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by British engineers so as to cut off any possible connexion
between the Russian railways in the interior of China and
those in Manchuria. To this demand China yielded ; and

Foreign Investments 219

finally Russia and Great Britain came to an agreement to
the eifect that the former would not seek for railway con-
cessions for herself or her nationals in the basin of the
Yangtze, and the latter would not seek them to the north
of the Great Wall. At the same time, the Government of
Hong Kong was anxious to lend money to China to redeem
the Canton-Kowloon Railway from the American China
Development Company, to whom the construction had been
conceded, so as not to introduce American competition in
any region near the Colony.

Competition always promotes the interests of the con-
sumer, as he can then buy in the cheapest market, but, as
already noted, foreign competition in China is not governed
by economic law. It is a struggle between the diplomatists
of different Powers, or between diplomatists and the Chinese
Government. In fact, it placed China in the most anomalous
position, because the number of loans she could accept at
a time were not sufficient to satisfy the demands of all her
treaty States, with whom she desired to cultivate cordial
relations. Since 1908 the policy of competition has been
changed to that of co-operation. The Tientsin-Pukow
Railway was financed by a corporation consisting of the
Hong Kong and Shanghai Bank and the Deutsch-Asiatische
Bank. These two institutions negotiated conjointly with
the Chinese Government for a loan and divided it into two
parts, to be floated respectively in London and Berlin at
the same price and bearing the same interest. The northern
section of the line was to be constructed by a German
engineer and the southern by a British. The principle of
co-operation was further extended in the case of the Hu-
kvvang Railway, and tlic Currency Reform and Industrial
Development in Manchuria Loans finally, in 191 1, included

220 Economic Concessions and

France and the United States in the enterprises (in addition
to Great Britain and Germany).-^

With the negotiation of the Reorganization Loan in 191 3,
International Co-operation reached its culminating phase.
The banking Group representing four nations was extended
to one representing six. Russia and Japan were invited to
join the charmed Consortium and participate in the floatation
of the loan. It was now declared in the official language
of the Governments interested that Internationalization of
Chinese Loans had become their mutual determined policy,
and it was further proclaimed by the British Government
with full conviction that ' both in the interests of their own
financiers and the investing public, and also as a safeguard
of China's credit, it is incumbent on them to prevent . . .
all possibility of a return to the former dangerous policy of
unprofitable international competition in China, which only
enabled the Chinese Government to obtain money without
adequate guarantees, and rendered it impossible for the
Governments interested to exercise the necessary control
over the terms of any loans. There can be no doubt that
the internationalization of future loans would go far to
secure this desirable end '.-

International Co-operation, carried to this extreme, has
its drawbacks and is as injurious to China as unscrupulous
competition. It. denies her the freedom to contract loans
in the most reasonable market, and under the most favour-

^ It should, however, be noted that international co-operation does
not exclude China from negotiating separate loans, as she has in the case
of the Pukow-Sinyang and the Sinyufu-Shasi railway loans, but the
struggle for the right to finance and construct railways among different
Powers so as to check and balance each other has now come to an end.

^ Cd. 6446, p. 4. The Foreign Office to Lord Balfour of Burleigh.

Foreign Investments 221

able terms. It imposes on her the will of the lending group
and threatens to drive her into bankruptcy in case she refuses
to accept the terms. It creates a monopoly and destroys the
activities of other financiers. Moreover, if the control of
expenditure is enforced, it may lead to an international
control of China's finances on the Egyptian model, a control
that would destroy her fiscal independence.

