FOREIGN FINANCIAL CONTROL IN CHINA THE MACMILLAN COMPANY HEW YORK • BOSTON • CHICAGO • DALLAS ATLANTA • SAN FRANCISCO MACMILLAN & CO., Limited LONDON • BOMBAY • CALCUTTA MBLBOURNB THE MACMILLAN CO. OF CANADA, Lto. TORONTO FOREIGN FINANCIAL CONTROL IN CHINA BY T. W. OVERLACH THE MACMILLAN COMPANY 1919 All rights reserved COPTBIOHT, 1919 By the MACMILLAN COMPANY Set up and eleotrotj-rjed. Published, January, 1919 ^Xl UNIVERSITY OF CALIFORNIA SANTA BARBARA COLLEGE UBRAfiX TO THE MEMORY OF WILLARD D. STRAIGHT CONTENTS THEORETICAL INTRODUCTION Foreign encroachment on China (i), Struggle of inter- national financial interests (ii), Conquest by railroad and bank (ii), China important center of world politics (iii), Necessity for clearer vision in international affairs (iii), Task (iii). Definitions: "Spheres of Interest," "Spheres of influence" (iv), "Open Door" (vi). Railroad "conces- sions" (vii), "Control" denotes certain "Financial Safe- guards" (viii). Foreigners have no right to political con- trol (x). Abuses of "Control" (x), Method of Investiga- tion (xii). CHAPTER I Historical Introduction : Foreign Relations with China before 1895 The East India, Company : Monopoly (i), The "Hong" as intermediary (2), Lord Macartney's attempts to estab- lish direct relations vi^ith Chinese government (3), Con- ditions of trade at beginning of 19th century (4), Abol- ishment of East India Company's Monopoly (5), Lord Palmerton's instructions to Lord Napier (5), Admission of Elliott as Comptroller (6), Treaty of Nanking, Con- cessions to British (7), John Quincy Adams on the Opium War (8), Foreign relations with China remain unstable (9), License and violence of the foreigner (10), French and British interference (10), Treaty of Tientsin provides for British diplomatic agent (11), Establishes "Extra- territoriality" (12), Foundation of " Tsungli Yamen " (15), Formation of Maritime Customs Service (16), Un- satisfactory state of affairs (17), Expansion of trade (18), British policy of non-interference (21), French in Tonking and Annam (22), British secure counter-concessions (23), Burma and Sikkim pass under British rule (23), Chino- Japanese war opens new political problems (24), The " battle of concessions " of 1897 to 1898 (24), Play of eco- nomic forces (26). V PAGE vi CONTENTS CHAPTER II PAGE Great Britain 27 Great Britain's "open door" policy {2^^. Lease of Weihaiwei and Russia's advance in the north (28), France in Yunnan, British secure counter-concessions (28), Ex- tension of Hongkong (29), Non-aHenation of Yangtsze Region (30), Preferential advantages of other Powers (31), British counter-demands (32), "After consultation with the Admiral" (,iZ), 2,800 miles of railway conces- sions {Zc>^ t Delimination of British and Russian spheres (34), Of British and German spheres (35), Lord Salisbury and Mr. Hay on the "open door" (38), China attempts to bar foreign capital (39), Indemnity loans (40), For- eign pressure and the Boxer Rebellion (41), Opinion of a rebel leader (41), Russia's duplicity (42), Anglo-Japanese alliance (43), Powerful influence of local vested interests (45), The Hongkong and Shanghai Banking Corporation and British government support (47), British Syndicate, the British and Chinese Corporation's monopoly (48), British "control" (49), Shanhaikuan-Newchwang rail- way contract (50), "Control" provisions (51), Shanghai- Nanking Railway contract (53), Canton-Kowloon Rail- way agreement (54), Peking Sjoidicate's rights in Shansi and Honan (55), Willard Straight on "control" (57), Kent's summary : Syndicate " mortgagee in possession " (58), British control: private, financial, and non-political (60), Admittance of non-British interests to British sphere (60), The Chinese Central Railway's and international amalgamation (61), Advent of Deutsch-Asiatische Bank (62), British misgivings (63), British "laissez-faire" policy (64), Hobson on International Finance (66), Fur- ther railway concessions (67). CHAPTER III Russia 69 Russian imperialism (69), Designs upon Chinese ter- ritory (70), Siberian Railway (71), Russia and Li Hung Chang {"JZ)' "Yellow Peril" argument (74), Cassini convention (75), Manchurian Railway agreement (78), Political aspect of Russo-Chinese Bank (78), The l)ank and the Chinese Eastern Railway (79), Land grants (79), Troop movements (80), Railway controlled by Russian government (82), Russian "control" nominally financial, in fact political and military (83), Railway "guards" (84), Railway part of Transsiberian system (84), Rus- sian domination of North Manchuria (85), Russia's ad- vance into Southern Manchuria (85), Lease of Port Ar- thur (85), Russification of Manchuria (87), Russo-British CONTENTS vii PAGE animosities (88), Russo-French-Belgian cooperation (91), Sir Claude MacDonald's protest (92), Belgian "control" financial (94), Further Russo-Belgian schemes (94), Se- cret Russo-Chinese convention (97). Treaty of Ports- mouth (100), A check to Russian ambitions (loi), Rus- sian administration of railway "zones" (102), Concilia- tory post-bellum attitude (108), Russia and Japan mutually guarantee their respective spheres (no), New railway enterprises (in), Advance upon Mongolia (n2), Rus- sia's attitude toward Asiatic peoples (116). CHAPTER IV France 119 Early intercourse with China (n9). Shaping of railway policy (120), Penetration of Southern China (121), Eco- nomic and political motives (122), Mr. Hazen on French foreign policy (123), Mr. Doumer's railway program (124), China grants railway rights to France (126), Lease of Kuangchouwan (126). Chinese "non-alienation" decla- rations (127), French Chamber authorizes construction (128), French syndicate concessionaire Yunnan Railway (128), French "control" (130), "Policy of Colonization" (131), Furtherance of French Commerce (131), Pro- hibitive freight rates (132), Expansion of French am- bitions (133), Franco-Russian cooperation (134), Govern- ment safeguards French interests (136). CHAPTER V Germany .... 137 Occupation of Kiaochau (137), German indifference as to future of China (139), Prince Biilow on the partition of China (139), Railway concessions (141), The Shantung Railway Company and the Deutsch-Asiatische Bank (143), "Control" by governor of Kiaochau (144), China has no right to assume control (145), Shantung German sphere of interest (145), "Control" nominally financial (146), Political aspect of German "control" (147), British German agreement (147), Splendid location of Tsingtau (149), Later railway concessions (150), Coordination of German finance and industry (151), Government promo- tion of foreign financial enterprise (151), Concentrated upon exclusively German success (152), Purpose of Deutsch-Asiatische Bank (153), German-British cooper- ation (154), Elimination of Germany's interests (155). viii CONTENTS CHAPTER VI PAGE Japan 156 The Russian peril (156), The Korean question (157), Humiliation of Japan by Russia, France and Germany (158), Sagacity of "Elder Statesmen" (160), Motives of Japan's foreign policy (161), Economic difficulties (162), China: Japan's commercial hope (164), Treaty of Ports- mouth unsatisfactory (165), Transfer of Russia's Man- churian interests to Japan (165), The South Manchurian Railway Company (167), Large scope of enterprise (168), "Guards" and "zones" (169), Close connection of com- pany with Japanese government (171), Japanese "con- trol" in South Manchuria (171), Economic paternalism (172), The Hsinmintung-Fakumen project (173), Chin- chau-Aigun and Kirin-Changchun Railways (i75). Mili- tary aspect of South Manchurian system (176), The evacuation period (177), Japanese pledges to doctrines (178), Count Okuma claims strict adherence to Inter- national Law (181), Japan's justification (181), Russian precedence (182), Russo-Japanese agreements mean di- vision of interest (183), Monarchical-paternalistic form of government (185), Significance of Japanese-British Alliance (186), Japan seizes German possession in Shan- tung (187), Occupation of German railway (188), Fur- ther concessions from China (188), United States-Japan agreement of 1917 to disperse suspicions (191), Latest Russo-Japanese conventions (192), American recogrnition of Japan's "special interests" in China (193). "Pax Japonica " (195). CHAPTER VH United States 196 Unselfishness (196), Secretary of State declines partici- pation in Chinese war (197), Anson Burlingame advocates "open door" (197), Mr. Hay's "Open door" notes (199). Further steps towards permanent safety of China (200), Mr. Taft on the "open door" (202), American participa- tion in financial development of China (204), Mr. Harri- man's Manchurian Railroad Scheme (205), Mr. Knox's "Neutralization" Scheme (205), Refused by Russia and Japan (207), Mr. Leroy-Beaulieu's opinion (209), Strengthening of American prestige (210), Admission of American capital to interlational loans (211), President Wilson refuses support (213), Directed against certain "control" provisions (213), American criticism (214), The American International Corporation (217), Latest loan proposals (217), American Japanese agreement of 1917 (218). CONTENTS IX CHAPTER VIII PAGE International Control 220 Early international loans. Secured by Maritime Cus- toms Revenue (220), "Control" (221), Anglo-German Tientsin-Pukow railway agreement (222), "Control" re- mains with Chinese government (224), Favorable terms (225). Unsatisfactory operation (226), Anglo-American- French-German "Hukuang" loan {227), Final agreement (229), "Control" (230), secured by salt, likin, and rice tax (231), In case of default to be administered by Mari- time Customs Service (232), Lenient "control" provisions (232), "Four Powers" currency loan (234), "Control" over administrative expenditures (235), China's financial plight (236), Quadruple syndicate advances funds (239). President gives firm option to banks (240), A "Belgian" loan (241), Its political aspect (242), China's breach of faith (243), Four Power Syndicate's protest (244). Stand- point of British foreign office (244), Addition of Russia and Japan (246), Mr. Willard Straight's summary on loan negotiations (247), Vital question of "control" (251), Chinese opposition (251), Sir Edward Grey's approval of group action (252), Independent loans (253), The " Crisp" loan (253), Hypothecation of surplus revenues of Salt Gabelle (254), Crisp gives up privilege (255), Continu- ation of international loan negotiations (256), Interna- tional rivalry (256), America's withdrawal (257), Final "Reorganization loan" agreement (257), Charge upon salt revenues (258), Central Salt Administration under international "control" (259), Qiinese opposition (262), Necessity of loan (263), Necessity for supervision over expenditure and revenues (266), Responsibility of Bankers (267), Satisfactorv result of salt reform (268), Vindica- tion of "control"' (268). Conclusion 270 Important aspects of the problem (270), Foreign com- mercial pressure on China (271), Profit of the West (272), Burden of indemnities (272), Chinese obstruction (273), Stability of China's foreign policy (274), Foreign powers moderate their policies (275), Count Hayashi on foreign combinations (275), International finance as a peace maker — Quotation from J. A. Hobson (276), Slow Trans- formation of China (279), Advisability of international cooperation and "control" (279), Necessity for tolerant spirit of mutual respect (280). Bibliography 283 THEORETICAL INTRODUCTION With the conclusion of the Chino-Japanese War in 1895, a new era opened in the Far East, an era of rapid encroachment on China by powerful western nations and by Japan. These powers secured strategic bases on Chi- nese territory and sought to control certain parts of the Empire through the medium of railways. Railway con- cessions, and to some extent public loans, were the instru- ments by which the foreign powers advanced and carried out their policies. The obvious tendency of foreign am- bitions at this time in regard to railway enterprise was to secure a monopoly of rights within socalled " spheres of interest," and as far as possible to exclude Chinese as well as other foreigners not only from securing con- cessions but also from any share in the control or manage- ment of those railways that were to be constructed in their respective spheres. Though at first sight political, and fought by diplom- acy, the struggle for foreign control in China was not less one of international financial interests, contending for the exploitation of new opportunities for investment. Foreign capital was attracted by the great profits to be ii INTRODUCTION gained from the impending industrial revolution of China. In order to eliminate financial competition of other na- tions or to counteract political moves on the part of other governments, if such were destined to be harmful to its own expansion, foreign finance often solicited, and freely received, diplomatic protection. With a protection and promotion of foreign enterprise several governments combined the furtherance of national ambitions of a more or less political character. All banks and syndi- cates in charge of the railways and loans became more and more generally recognized as indispensable means to the political and commercial ends of their respective gov- ernments. The struggle for foreign control in China has accordingly been marked by a most singular and dis- tinguishing feature, namely, the closest possible coopera- tion between foreign finance and foreign policy. The period was one of " conquest by railroad and bank." The tenacious determination on the part of several powers to control their respective spheres to the greatest possible exclusion of their competitors not only tended to prejudice China's integrity but also the full and free en- joyment of the treaty rights of others. Though protest- ing vehemently and professing adherence to the " open door " doctrine nations viewed, nevertheless, with jeal- ousy the preserves seized by others. They were driven to bitter diplomatic strife over each new prospective " sphere." In short, the tremendous pressure of modem INTRODUCTION ill imperialism coupled with modern capitalistic enterprise was, in China as elsewhere on earth, a constant menace to peace ; and a continued application of imperialistic poli- cies to exclusively national ends might again make for war, as soon as the present conflict is over. For China will unquestionably become once more one of the principal centers of world politics, in which Great Britain, Russia, France, Germany, Japan, and the United States are con- cerned. But whatever the future relations of these nations in reference to China may be, it would appear that a clearer vision in international affairs would go far towards pre- venting further hostilities, namely, if each nation, with unprejudiced mind, would candidly consider the claims of an opponent as well as its own and would seek to strike a fair balance by mutual concession. Such is at least what we propose to do in the following modest contribution to the study of recent and present day financial and political activities of foreign powers in China. We shall adopt a sympathetic view and attitude towards all the powers concerned, trying to give justice to each, instead of seeing things through the colored glasses of national ambitions. To offer a solution, to give suggestions or to pass judg- ment can obviously not fall within the scope of our inves- tigation. We merely aim to give a comparative and scientific account of what we consider the most tangible and concrete problem of the otherwise so elusive Far IV INTRODUCTION Eastern Question, namely, the problem of " Foreign Financial Control in China." Before we can offer a definite program for our investi- gation we shall have to define our task more clearly. To that end it will be necessary to analyze certain theoretical phrases in their application to our problem and to reduce them to their true meanings. And we shall not be held to anticipate unduly if we define, at the outset, terms which will constantly reappear, although detailed illustrations will as a matter of course have to be reserved for their proper places. The principal phrases which we have in mind are: " spheres of interest," " spheres of influence," " independ- ence," " open door," " concessions," and " control." One thing common to all these terms is their flexibility ; for they have been used with the greatest latitude of meaning and have been applied to a great variety of relations; but through all their uses run certain special characteristics which may be determined with a fair de- gree of accuracy.^ The most confusing terms, often used interchangeably even in theoretical literature, ^ are " spheres of interest " and " spheres of influence." A '* sphere of interest " is officially earmarked by non-aliena- 1 See P. S. Reinsch, " Colonial Government," page 103. 2W. E. Hall and L. Oppenheim, both of whom will be quoted below, in their treatises on International Law, fail to distinguish clearly between the two phrases, apparently only having conditions in Africa in mind. See Hall, pages 129 to 131, and Oppenheim, Vol. I, page 297. INTRODUCTION v tion declarations extracted from the Chinese Government and officially created by an agreement between two powers. It refers to an area frequently adjacent to a possession or a protected or leased territory within which area the foreign power claims the primary right of eco- nomic exploitation,^ Its essential element is a negative one; namely, the term expresses the principle that no other powder except the one in whose favor the " sphere of interest " exists shall be permitted to acquire conces- sions or to exert any control or influence whatsoever — not to speak about military occupation — at the same time giving the privileged power a monopoly of the right to seek concessions."