The Chargé in China (Peck) to the Secretary of State
[Received February 8—8 a.m.]
77. During informal visit to Kung, Minister of Finance, February 5, 5 p.m., he told how the British kept pressing him to permit implementation of the agreement in regard to the Maritime Customs that as he asserted Hall-Patch49 had concluded for the apparent purpose of giving some protection to British holders of Chinese obligations. On February 4, Scott,50 Acting Financial Adviser to the British Embassy in the absence of Hall-Patch, called on Kung and again urged implementation and Kung returned positive refusal. Kung said that in view of the sympathetic and helpful attitude of the American Government he wanted to keep us informed of these and proceeded to explain some of the reasons he gave for his refusal. The main objection of course was one of principle. The British Government contend that the Inspector General of Customs is subject to the authority of the Chinese Government and therefore they are not consistent in suggesting that the Chinese Government would not be implicated if it were tacitly to permit their implementation of the agreement. He asserted that early in the hostilities the Chinese Government suggested that the interested powers take over custody of the customs. The Japanese objected for the obvious reason that they wanted to control the customs in order to obtain funds to finance their military [Page 814]operations and to have a means of controlling China’s foreign trade. As a Chinese official it would be actually treasonable for him to lend himself to any arrangement whereby government revenue could be used to finance war against China. The Japanese have never shown any good faith in these matters. For example, they promised to remit to the Chinese Government proportionate loan quotas collected by the Chinese customs in Dairen but have never done so and he did not believe that revenues collected by the customs in areas successively occupied by the Japanese forces have been immobilized but thinks these funds which should total 150 million dollars are being used or will be used to further the aims of Japanese aggression. He contrasted this with the action of the Chinese Government in advancing 175 million dollars to pay service charges on customs secured obligations even though the hypothecated revenues were being retained by the Japanese.
Kung said that the agreement provides that only obligations expressed in foreign currencies shall come within the scope of the agreement and that this is not a rational basis of discrimination since foreign currency obligations are held by persons of Chinese as well as many foreign nationalities whereas Chinese currency obligations including the internal debt service that do not share in the benefits of the agreement are held by many persons of foreign nationality as well as Chinese. The Chinese Government could not make this discrimination between equally binding obligations particularly on this irrational basis.
The British in official notes on the increase of Japanese personnel in the customs when no additional British subjects were being admitted referred to the duty of the Chinese Government to maintain a certain ratio between nationalities but as just described they ignore other duties even more binding on the Government. Kung said he was gratified that the American Government had informed the Japanese Government of American general interest in the integrity of the customs but he suggested that through the American share in the Boxer Indemnity the United States was in position to assert a particular legal right to the functioning of the customs. (It occurs to me he may have had in mind the subject matter of Shanghai’s 92 of February 2, 6 p.m., stating that indemnity payments will henceforth be placed in a special account pending receipt of quotas from Japanese occupied areas.)
Throughout this conversation I avoided expressing any opinion on the subjects discussed by Kung. While the tone of the interview between Kung and Scott was on the whole amicable yet Kung was very critical of Great Britain and said it was time that country actually did something on behalf of China and of its own interests now threatened by Japanese policies.[Page 815]
I may add that Dr. Young,51 American Adviser to the Ministry of Finance, recently remarked to a member of my staff that, as regards the granting of foreign credits to China, Russia has hitherto supplied the largest sums and further grants are being received from that country despite its straitened financial position. He also observed that Germany had extended more credits to China since the commencement of hostilities than Great Britain and that the German credits are still being utilized by virtue of their revolving character.
Repeated to Shanghai and Peiping. Latter send code text by mail to Tokyo.