For these reasons, the United States withdrew from the
Consortium and refused to commit herself to a policy
injurious to the Republic. Moreover, it should be noted
that while the five-nation group were deliberating with the
Chinese Minister of Finance on the security and interest,
the Chinese Government, through their agency in London,
signed quietly and confidently a loan for £1,000,000 with
a Stock Exchange broker, named Crisp, representing a group
of British and French financiers. The conclusion of this
loan created a storm of indignation in the chancelleries of
the Powers concerned and induced the Quintuple Group in
Peking to modify their terms. In the final agreement,
though it was provided that the Chinese Government should
give the group the option of issuing future loans guaranteed
on the revenue of the Salt Administration (on which the
Reorganization Loan is mortgaged), or supplementary to
the Loan just concluded for the same purposes as those to
which it was to be expended, namely, the redemption of
outstanding loans, the disbandment of troops, and the pay-
ment of current administrative expenses, there was created
nothing like a monopoly for the group or an international
control of China's finances. Moreover, it is very unlikely
that China will depend on further borrowings for the pur-
poses specified. In fact, it is only due to the disorganization
of her financial and political machinery caused by the

222 Economic Concessions and

Revolution that she is compelled to borrow money for these
purposes ; and if further loans are needed, as no doubt they
will be, they will, let us hope, be devoted to productive
purposes, such as extension of railways and reform of the
currency. For these productive purposes, China is free to
borrow on any market, and is bound by no obligation to
the Quintuple Group.

International control of China's finance may have been
avoided, but as a preliminary condition to the successful
conclusion of the loan, it was agreed that a Russian, a
German, and a Frenchman should be employed by the
Chinese Government to co-operate with their own officials
in the Audit Bureau and the National Loan Department
to which the control of the expenditure of the loan was to
be entrusted ; and that, should the representatives of the
Group ' be in doubt in respect to disbursements of loan
funds which have been made ' by the Chinese Minister of
Finance, the said representatives ' shall be entitled to make
inquiries of the foreign Director of the National Department
and to call upon him for the production of receipts and
vouchers for inspection '. Moreover, the Salt Gabelle, on
which the loan was mortgaged, had to be reorganized and
administered with the assistance of a foreign (British) Chief
Inspector and many other assistant inspectors (foreign). It
is true that these officials are all appointed and may be
dismissed by the Chinese Government, subject to no inter-
ference of the Group, but it is worthy of note that the fact
that they must be foreigners, and that the group insisted on
their appointment, is indicative of its anxiety to get the
loan funds properly expended and the security efficiently
administered so as to produce sufficient yield to meet the
service of the loan — an anxiety that is explained by its

Foreign Investments 223

distrust of Chinese officials. In fact, it may be said that the
control by foreign employees of the Chinese Government
is a modus vivendi between an independent control by China
herself and that by foreign delegates.

In her railway loan agreements signed before 19^8, China
consents to the supervision and direction by lending banks
in regard both to construction and to the expenditure of
the proceeds. In the Shanhaikwan-Hsinmintun Railway
loan agreement, signed with the British and Chinese Cor-
poration in 1898, it was provided that ' during the currency
of the loan, the chief engineer should be a British subject
and appointed by the Corporation ; that the principal
members of the Railway staff should be Europeans appointed
by the Chinese Administrator-General, and only liable to
be dismissed in the event of misconduct, or incompetency
after consultation with the chief engineer ', and that ' an
European accountant is to be appointed by the Corporation
with full power to organize and direct the keeping of railway
accounts, and to act with the Administrator-General and
the chief engineer in the supervision of receipts and expendi-
ture '. ' The loan was to be the first charge upon the
security of the railway property between Peking and Shan-
haikwan, and on the freights and earnings of the new line
(from Shanhaikwan to Hsinmintun), when constructed.'
The Chinese Government is responsible for the payment of
the principal and interest at the proper date ; and in the
event of default of payment, the railway line and its property
are to be handed over to the Corporation.

These conditions are reproduced in the Shanghai-Nanking
Railway Loan Contract with the additional article that the
Corporation has the power to appoint two British members
to the Board of Commissioners in charge of the general

224 Economic Concessions and

supervision of the work (the remaining two members of the
Board being Chinese and appointed by the Chinese Director-

The Corporation is to receive 20 per cent, of the net
profit, and the experience gained during the Revolution
in 191 1 has proved that, so long as the loan is not
redeemed, it can claim the right to make the railway
neutral in times of internal strife between different political

The same conditions prevailed in the case of the Peking-
Hankow Railway, before it was redeemed in 1909 by the
Chinese Government from the Belgian Syndicate. The
control of the Taoching Raihvay in the province of Honan
remains with the Peking Syndicate (a British firm), so long
as the bonds issued by it for the Chinese Government are
not redeemed.