* This privilege, however, does by no means entitle its holder to any positive exercise of " in- fluence " within the sphere which would change the " sphere of interest " into a " sphere of influence." For the latter term, which never has been used officially, as far as China is concerned, suggests a certain degree of authority or control, either financial or political, exer- cised by a foreign power within a certain territory. Political control, however, has to stop short of chang- ing the " sphere of influence " into a protectorate. ' Foreign " spheres " in China are, legally, only economic spheres in contrast to the political spheres of Africa. * See Reinsch, page 103. Otto Kobner, " Kolonialpolitik," page 14: "Strong rechtlich betrachtet liegt also nnr ein pactum de ex- cludendo alium vor. . . . Erfolgt von Seiten eiiier dritten Macht ein Widerspruch nicht, so ist rechtlich ein ius excludendi alios, alien frcmden Machten gegeniiber entstanden." vi INTRODUCTION Though eventual occupation may be contemplated, the re- gion has " not actually been so reduced into control that the minimum of the powers which are implied in a protectorate can be exercised with tolerable regular- ity." ^ As long as control consists merely of a legitimate pro- tection of the financier, subject to agreements of an ex- clusively financial nature, no objection can be raised by anybody. But as soon as the exercise of a reasonable financial control changes into the exercise of an adminis- trative control or an assumption of territorial supremacy by a foreign power, without any sanction on the side of the Chinese, such control would seriously menace the supreme sovereign authority, in other words, the inde- pendence, of China. For one of the marks of an inde- pendent state is that " it is independent of external con- . trol." ® " In the interest of the territorial supremacy of other states, a state is not allow^ed to send its troops ... or its police forces into . . . foreign territory, or to exercise an act of administration or jurisdiction on foreign territory without permission." '^ The wielding of a political control would also be violat- ing the socalled " open door " policy. For this policy aims to be an instrument for the maintenance of the integ- rity of China and the preservation of an " equal oppor- 5 See W. E. Hall, " International Law," page 129. » See Hall, op cit., page 17. 7 See L. Oppenheim, " International Law," Vol. I, page 179. INTRODUCTION vii tunity for all." It is mainly directed against the assump- tion of an undue administrative control or territorial supremacy within a " sphere." It is, however, not ex- plicitly opposed to the policy of " spheres of interest," and not necessarily to the " sphere of influence " as long as influence means financial control within reasonable bounds. Indeed, the " open door " principle recognizes the " vested rights " and " special interests " within such spheres as long as a certain amount of opportunity for others is preserved, that is, as long as the Chinese treaty tariff is indiscriminately applied, as long as treaty ports are kept open and as long as no harbor dues or railroad charges are levied higher than those imposed upon sub- jects of the country in whose favor the '' sphere " exists. The principle is also more or less opposed to the acquisi- tion of a monopoly in the supply of railway materials and rolling stock. To return to the term " sphere of interest " : The interests have invariably taken the form of the socalled railroad " concessions." The term concession has been as loosely applied as the other phrases. Railroad con- cessions are agreements, conferring on the foreigner cer- tain rights of financing, building and managing of rail- roads. In several cases where the railroad grants have been made under conditions which deprive China of al- most all control and profit in the several undertakings, and which lead to political control and therefore prejudice viii INTRODUCTION her sovereign rights within the " sphere," the term " ces- sion " might be more appropriate than " concession." In many cases the " concessions," that is, the railroad agree- ments, are simply in the nature of underwriting contracts. In no instance have the Chinese parted with the ultimate property in the railways. The grantor of the railway concessions as well as the principal claimant of capital was the Chinese Govern- ment. But while to strong and reliable governments money is entrusted unconditionally, China's political in- security, together with her financial inexperience, forced the foreign financier to maintain a great amount of con- trol over his investments. The principal feature of all railroad agreements then are the " control " clauses, and the word " control " in this connection is being used " to denote certain financial safeguards for the protection of loan funds " in the interest of the owners and the bond- holders.^ These safeguards either consist of a first mort- gage upon the railway if owned by the Chinese Govern- ment and in a certain share in the management of the line in order to prevent fraud and to secure efficiency and an adequate return, since the lenders usually are entitled to a share in the profits of the line. Or " control " means direct management by the foreign owners, if the railway is nominally a private foreign and Chinese joint stock 8 The quotations in the definition of control have been taken from W. D. Straight, "Recent Developments in China," page 131. INTRODUCTION ix company in which the Chinese in the natural course of things had but Httle share. The word " control " similarly refers to loans, in which connection it signifies certain " guarantees against im- proper loan fund expenditure," and secures principal and interest by some special hypothecation and the supervision or management thereof — as, for instance, when the revenue of customs, taxes, or some monopoly is pledged. Furthermore has the word " control," though inac- curately, been used in connection wath certain monopolies, which interest us only secondarily. On the one hand have the contracting bankers occasionally " controlled " the supply of railway materials and rolling stock by stipu- lating that such were to be purchased from the manufac- turers of their respective countries. On the other hand did the bankers through national or international monop- olistic syndicates attempt to " control " the money supply to China. The main points we now mean to emphasize, are: First, that the " control " clauses embodied in the sev- eral concessions as well as loan agreements are nominally of a financial character. All railways and loans are nom- inally, as far as foreigners are concerned, financed, man- aged, or controlled by private citizens, and the control provisions constitute nothing else but foreign expert sup- ervision or management to secure adequate profits. That X INTRODUCTION is to say : the provisions confer legally upon the foreigner no rights to political control. Secondly, that the " sphere of interest " policy and the agreements referring thereto do likewise not confer upon the privileged power any rights to political control. For China had not the slightest intention of selling its sov- ereign rights within said spheres. Thirdly, that the several control provisions vary con- siderably as to character and degree since they reflect the tendencies of the Far Eastern policies of foreign powers which either represent the results of economic pressure or serve as incidents in a larger policy of national im- perialism. It is important, in this connection, to bear in mind, that concessions and loan contracts have been ne- gotiated not only by bankers who acted as politico-finan- cial agents of their governments but also by diplomats directly. And it will be observed that, whereas it was the aim of the one power to insist upon " adequate con- trol " for economic purposes and incidentally to China's interest, it was the aim of the other power to control railways or loans for more or less political purposes and against China's interests. The control provisions there- fore often tended to evade, by practices which are diffi- cult to trace definitely, the principle of equal opportun- ity, and to undermine China's sovereignty. In other words, foreign control in China is nominally purely finan- cial, and if political, it is an undue extension of financial INTRODUCTION xi control by means of a peculiar wording and an arbitraiy interpretation of the control clauses embodied in the dif- ferent railroad and loan agreements. It might be objected here that certain powers have ex- ercised and still exercise control upon other premises than railroad or loan agreements. It is one of the aims of our investigation to show that this is not the case, — with the exception of the Maritime Customs Service in its original form.