you that I am [pleased?] to receive your understanding of these conversations and that the matter will receive my careful attention.”
In the course of a conversation Sir Frederick Phillips4 reiterated that irrespective of future developments Chinese credit in London had been unfavorably affected by recent events in North China and that neither the proposed currency loan nor the two proposed railway loans can be effected unless market conditions prove favorable and that the present situation in China is likely to have an adverse effect on them for some time to come. Phillips also said that the Chinese had been losing “a fair amount” of sterling; that in his opinion they could hold their currency under present conditions for several months if they wished to do so but that if a real war came “there is no telling.”
I gather that similar communications have been given by the Foreign Office to the French and Japanese representatives.