It will be seen that in all the railways so far mentioned
foreign control is strong, and that the chief engineers
appointed by the lending corporations are not only charged
with the construction of the lines but also with their up-keep
after they have been built. Nominally, they are Chinese
Government property, but during the currency of the loan
China has not an absolute control of these possessions, and
if she wishes to take any step not provided for in the original
agreement, she has first to ask for the permission of the
Corporations acting on behalf of investors.

In all the railway loans since igo8, foreign control is much
diminished, if not entirely eliminated. In the Tientsin-
Pukow Railway Loan Agreement signed in that year, it is
provided that the construction and the control of the line
rest entirely with the Directors appointed by the Govern-
ment. The Directors appoint chief engineers acceptable to

Foreign Investments 225

the lending corporation, and employ accountants of their
own choice. They control the funds derived from the loan
and exercise their own discretion in the matter of purchase
of material. There is no such provision as the sharing of
profits by the Corporation, but for the service it has rendered
in connexion with the issue of bonds and the payment of
interest, a compensation is paid by the Government out
of the first issues of bonds. In short, the line is entirely
Chinese — under native ownership and control, except for
a periodical inspection of the account books by the Corpora-

The loan is secured on the li-kin and inland excise of
the four provinces which the railway traverses. Unlike
other lines previously constructed with foreign capital, the
Tientsin-Pukow Railway is not mortgaged, and in the event
of the yield from these duties being insufficient to meet the
service of the loan, they are to be administered by the
Maritime Customs Service. This service, being staffed with
Europeans, enjoys the confidence of foreign investors, and
it is natural that it should be entrusted with this additional
duty, if necessity arises, in the interest of China's credit, as
well as in the interest of investors, but it is believed that
this provision is not intended to be effective, as it is beyond
the capacity of the foreign Customs Staff to administer the
inland excise of China, which has been much complicated
by thousands of years of tradition and immense diversity in
the system of taxation in the different parts of the country.

The conditions governing the Tientsin-Pukow Railway
loan have been made a basis of negotiation for subsequent
loans, for that of the Hukwang Railway with the Quadruple
Group, and for those of the Pukow-Sinyang and the Singyu-
Shasi Railways with the British and Chinese Corporation.

1832.13 Q

226 Economic Concessions and

The only difference is that these latter lines are mortgaged
for loans, whereas the Tientsin-Pukow line is not ; and that
in the case of the Singyu-Shasi line the contract has been
made on a percentage basis. The appointment of personnel
and the control of the funds derived from loans remain
entirely with the Chinese Government.

It may be argued that so long as the chief engineers are
foreigners, as required by all these agreements — ^British and
German on the Tientsin-Pukow line ; British, German, and
American on the Hukwang lines ; British on the Pukow-
Sinyang and the Singyu-Shasi lines — there must be a certain
amount of foreign control. This is true, but it is a necessary
inconvenience at this elementary stage of railway construc-
tion in China. Science is a new study to the Chinese and
technological skill can only be acquired with experience.
The work of training native engineers has only begun so
recently that there has not yet been time to produce a
sufficient number of them to undertake railway construction
on an extensive scale. That the Chinese themselves, when
properly trained and employed, can construct railways with
the best results has already been proved by the Peking-
Kalgan Railway, a Government line built by profits from'
the Peking-Mukden line.

It should therefore be made a rule that, on all lines built
with foreign capital, Chinese engineering students, or those
who have exceptional aptitude for engineering work, should
, be given every facility to improve their skill, and that as
soon as they are qualified they should be employed in
suitable posts. If this is done, the difficulty of obtaining
native engineers will be soon overcome and eventually there
will be no necessity to employ foreigners.