^ True enough, several powers have con- trolled Chinese territory by military force. Such con- trol, however, has always remained a temporary meas- ure. Control as we understand it, is of a permanent nature. Neither must " foreign control " be confused with the sovereign rights enjoyed by foreign powers within " leased territories," nor with the rights of extra- territoriality, nor with foreign administration of interna- tional settlements. In the first two cases China has ex- plicitly ceded certain sovereign rights, and the third case is practically nothing but an extension of the right of extraterritoriality. Foreign " control " is exercised where no sovereign rights have been ceded. If we entitle this book " Foreign Financial Control in China " we do so firstly to avoid any possible confusion, and sec- ondly to indicate the sources as well as the raison d'etre of foreign " control." By too many distinctions at the outset, however, we * See Chapter I. xii INTRODUCTION might anticipate certain results of our investigation. The advantages and justification of narrowing down the vast field of foreign finance and foreign policies in China to a more concrete question of foreign financial control will, we trust, become clearer when the proceedings and problems which have been touched upon are analyzed and narrated in detail. We shall consider these by treating each foreign power individually, although such treatment may involve repetition in certain particulars, seeing that the several policies are occasionally closely connected. In order to understand fully the character and degree of for- eign control and the policies and operating causes under- lying it, we shall have to give a comprehensive knowledge of past and existing affairs, conditions, and problems. The method of our investigation therefore must be mainly historical. By considering the vastness of the field, the thesis can only aim at a brief analysis and interpretation of history, based upon the most important documents and utterances of authorities and writers such as are enumer- ated in the Bibliography. Many important events which have no direct bearing upon the subject will have to be left unmentioned. Likewise will many of the numerous railways and loans, either contracted or projected, have to be left undiscussed. For our purposes it will be suf- ficient to consider only the more important contracts and agreements. The main investigation is to be preceded by a general INTRODUCTION xiii historical introduction, which makes no claim to scientific \alue whatsoever. In this chapter we merely intend to set the stage, so to speak. The arrangement of the chap- ters which then follow w'ill not be strictly chronological but rather chronological, subject to geographical and his- torical conditions. A separate chapter is to be devoted to international control, while in the conclusion some reflec- tions will be made. A word has to be said about the spelling of Chinese names. The writer has not adopted a uniform system, but has quoted names as he found them printed. The inconsistency in spelling them is due to the fact that each author spells Chinese names as he pleases. The majority of these conform to Giles' system or to common usage. In concluding our introductory remarks we venture to believe that the subject demands the treatment which we have outlined, and that it will be found both logical and convenient. FOREIGN FINANCIAL CONTRO L IN CHINA CHAPTER I FOREIGN RELATIONS WITH CHINA BEFORE 1 895 China's recent and present day international relations will be better understood on the basis of a knowledge of the development of these relations during the nineteenth century. Of the literature available on this period ^ we have principally followed the two admirable accounts of Sargent, " Anglo-Chinese Commerce and Diplomacy," and Morse, " The International Relations of the Chinese Empire " ; and since we can dwell upon the nineteenth century previous to 1895 only in an introductory way, we shall content ourselves with a brief summary of the two books, supported by references to official documents and In- a few other quotations. China has been opened by England to intercourse with the modern world. The early history of British rela- tions with China is to all practical purposes the history of the East India Company, which made the project of opening up a trade with China an integral part of her ^ See Bibliography, Section VI. I 2 FOREIGN FINANCIAL CONTROL IN CHINA policy. The great bulk of the capital required for the trade with the East was invested in ships and goods and in a few trading stations in fixed establishments abroad. The Company's station in China was the " factory " at Canton where she enjoyed a monopoly granted to her by Great Britain and special privileges obtained from China. This twofold advantage enabled the Company to main- tain her commercial predominance of the Chinese trade intact throughout the various vicissitudes of its fortunes and in spite of the modifications introduced at successive intervals of the charter. The excellent responsible or- ganization gave her the further advantage of stability in dealing with the Hong merchants and Chinese officials. The latter in their intercourse with foreigners concerned themselves only with two points : the revenue and taxes imposed arbitrarily to be collected, and the orderly be- havior of the traders. As intermediary in all things be- tween the Chinese officials and the foreigners they in- stituted the Hong, which was a body of merchants num- bering from two to eleven. The Hong was responsible to the government for the good behavior of the foreign- ers, and for the customs duties on the whole trade, in- cluding that of outside or unprivileged merchants. The responsibility of the Hong merchants was more than nominal. No foreign ship was allowed to trade until one of their body had become security for the good be- havior of the crew. Those strict regulations served the HISTORICAL INTRODUCTION 3 purpose of restricting the energetic foreigner to only such intercourse as could be carried on under official super- vision. The monopoly system of the Hong was emi- nently calculated to attain this end. The functions of the Hong were thus diplomatic or political as well as commercial. In the former capacity they acted as a convenient barrier between the degraded " barbarian " and official pride; in the latter they were useful as a fairly safe and regular means of filling official coffers. In their dealings with the Hong and the officials, the Company, as the only representative foreign body, was compelled by its traditions to champion the cause of for- eigners in general and it was only at the close of the eighteenth century that the British Government began to take official intercourse in its own hands. This first step was the embassy of Lord Macartney, sent out both on behalf of the East India Company, and in order to im- prove the general relations between the two nations. It was pointed out to Macartney that, though the English were more numerous than other foreigners at Canton, they had hitherto had no official communication with the Chinese Government, and that it was the duty of the Sovereign to take up the matter and defend the interests of his subjects. Here is the beginning of a trouble which required a century for its settlement. It was thought that the local rather than the Imperial officials were respon- sible for the vexatious restrictions on intercourse with 4 FOREIGN FINANCIAL CONTROL IN CHINA foreigners, and subsequent diplomatic history is largely concerned with attempts to establish direct relations with, and wring concessions from, the Chinese Government. The main questions which were destined to be fought out in the nineteenth century were the legal control over for- eigners and the conditions under which commercial inter- course was to be allowed. With the beginning of the nineteenth century, this intercourse had become more and more difficult. The number of foreigners resorting annually to Canton had greatly increased ; disturbances were frequent, the anti- foreign feeling became more clearly marked, and there was undoubtedly, on the part of the Chinese, a distinct intention to restrict as far as possible the existing privi- leges of foreigners. With the appearance of numerous private traders the commercial importance of the East India Company began to decline and the profits which so far had been satisfactory began to diminish. In view of these commercial and political difficulties and of the grow- ing hostility of the Chinese, the position of the Company was becoming critical. A final attempt to improve her relations with China by invoking the aid of the State and sending out the embassy of Lord Amherst in 1816 with the hope that the establishment of direct relations between the two governments might lead to better trade conditions generally, also proved a failure. In conse- quence of all this, the monopoly of the Company was HISTORICAL INTRODUCTION 5 abolished in 1833, owing especially to a large force be- hind Parliament, both of traders and theorists, who advo- cated open trade on various grounds. Simultaneously with the abolishment of the monopoly, other orders in Council provided regulations for future relations." Three " superintendents '" were contem- plated to present British authority. The orders also give power to the Crown to create a Court of Justice with criminal and admiralty jurisdiction at Canton and to ap- point one of the superintendents to be the officer to hold such a court. Here w^e have the formal opening of British relations with China. The instructions by Lord Palmerston to Lord Napier and his colleagues, as the first superintendents, throw considerable light on the ideas and policy of the Flome Government.^ The superin- tendents were enjoined to watch over trade generally and to adjust disputes between British subjects and Chinese or foreigners. In doing so they had to avoid irritating Chinese officials and above all impress on British subjects the duty of conforming to the laws and usages of the Chinese Empire. Lord Napier was directed to ascertain how far it might be possible to extend trade to other parts of China and to seek for the best means of estab- lishing direct relations wMth China. There is evident in 2 See " Additional Papers Relating to China," 1840, Vol. XXXVI. ^ See " Correspondence Relating to China," 1840, Vol. XXXVI, No. 2. 