693.002/454: Telegram

The Consul General of Shanghai (Gauss) to the Secretary of State

126. Reference my 113, January 20, 6 p.m., regarding customs. Inspector General of Customs has now communicated to the British and French diplomatic representatives and to me a letter from the Commissioner of Customs outlining the Japanese proposals, as reported in my 113. Inspector General thinks these proposals if officially confirmed by the Japanese and accepted by the Chinese Government, and if scrupulously observed, would protect foreign obligations and provide for financial upkeep of the service but he questions whether they will prove acceptable to the Chinese Government as the Shanghai revenue which is normally about 50% of the total for all China would be placed in a bank functioning under Japanese law and the arrangement for Shanghai might in due course be extended to most if not all principal ports of China and thus give Japan control over funds which in the past have served Chinese domestic loans and administrative expenses. He suggests that the holding of such balances by Japan might facilitate their diversion toward payment of the large unsecured and inadequately secured Chinese debts to Japan. He also recalls that the question of custodian banks for customs revenues has long been the subject of international discussions, the last occasion being at the Tariff Conference in 1926 when Japanese made proposals which would have given them predominant positions through their interest in unsecured debts. However, he considers the proposals offer a basis of discussion and they will in due course be submitted to the Chinese Government. Meanwhile he desires that our respective governments be informed.

Repeated to Tokyo, Hankow and Peiping.

Gauss