A word as to the control of the proceeds of loans by the

Foreign Investments 227

issuing banks. The raison (Vetre for such control is that
the Chinese officials have not proved themselves worthy of
confidence in the matter of handling money, and that, as
they are inexperienced in railway work, they can hardly be
expected to maintain the same standard of vigilance and
efficiency as is found in most European railway managing
departments ; but the successful construction and the good
management of the Tientsin-Pukow line have already justi-
fied the belief that, provided they are equipped with a proper
staff and are under proper supervision, they can be trusted.

In fact, it is mainly due to the elaborate system of
financial check and control in other countries that the
integrity of their officials has been well maintained. China
is adopting this system by creating Audit departments
and by giving her Parliament a control over finance. When
the system has become effective, foreign financiers may well
give up their distrust of the Chinese. They will then not
be troubled with the control over securities and proceeds
of loans, but simply present coupons for payment of principal
and interest at the proper times. In fact, it is hoped that,
with the better organization of Chinese banks, China will
be able to float her loans in European markets by her own
agents, without relying on the good-will of foreign financiers.

(3) Foreign Capital in private enterprises.

Subjects of treaty States have the right to ' frequent,
reside, and carry on trade, industries, and manufactures, or
pursue any other lawful avocation in all ports, cities, and
towns of China which are now or may hereafter be opened
to foreign residence and trade '. In pursuance of this
right, they have not only established business firms of every
description in various ports, but have also erected many
factories, using the most modern machinery and employing

Q 2

228 Economic Concessions and

thousands of skilled and unskilled labourers to manu-
facture articles for all purposes, ranging in magnitude from
a pin half an inch long to a steamship of 10,000 tons in
displacement. The best-known works owned by foreigners
are the Sunlight Soap Factory and Cotton Mills, which in
1914 owned 510,088 spindles and 3,948 looms, in addition
to 355,600 spindles and 1,190 looms owned by the Chinese.
The only restriction on foreigners in open ports is that they
must not engage in the transport or manufacture of contra-
band goods and other prohibited articles, such as morphia,
without special authorization by the Chinese Government.

It should be observed, however, that aliens are only
free to act within the boundaries of open ports. In the
interior, they are not allowed to trade or reside unless they
are engaged in some religious mission. For pleasure or
for the purpose of trade, they may only travel under
passports issued by their Consuls and vises by the local
authorities ; and during the journey, they are entitled to
the protection of Chinese officials, but may not establish
business firms or industrial works. They may erect ware-
houses and may accompany their goods on transport from
a port to the interior or, if purchased in the interior, to
a port for shipment abroad, but during all these transactions
they must not stay longer there than their business requires.

These rules are generally observed, but there are instances
of evasion, mostly cases of Japanese shopkeepers or pedlars,
who sell biscuits, medicine, and toys, and who, by virtue
of their similarity to the Chinese in the standard of living
and comfort, can mix with them more easily than most
Europeans. A legal exception is, howeve'-, provided in
South Manchuria.^

^ See below.

Foreign Investments 229

To the general rules regarding foreigners in the interior
mining merchants and engineers form an exception. The
right to exploit mines, apart from that granted to foreign
Governments in connexion with their railway concessions,
is usually granted by special agreements. As an instance,
the Peking Syndicate is authorized (by the Chinese Govern-
ment) to exploit mines in the provinces of Shansi and Honan
on the conditions that it advances a loan to China as her
share in the capital of the mining Company ; that, during
the term for which it is authorized to exploit, it sets aside
6 per cent, of its annual proceeds for redemption of the
loan and 10 per cent, for repayment of the capital and
consequent reduction of interest ; that it pays one-fourth
of the net profits as royalties to the grantor ; and that it
pays a production tax of 5 per cent, at the pits. "On the
expiration of the term, it hands over all mines to China
gratis and without any compensation ; and in the event of
Chinese merchants acquiring three-fourths of the shares of
one mine within sixty years from the time of the grant,
that mine may then be redeemed from the Syndicate.