6 FOREIGN FINANCIAL CONTROL IN CHINA these instructions an attempt to give effect to the aspira- tions of the British mercantile community towards a wider trade based on more secure conditions than the custom of the Company. The Chinese were well aware of the radical difference between these new officials and their predecessors, and they did all in their power to counteract the British policy. Thus Napier's mission was unsatisfactory. It then be- came clear that nothing had been gained by the removal of the East India Company; on the contrary the Chinese were attempting further restrictions and continued to refuse acknowledgment of the Government emissaries. However, on February 2nd, 1837, the Chinese policy underwent a little change, when an Imperial Edict gave the required permission for admittance to Canton to Superintendent Elliott as comptroller, who after months of negotiations was successful in really establishing his official position after having boldly informed the viceroy of his appointment to the station of the " Chief English authority in China." * His admission marks a new chapter in the history of English commercial relations with China. The English abandoned the quiescent policy of the earlier times and showed determination. The first result of the new policy was the Opium War, during which the British took permanent possession of Hong- *Sce "Correspondence Relating to China," 1840, Vol. XXXVI, pages 142 ff. HISTORICAL INTRODUCTION 7 kong. The war was concluded by the treaty of Nanking of August 29th, 1842.^ Its enactments are simple in the extreme — they are : 1. The conclusion of a lasting peace between China and Great Britain. 2. The payment of an indemnity of $21,000,000 by China to England: $3,000,000 to settle Hong debts, $12,- 000,000 to cover expenses, and $6,000,000 as opium com- pensation. 3. The opening of Amoy, Canton, Fuchow, Ningpo, and Shanghai to British trade. 4. The cession of the island of Hongkong to England. 5. The provision for free transit of goods after pay- ment of the tariff and a fixed transit duty. Opium was the immediate cause of the war. The Chinese tried to stop opium smuggling, which was strongly supported by the Indian Government. India was profiting enormously by the trade and did not wish to discontinue it. When the Chinese stopped it they put themselves in the wrong. Yet opium was not the prin- cipal reason for hostilities. A contemporary conception of the significance of the Opium War is given by John Quincy Adams in an address before the Massachusetts Historical Society, November 22nd, 1841, on the subject of " The War between England and China." ^ See W. F. Mayers, " Treaties Between the Empire of China and Foreign Powers," page i. 8 FOREIGN FINANCIAL CONTROL IN CHINA " The justice of the cause between the two parties, — which has the righteous cause? You have perhaps been surprised to hear me answer, Britain. Britain has the righteous cause. But to prove it, I have been obHged to show that the opium question is not the cause of the war. My demonstration is not yet complete. The cause of the war is the kowtow ! — the arrogant and insupportable pretension of China that she will hold commercial inter- course with the rest of mankind, not upon terms of equal reciprocity, but upon the insulting and degrading forms of lord and vassal." ^ " In fact the direct cause of the war was the growing sense of the need for better protection to life and property, though behind this was the ground cause of the need for better relations generally." '^ The Treaty of Nanking, then, intended to settle the disputes between the mandarins and the British traders and it was to be the charter of commercial rights in China, acknowl- edging for the first time in history, the existence of a Western Power on an equality with the Celestial Empire : For Article I stipulates that the respective subjects " shall enjoy full security and protection for their persons and property within the dominions of the other," while ac- cording to Article II Great Britain " will appoint Super- 6 Boston Evening Transcript, Wednesday, Nov. 24, 1841, quoting the transactions of the Massachusetts Historical Society of Nov. 22, 184 1. ■^ See H. B. Morse, " The Trade and Administration of China," page 36. HISTORICAL INTRODUCTION 9 intendents or Consular Officers, to reside at each of the above-named cities or towns, to be the medium of com- munication between the Chinese authorities and the merchants." But when England accepted the treaty in final settle- ment of the annoyances which had led to the war of 1839, she had reckoned without her host. Owing to the fact that the Chinese were not permitted by a Christian nation to abolish the infamous opium traffic because it was a very lucrative one, and owing to the humiliation of their defeat and of the Treaty of Nanking, which has " inflicted a deep wound in the pride, but by no means altered the policy of the Chinese Government," ^ and last, but not least, owing to the conservative and even stub- born disinclination on the side of the Chinese to treat other nations on terms of equality, relations between China and other Powers, and especially with Great Brit- ain, continued unstable. The Chinese view of the treaty w^as in marked contrast to its terms. China had signed it reluctantly and merely to stop the incursions of the British in her realms, and, having obtained her aim, she made no attempt to abide by its provisions. Thus the period following the Treaty was filled with further dis- turbances and difficulties in the relations, the principal complaint being that charges still were suddenly and 8 See Alexis Krausse, "The Far East," page 36. lO FOREIGN FINANCIAL CONTROL IN CHINA arbitrarily imposed by the provincial officials in spite of the treaty stipulations. But on the other hand, the reports and opinions of consuls drawn up for the benefit of Lord Elgin show plainly that many elements of disturbance were also to be found within the European settlements, and that in the matter of observance of treaties the Chinese were far from being the only offenders.^ To quote Sargent ^ ■' : " Foreign merchants, in direct custom-house relations with Chinese authorities, all more or less venal and corrupt, launched into a wholesale sys- tem of smuggling and fraudulent devices for the evasion of duties. Contempt for all Chinese authority, and dis- regard of inherent rights, habitual infraction of treaty stipulations, licence and violence wherever the offscum of the European nations found access, and peaceable people to plunder — such were the first-fruits of this important concession; and time only served to increase their growth." Conditions soon pointed to another armed interference in which the French joined hands with the English, while Russia and the United States abstained strictly from any hostile steps, using moral suasion alone. The re- sult of the interference was the Treaty of Tientsin, which ^ Correspondence relating to Earl of Elgin's special mission to China, 1857 to 1859, " China," 1859, Vol. XXXIII, No. i. 1'^ Sargent, op. cit, page 103. HISTORICAL INTRODUCTION II was signed with China on the 26th of June, 1858, by Lord Elgin in connection with representatives of France.^^ This treaty strengthens that previously arranged at Nan- king, and supphes several omissions in the former. It serves as the ukimate basis of foreign relations with China and therefore merits a close examination. The most important novelty is put in the forefront of the doc- ument. Article 2 provides for the sending of an ambas- sador to the court of Peking with all the usual privileges of such ministers and the dispatch of a similar represen- tative from China to London. He may come and go at pleasure ; his letters are to be inviolable ; he may com- municate with a high official on terms of equality, and shall not be called on to perform " any ceremony derog- atory to him as representing the Sovereign of an inde- pendent nation." By this clause, China is compelled, once and for all, to surrender her formal claim of supe- riority over western nations, which was one of the most cherished principles of the traditional policy of the Em- pire. Next in importance to the position of the British representative comes the fuller recognition of the prin- ciple of extraterritoriality. Referring to the latter Morse writes, ^^ " English . . . were not molested so long as they were law-abiding, but law-abiding in the sense of the law of China. It was irksome to them to have no ^1 See Mayers op. cit., page 11. 12 See Morse, " Trade and Administration of China," page 179. 12 FOREIGN FINANCIAL CONTROL IN CHINA lawyer to instruct them in the law of the land, to have no fixed and certain law to appeal to, to be doubtful of the application of the law to any particular case, and to have no doubt whatever on the course likely to be followed by the administrators of the law.'' While the Treaty of Nanking made consuls the " medium of communication between Chinese authorities and the merchants," and while the supplementary treaty of Hoomunchae ^^ merely contained provisions for extradition, and regulations re- garding the punishment of English criminals, Article XV of the Treaty of Tientsin establishes the principle of ex- traterritoriality as far as British subjects only are con- cerned : " All questions in regard to rights, whether of property or persons, arising between British subjects, shall be subject to the jurisdiction of the British authori- ties." The principle of extraterritoriality was more clearly expressed and expanded in the Chefoo Convention of 1876,^'* between Great Britain and China, providing for mixed jurisdiction between English and Chinese, and again in the American Supplemental Treaty of Peking of 1880.