Foreign Relations of the United States Diplomatic Papers, 1938, The Far East, Volume III

693.002/576: Telegram

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

Shanghai, March 25, 1938—noon.
[Received March 25—11:35 a.m.]

451. Following from Tokyo:

198. “March 24, 8 p.m. The British Ambassador called this morning and informed me that his negotiations with the Japanese Government with respect to the settlement of the Chinese customs question were coming to a close. He furnished me with a copy of the text of a proposed agreement which he has telegraphed to Ms Government. He believes the proposed agreement, which the Japanese would like to put into force from April 1st next, represents the maximum concession obtainable from the Japanese and that it will be generally satisfactory to the British Government although there are two or three points which may require modification. The Ambassador stated that he believed the agreement would be satisfactory to the Chinese in view of the fact that the Japanese were agreeing to the full servicing of the foreign loans and thereby helping to maintain China’s credit and furthermore that the arrears on the foreign loan and indemnity service at present deposited in the Hong Kong and Shanghai Bank would be released to meet the relevant overdraft of the Central Bank of China for the loan and indemnity payments for which they act as security.

The French Ambassador has cabled the text to his Government and asked for instructions.

Craigie expressed the hope that the settlement of the customs question by the proposed agreement would prevent the Chinese from further playing of the American, British, and French Governments against Japan. Craigie then stated that he hoped that if we could not accept or approve the proposed agreement our Government would at least express no objection to it.

The proposed agreement presumably is to be initialed by Craigie and the Minister for Foreign Affairs and despatched to Shanghai to be signed by the Inspector General of Customs and the Japanese Consul General at Shanghai.

Hall-Patch, financial adviser to the British Embassy in China, is arriving in Tokyo tonight for consultation.

The text of the proposed agreement is as follows:

• ‘1. All revenues collected by the Chinese Maritime Customs at each port within the areas under Japanese occupation to be deposited with the Yokohama Specie Bank or, where the bank has no branch, with any other bank or banks agreed upon.
• 2. From revenues thus deposited, foreign loan quotas to be remitted at intervals agreed upon to the Inspector General’s account at the Yokohama Specie Bank in Shanghai in order to meet in full on due dates the service of such foreign loans and indemnities secured on the customs revenues as were regularly met up to July, 1937.
• 3. The service of foreign loans and indemnities secured on the customs revenues to be treated as a first charge on the revenues after deducting the maintenance expenses of the Customs Administration.
• 4 (a) Foreign loan quota for each port to be in proportion to its share of the total revenue for all ports during the 6 months period commencing September 1, 1937.
• (b) Quotas to remain good for 6 months, except in the event of a radical change affecting the proportion of revenue of each port, whereupon a readjustment of the quotas is to be undertaken.
• (c) Quotas for the following 6 months to be determined at the close of the first 6 months period on the basis of the actual revenue during that period.
• (d) All calculations in respect of quotas to be based on Chinese customs statistics and to be determined on the above basis by the Chinese Customs Administration with the agreement of Japan and the interested third powers.
• (e) Any insufficiency of revenue to meet the quota of any port within the area under Japanese occupation in North China and in Central China to be made up out of the revenue of other ports in the respective areas.
• 5. (a) A reserve fund in respect of North China revenues to be created from the revenues now being held at Shanghai and Tientsin of a sum, equal to the foreign loan quotas for Tientsin and Chinwangtao determined according to 3 [4?](a) for the period commencing on the date of the suspension of remittances to the Inspector General in October last and ending on the 28th February. This fund to be deposited in the Yokohama Specie Bank at Tientsin. The Inspector General to be authorized, after consultation with the proper Japanese authorities, to make the necessary requisitions from this fund in order to make good any insufficiency of revenue to meet quota payments at any port in North China under Japanese occupation.
• (b) A reserve fund in respect of the Central China revenues to be created from the accumulated balance of current revenue collections at Shanghai now deposited at the Hong Kong and Shanghai Bank. This fund, of which the amount would be equal to the fund to be created under paragraph (a) above, will be deposited in the Yokohama Specie Bank at Tientsin. The Inspector General to be authorized, after consultation with the proper Japanese authorities, to make the necessary requisitions from this fund in order to make good any insufficiency of revenue to meet quota payments at any port in Central China under Japanese occupation.
• (c) The arrears on the foreign loan and indemnity service at present deposited in the Hong Kong and Shanghai Bank at Shanghai to be released to meet the refund overdraft for which they act as security.
• (d) The arrears on the Japanese portion of the Boxer indemnity held in a suspense account at the Hong Kong and Shanghai Bank since September 1937 to be transferred to the Yokohama Specie Bank for the account of the Japanese Government.
• (e) Future payments of the Japanese portion of the Boxer indemnity as well as the Japanese share of the reorganization loan of 1913 to be made from the Inspector General’s accounts at the Hong Kong and Shanghai Bank and the Yokohama Specie Bank as in the servicing of all foreign loans and indemnities secured on the customs revenue.
• (f) After the above-mentioned payments and adjustments have been made the balance of the customs accounts with the Hong Kong and Shanghai Bank in each port under Japanese occupation is to be transferred to the branch of the Yokohama Specie Bank in each port and utilized for future foreign loan quota payments’.

The following is a paraphrase of Craigie’s telegram to his Government commenting on the proposed agreement:

‘The arrangement proposed represents the best I can hope to get here and, while we need not take too seriously Vice Minister’s warning in regard to impatience of local authorities, I am definitely of opinion that further bargaining now over details will only play into hands of opponents of any arrangement with foreign interests.

Under proposed arrangement we secure return to central bank of Shanghai arrears on foreign loan quotas (£6,700,000) and creation of reserve fund in addition to reserve fund for northern area. It is useless to press further for any control over surplus balances whether of arrears or of future collections, but arrangement contains no mention of how surplus is to be disposed of after deposit in Yokohama [Specie] Bank and we remain free to continue unofficial pressure on behalf of domestic loan service. I have proposed deposit of surplus in name of Inspector General (see Shanghai telegram to Foreign Office No. 482) but I do not think Japanese Government will agree. Vice Minister hopes that new currency in North China will be placed on a convertible basis before arrangement is concluded, but agrees that, failing that, a clause must be added to ensure that northern revenues are made available to the Inspector General either in Chinese legal tender or in foreign currencies necessary to these obligations.

I hope to receive simultaneously desired assurances as regards Japanese non-military imports and customs launches, except that latter must at present be confined to ports in occupied area. I am hopeful however we may gradually be able to secure release of some launches for operation off coasts of unoccupied area. Decision on 1931 tariff still hangs fire and I do not anticipate answer before end of month: but omens are favorable and I do not recommend insistence on obtaining parallel assurance on this point.

It is just possible that, after discussions with financial adviser, we may still be able to get monthly basis of calculation of quotas in return for abandonment of all claim to creation of reserve funds, but I am not sanguine of this nor am I convinced that it is wise policy.

Subject to any amendments which financial adviser may propose on points as to detail, I hope I may have your authority to agree to proposed arrangement before the end of this month. It will, I presume, ultimately take the form of an agreement between Inspector General of Customs and Japanese Consul General at Shanghai, but I should be grateful for your views on this point.’

Please repeat to Hankow and Department as our No. 198, March 24, 8 p.m. Grew.”

Gauss