Other mining explorers obtain their rights under different
conditions. The French Syndicat du Yunnan undertook,
in return for the right to operate mines and for the facilities
given to it, to furnish annually 1,000,000 lb. of copper
to the Chinese Government, provided the working of the
mines allowed of it ; to permit the Government to partici-
pate in the net profits to the extent of 35 per cent. ; to
pay taxes and duties as required by Chinese law ; and to
open a mining school for the benefit of the Chinese, In
the agreement, it is said that ' the Syndicate undertakes to
cause Chinese capital to participate as far as possible in the
public issues of shares ', but there are very few capitalists

230 Economic Concessions and

in China who have the courage to invest in a joint-stock
enterprise, the intricacies of which they do not understand.
This French enterprise, as well as that of the Peking
Syndicate, is entirely under the control of the conces-
sionaire, the Chinese Government having no voice in its
management. There are other enterprises in which Chinese
and foreigners take an equal number of shares and are
jointly responsible for the management. Such are the Yalu
River Timber Company and the Penshi Hu Mining
Company, both Chino-Japanese concerns in Manchuria.
In the contract relating to the former it is provided that
5 per cent, of the net profit shall be appropriated to the
Chinese Government, ' in consideration of its permission
to fell trees ', and that ' the remainder shall be distributed
among s'hareholders of the two countries ' ; in that relating
to the latter, it is agreed that ' after paying 8 per cent,
interest, any -profits will be divided into ten equal parts,
of which 2^ will be paid to the Chinese Government as
a contribution, and 6-|- will be equally divided among the
Chinese and Japanese shareholders ', the remaining one part
being put aside as a reserve fund. In each of these two
companies, there are two Directors-in-Chief, one of each
nationality, both subordinate to the Chinese Governor of
Manchuria, who is ex officio Director-General. So far as
the form of the contracts is concerned, China is not placed
in a disadvantageous position, but in practice the Japanese
hold more than half the number of shares by registering
themselves under Chinese names, and in the event of China
being unable to subscribe the full quota of shares allotted
to her — ^an event that often happens— they nominally
advance her a loan as her subscription, but actually get
control of the whole number of shares for themselves.

Foreign Investments 231

The Japanese Directors-in-Chief, with the support of their
Government, often assume the exclusive right of control,
relegating their Chinese co-operators to the position of
a figure-head.

These joint enterprises are established by special agree-
ments between the Governments concerned. There are
other enterprises not supported by Government authority,
but established in accordance with the law of the country
in which they are registered or located. Little need be
said of the co-operation between Chinese and other nationals
in enterprises situated in other countries, or situated in
China but under the control of other States. The Chinese
are treated as citizens of any other friendly State and enjoy
the same privileges and fulfil the same obligations. In
fact, they are protected by two clauses in the treaty of
1902 with Great Britain to the effect that :

* Whereas questions have arisen in the past concerning
the right of Chinese subjects to invest money in non-
Chinese enterprises and companies, and whereas it is a
matter of common knowledge that large sums of Chinese
capital are so invested, China hereby agrees to recognize
the legality of all such investments past, present, and
future ', and that

' It being ... of the utmost importance that all share-
holders in a joint-stock company should stand on a footing
of perfect equality as far as mutual obligations are concerned,
China further agrees that Chinese subjects who have or
may become shareholders in any British Joint Stock Com-
pany shall be held to have accepted, by the very act of
becoming shareholders, the Charter of Incorporation or
Memorandum and Articles of Association of such Company
and regulations framed thereunder as interpreted by
British Courts, and that Chinese Courts shall enforce com-
pliance therewith by such Chinese shareholders, if a suit to
that effect be entered, provided always that their liability

232 Economic Concessions and

shall not be other or greater than that of British share-
holders in the same company.'

Under these two provisions, numerous Chinese have
established industrial works and commercial houses in
British Colonies and in many other parts of the world.

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Online LibrarySih-Gung ChengModern China, a political study → online text (page 17 of 28)