^^ In the latter, Article IV reads as follows: — " When controversies arise in the Chinese Empire be- tween citizens of the United States and subjects of His Imperial Majesty, which need to be examined and de- 13 See Mayers, op. cit, page 5. 1* See Mayers, op, cit, page 44. IS See Malloy, " Treaties Between U. S. and Other Powers," Vol. I, pages 239 ff. HISTORICAL INTRODUCTION 13 cided by the public officers of the two nations, it is agreed between the Governments of the United States and China that such cases shall be tried by the proper official of the nationality of the defendant. The properly authorized official of the plaintiff's nationality shall be freely permitted to attend the trial, and shall be treated with the courtesy due to his position. He shall be granted all proper facilities for watching the proceedings in the interests of justice. If he so desires, he shall have the right to present, to examine, and to cross-examine witnesses. If he is dissatisfied with the proceedings he shall be permitted to protest against them in detail. The law administered will be the law of the nationality of the officer trying the case." Articles IX-XI of the Treaty of Tientsin contain the new concessions. British subjects may travel for pleas- ure or trade to all parts of the interior, under passports issued by their Consuls, and countersigned by the local authorities. Newchwang, Tangchow, Taiwan, Swatow, and Kiungchow are opened as new treaty ports, where foreigners are privileged to establish consulates and for- eign merchants are permitted to live and trade. The new area thus provided for British enterprise was greatly extended by the opening of the Yangtsze to British merchant ships. Finally Article XXVIII deals with the vexed question of inland transit duties. At all the treaty ports there are 14 FOREIGN FINANCIAL CONTROL IN CHINA levied dues and duties on the trade according to a tariff settled by both parties. Goods were exempted from all further taxation on movement by one initial payment, except that the goods go " inland " to a place which is not a treaty port, where the bale is liable to the taxa- tion which is levied in China on all movement of com- modities not exempted by " special privilege." This is the one reason underlying the constant demand for the opening of new treaty ports, with all the expense for administrative work imposed on China, and for the en- forcement of extraterritorial rights. This Article XXVIII does away with the arbitrary imposition by provincial authorities of transit duties, so much com- plained of by British merchants, and stipulates a single transit charge to be declared by the collector of duties and to be levied at the first barrier or at the landing port. The charge is to be as near as possible 23^ ad valorem. Hereafter goods are exempt from all further inland charges whatsoever. Between the signature of the treaty and its ratification there was again a period of armed conflict, illustrating the reluctance of the Central Government. The Con- vention of Peking finally signed the treaty on October 24, i860, a few days after the English and French Allies had found it necessary to give the Chinese a severe lesson in destroying the summer palace." HISTORICAL INTRODUCTION 15 Treaties similar to the British treaty were immediately afterwards concluded by all the important powers. The political history of the next few years is largely taken up with the difficulties incidental to the execution of the terms of the treaties. The governments standing behind the two contesting parties, the Chinese officials and the merchants, seemed to be disposed for a time to settle their differences by diplomacy rather than by force. The main step in that direction taken by China was the foun- dation of the Tsungli Yamen, or Board of Foreign Affairs, a product of the moderate party of Prince Kung. Having thus to deal with a responsible central body the English decided not to tolerate local pressure any longer and tried to induce the Chinese to adopt western ideas as to the subordination of local to central authority. The strengthening of central authority as against provincial . authority would have been to China's own interests, since local officials were not willing to surrender revenue col- lected for the benefit of the Chinese Government, which was in need of resources to cope with the Taiping rebel- lion. In this connection the English helped China not only to strengthen centralization, but they also sent mili- tary aid to quell the Taiping rising, which at one moment threatened to overwhelm the whole country and to depose the Manchu dynasty. Thus the British Government com- mitted itself definitely by this assistance rendered to the 1 6 FOREIGN FINANCIAL CONTROL IN CHINA upholding of the dynasty and to the protection of the Empire's integrity. In spite of all this friendly assistance, however, the attitude of the Chinese underwent no material change. Internal disorder and corruption seriously affected the execution of the treaties; the transit system continued to be totally inefficient and unsatisfactory. The internal administration of China was hopelessly corrupt ; military and civil organization were in confusion; the Empire, without rail or telegraph, with its capital in the far north, was too vast for effective centralized government. Reor- ganization, indeed, was greatly needed everywhere. The only thing accomplished in that line was the reforma- tion of the customs system on western lines, when native talents and methods were inadequate for dealing with the complicated conditions introduced by the Treaty of Tientsin. The formation of the " foreign customs," says Morse,^'' " was laid in the necessities of the Chinese Gov- ernment and not in any demand by the foreign merchant that an improved revenue service should be provided for them." The system grew out of the voluntary collection of customs established in Shanghai during the Taiping re- bellion. It was ever more enlarged and Rule lo of the Agreement of the Tariff Commission of 1858 laid the foundation for the appointment of a foreign Inspector- 1" See Morse's " Trade and Administration," page 366. HISTORICAL INTRODUCTION 17 ate.^^ In 1863 Mr. — later Sir — Robert Hart was ap- pointed Inspector General and brought the system to its highest possible efficiency, thus benefiting the Chinese as well as foreign creditors : for the Chinese Maritime Cus- toms were to serve as securities for loans, to which we shall have occasion to refer later. All further attempts on the European side at reorgan- ization and the attempts to carry out the different treaty stipulations and the conventions for treaty revisions proved to be without any result. The Chinese were not only not prepared to make any further concessions but they also desired a great deal to be altered. The car- dinal points of Chinese policy were brought to light at the Convention of 1869.^^ These were — the total pro- hibition of opium, the restriction of missionaries from inland residence, and the abolition of the principle of ex- traterritoriality. They amounted to the recovery of the greater part of that liberty which had been wrested from the Court of Peking in the various treaties. Chinese opposition was reen forced by the extravagant demands of the British merchants. The latter insisted upon the most sweeping changes, but were not disposed to concede anything. Indeed, their presence in China was not based on the desire to further the welfare of the Chinese but on their own benefit. And that in the treatment of China ^^ See Mayers, op. cit., page 31. ^'* See Mayers, op. cit., page 37. i8 FOREIGN FINANCIAL CONTROL IN CHINA by the foreigner much remained to be desired was amply illustrated by the plea of Burlingame in his famous mis- sion on behalf of the Chinese Government. The demands of the merchants were not only prompted by an unsatisfactory state of affairs in China, but they also reflected unsatisfactory trade results. For a quarter of a century after the passing of the East India Company, the British had cherished the idea that the Chinese Em- pire, once successfully opened to trade, would offer a vast field of lucrative opportunities for British mer- chants. The several wars and following treaties were deliberately undertaken for the development and protec- tion of that field. Yet the renewed activities of trade as shown after the treaties of Nanking and Tientsin, and the extension of the markets by the addition of new treaty ports proved to be of little advantage to the for- eign mercantile community in China. The possibilities of the trade and the opening of the Suez Canal had attracted large numbers of traders with small capital or credit, while the more responsible merchant, in anticipa- tion of lower profits on each transaction, was naturally disposed to enlarge the scope of his operations by way of compensation. The result was an artificial expansion of business, greatly to the detriment of the merchants, but to the advantage perhaps of the British consumer and manufacturer and certainly greatly to the profit of the Chinese producer and merchant. These exploited HISTORICAL INTRODUCTION 19 to the full the competition among foreign buyers, who were helpless in the hands of the native dealer, since the latter was enabled by his excellent gild organization to maintain a strong control over the local markets and to keep up prices. ^'^ The control of the whole trade was fast getting into the hands of natives, last not least, through the foreigner's ignorance of language, while the foreigner began to decline to the position of a mere agent, and profits and influence dwindled together. The Chinese evidently were already discovering that there are other means than riot and open opposition for the ousting of the foreigner, — means that cannot be touched by force or treaty. The increase of trade, furthermore, depended on the expansion of the area and population open to British trade rather than on the increased use of English goods. " If we consider the vastness of the native population within reach of our goods at the opening of the trade, we are forced to the conclusion that we were no nearer capturing the native markets, in the sense of supplying the everyday needs of the masses, in 1884 than in 1834. . . . The economic self-sufficiency of China was perhaps the most formidable barrier which we had as yet encoun- tered in our career of industrial and commercial expan- sion." 20 19 Sec Schumacher, " VVeltwirtschaftiiche Studieii," pages 430 ft. in : " Die Organisation des Fremdhandcls in China." 20 Sargeant, op. cit., pages 224, 225. 20 FOREIGN FINANCIAL CONTROL IN CHINA Looking back over the whole history of foreign rela- tions with China since the abolition of the East India Company's trading monopoly, a few marked results clearly stand out: The most satisfactory result was the establishment of foreign financial control over the mari- time customs service, which, however, should prove of greatest value and service at a later period and which will be duly referred to at the proper occasion. Further- more, the principle of extraterritoriality was introduced in China. Though it had proved absolutely necessary for the protection of the foreigner, it put a stigma of inferiority on the Chinese which is evident in all further dealings between China and the foreign powers. It re- versed the position of China which formerly was one of overbearance and contempt for the " barbarian." But treaties could neither alter national feelings and long- established customs, nor could they strengthen the inher- ent weakness of the Manchu administration and official corruption. Truly enough, tolerable conditions for com- mercial intercourse w-ere established. Nevertheless, the Chinese trade, upon which great hopes had been founded, remained comparatively insignficant and unsatisfactory considering the sacrifices and risks incurred to develop it; while the experience revealed that it is impossible to create that trade by force of pressure or by treaties. Indeed, Europe used only a moderate amount of pressure in imposing its own will upon the Chinese Empire, HISTORICAL INTRODUCTION 21 as Morse in a summary of the " Period of Conflict " ^^ emphasizes : " In time the world, East and West, will recognize that the West has exercised great restraint and shown a wise moderation in reaping the fruits of victory, and that the restrictions imposed on Chinese sovereignty were only those rendered indispensable by the inefficiency and corruption of the mandarinate of the Empire; but this was a lesson for future years; now, as the result of three wars, the Chinese learned, and they accepted as their law, that, whereas formerly it was China which dictated the conditions under which international rela- tions were to be maintained, now it was the Western nations which imposed their will on China." The policy adopted by the British Government follow- ing the Treaty of Tientsin was one of non-interference. It was found advisable to consolidate what was already gained, and for the future to trust to patient negotiation and moral influence. A reaction of discouragement had set in, which found its expression in a policy of laisser- faire adopted by the Home Government after the removal of Lord Palmerston from the Foreign Office. This pol- icy also reflected a belief in China's ability ultimately to set her own house in order and a desire to be on friendly terms with other nations and to avoid any causes of fric- tion. In accordance with the laissez-faire and free-trade 21 See Morse, "International Relations," page 617. 22 FOREIGN FINANCIAL CONTROL IN CHINA principles England was ready, after having obtained new outlets for trade and other privileges, to share them with other nations. Thus her acquisition of trade facilities was followed by the conclusion of similar treaties be- tween China and other Powers. Britain had solved the problem of the conditions most favorable to national prosperity in her way, believing that open competition was the best condition for ensuring such prosperity. Wherever free-trade existed it meant British preponder- ance; and the predominance of England in China was admitted on all hands. Consequently, Great Britain did not attain exclusive privileges for the benefit of her trade and she strove by means of the " most favored nation " clause only to enjoy such privileges as have been accorded to other nations and no more. And she also was willing to refrain from the exaction of further priv- ileges. Thus her policy, however, had to undergo a moderation as soon as other countries began to seek special advan- tages at the expense of their competitors and of China. French aggrandizement in Tongking, and the declaration of a protectorate over Annam were followed by the Franco-Chinese Treaty of Tientsin, in June, 1885, which seriously affected British interests in setting up differen- tial duties in favor of France and in defiance of English treaty rights.^^ 22 See Mayers, op, cit., page 239. HISTORICAL INTRODUCTION 23 The British Government could not view without con- cern the prospect of differential treatment for French goods entering China by way of the land frontier, and the danger of railway concessions leading to commercial monopoly. Frequent protests and warnings were ad- dressed to Peking; and the Chinese were ready enough to give assurances representing wishes, which they were unable to carry out in the face of France's superior force. The only effective reply to the French claims then, it was held, was to be found in the grant of counter-conces- sions by China to England; and so the English secured a series of concessions and advances parallel to those granted to France, and in the same region. The agree- ments of 1886, 1890, 1893, 1894 and 18972'^ opened trade and residence to British officials at Yatung, recti- fied the Burmese frontier, organized overland trade, opened the West River to seaborne trade, Wuchau being declared a treaty port. The most important result of English diplomacy was the passing of Burma, thereto- fore under Chinese suzerainty, under complete British rule through the so-called O'Connor Convention of July 24, 1886.2^ By Article II China agreed " that, in all matters whatever appertaining to the authority and rule which England is now exercising in Burma, England 2" See Mayers, op. cit., pages 251 fF., and see also Rockhill, " Trea- ties and Conventions," Nos. i and 7. ^■•See "China," No. 5, 1886, C — 4861. 24 FOREIGN FINANCIAL CONTROL IN CHINA shall be free to do whatever she deems fit and proper." In 1890 Sikkim followed the way of Burma. But while the dependencies of China were dropping from her in the south and southwest and while Korea was preparing her independence, the conclusion of the Chino-Japanese War marked the beginning of a series of new events and the recognition of new political prob- lems concerning China proper. The war disclosed the utter military w^eakness of the Manchu Government, and several great Powers were not slow in taking ad- vantage of this fact by disintegrating Chinese territory and pressing China for special and exclusive advantages. The most important event at this time was the occupation of the Liaotung peninsula and Port Arthur by Russia, an occupation which had long been determined on and which enabled Russia to obtain a stronger influence over the Chinese at Peking. The occupation was preceded by the seizure of Kiaochau by Germany, which had been well aware of Russia's ambitions, and was immediately followed by similar actions of Great Britain and France. By this territorial aggression the old method of nego- tiating by force was revived. But while the armed inter- ference of Great Britain in former periods had secured equal opportunities to all other nations, the actions of the powers in the years 1 897-1 898 proved to be of an indi- vidual and selfish character. They disclosed the growth HISTORICAL INTRODUCTION 25 of the new principle of preferential concessions, develop- ing into the policy of " spheres of interest." Before long we find Germany maintaining that Shantung, as the hinterland of Kiaochau, could not be open without re- serve to the enterprise of others than Germans. Almost at the same moment, Russia was announcing that she would not permit the Chinese provinces bordering on the Russian frontiers to come under the influence of any other nation. She was pressing on to the economic as well as the political control of north China. While France was aiming at the south, Japan claimed pre- dominance in Fukien, and England in the Yangtsze- Kiang region. All these concessions were extorted from China prac- tically without any compensation. Stripped of her power, China had to pay the penalty of an unsuccessful war, and was forced to grant such privileges which she had hitherto steadily refused. The concessions were either granted without excuse, or they were the penalties of acts of violence on the part of the Chinese subjects, the missionary being a favorite pretext. But the pen- alty was usually out of all proportion to the crime, and China had reason for regarding the policies adopted by the European Powers as an open attack on the independ- ence of the Empire. And indeed the independence and integrity of China seemed to have been severely menaced, for it is evident that the vision of a " break up of China " 26 FOREIGN FINANCIAL CONTROL IN CHINA played a great role in the imagination of European statesmen. At the same time the commercial and financial world was stirred with splendid visions of the long-deferred unconditional opening-up of China, and finance began to display interest in a country which presented unusual eco- nomic attractions. In this connection it is necessary to bear in mind the tremendous economic changes which had taken place in Europe towards the end of the nine- teenth century. The immense development of the eco- nomic resources of Europe and the overproduction of capital resulted in an unprecedented outflow of capital to all parts of the world. The perfection of the joint stock company, and the general recognition granted to this form of organization, made it possible for capital successfully to undertake in distant lands enterprises which could not otherwise have been undertaken. The private speculator and especially the great financial inter- ests appear in China and behind the latter is the whole diplomatic force of their respective countries; or the governments appear as the economic patrons of their subjects and promote or encourage financial enterprises in China. Finance takes the role which trade so success- fully had played in its connection with foreign policy, the great and principal objects of finance being railway enterprises and political loans. Such were the economic forces behind the "battle of concessions." CHAPTER II GREAT BRITAIN The aim of Britain, the greatest Asiatic power, was the maintenance of her economic preponderance. Since her interests existed in every port and her trade flourished in every province, she was bound to resent the attempt at closing any portion of China to her trade, and she had to oppose any measures which might tend to give undue advantage to another power. The policy of England, under the leadership of Lord Salisbury, was that known a* the " open door " policy, its signification being that the door of trade should be kept open for Great Britain in every place where it was made available to any other country in China. To the demands for an " open door " were added the watchwords : " integrity of China " and '' equal opportunity," all of which are constantly reap- pearing in the newspapers,^ and in the official corre- spondence concerning the affairs of China. ^ But the Brit- ish Government had to go beyond the mere proclamation of these principles, as long as other nations did not respect them. When Germany leased the territory of ^ See, for instance, London Times, April 6, 1898, and otherwise. 2 See "China," No. i, 1899, Vol. CIX. 27 28 FOREIGN FINANCIAL CONTROL IN CHINA Kiaochau, Russia Port Arthur and Talienwan, and France Kuangchouwan, England was apparently unable to raise effective objections and resolved to follow the example of the others. The foreign office was especially worried about Russia's advance in the north, since Rus- sia was considered England's great opponent in Asia, Lord Salisbury declared that " the balance of power in the Gulf of Pechili is materially altered by the surrender of Port Arthur by the Yamen to Russia." ^ The English therefore entered into negotiations with the Yamen which resulted in the leasing of the harbor of Weihaiwei to England. A convention was signed on the first of July, 1898: " In order to provide Great Britain with a suit- able naval harbor in North China and for the better pro- tection of British commerce in the neighboring seas.'' "* Of great significance for Great Britain's policy is the clause in the first paragraph in which China agrees to lease Weihaiwei " for so long a period as Port Arthur shall remain in the occupation of Russia." In the meantime French plans had expanded with the success of their policy of pressure. France demanded the right to construct a railway from the Tongking fron- tier to Yunnan and a few other privileges, whereupon the British Government adopted the policy of counter- concessions. British policy and British demands are 3 See " China," No. i, 1898, Vol. CV, page 54- * See " China," No. i, 1899, Vol. CIX, page 199. GREAT BRITAIN 29 illustrated in the instructions of Mr. Balfour to Sir C. MacDonald of April 13, 1898: ^ " Inform Yamen that, although they have not followed our advice, we are anxious to maintain, as far as possible, integrity of China, and will, therefore, not make new territorial de- mands upon them. It is, however, absolutely necessary, if we are to pursue this policy, that they, on their side, should first immediately conclude negotiations — (a) for giving us all the land required for military defenses of Hongkong; (b) to fulfill their promise to make Nan- king a Treaty port; (c) to give some railway concession; (d) an agreement as to the non-alienation of Kuang- tung and Yunnan. In connection with condition (d), it is in the interests of the integrity of China and is justified by the proximity of Yunnan to Burma, and by our commercial preponderance in Kuangtung." The first result of British demands was a convention for the extension of Hongkong, signed on June 9, 1898," by which China granted a lease for ninety-nine years of 400 square miles of territory in the peninsula of Kowloon, immediately opposite to Hongkong. As to railway concessions mentioned by Mr. Balfour, Eng- land found herself soon in a position to press her de- mands, when the Peking-Hankow concession menaced England's interests in the Yangtsze Valley. ■-' See " China," No. i, 1899, Vol. CIX, No. 21. 6 See "China," No. i, 1899, Vol. CIX, No. 174; see also Rockhill, op. cit., No. 12. 30 FOREIGN FINANCIAL CONTROL IN CHINA One of the jfirst things undertaken by the British after the ratification of the Treaty of Tientsin, had been the exploitation of the Yangtsze-Kiang. Since British interests along the great valley were greater than those of other countries and as it was alike the most fertile, prosperous and densely populated region of China, it was essentially the most important British sphere of interest in that country. Hence the British Government, in or- der to prevent eventual inroads of other powers into this territory, exchanged in February, 1898, notes with the Chinese Government respecting the non-alienation of the Yangtsze-Region.''^ In this correspondence, which in its character is extremely vague, China gives an assurance that she would " never alienate any territory in the provinces adjoining the Yangtsze to any other power, whether under lease, mortgage, or any other designa- tion." The conclusion of the agreement was highly wel- comed by the British interests in China. Thus writes the China Association to Lord Salisbury : " The Asso- ciation has ventured on former occasions to indicate the Yangtsze Valley as a region in which British interests must prevail. It welcomed with cordial satisfaction, therefore, the announcement that China had been led to promise that no portion of that area should be leased or ceded to a foreign power." ^ 7 See "China," No. 2, 1898, Vol. CV; see also Rockhill, op. cit., No. 22. 8 See " China," No. i, 1899, Vol. CIX, No. 25. GREAT BRITAIN 31 British interests now were menaced, when, in 1897, a Belgian syndicate obtained a provisional concession for the great trunk line from Peking to Hankow.^ There was clearly ground for Great Britain to be alarmed that Belgium served the plans of France and Russia. Lord Salisbury declared that " a concession of this nature is no longer a commercial or industrial enterprise and becomes a political movement against the British interests in the region of the Yangtsze. You should inform the Tsungli-Yamen that Her Majesty's Government cannot possibly continue to cooperate in a friendly manner in matters of interest to China, if, while preferential ad- vantages are conceded to Russia in Manchuria and to Germany in Shantung these or other foreign Powers should also be offered special openings or privileges in the region of the Yangtsze. Satisfactory proposals will be forthcoming if the Chinese Government will invite the employment of British capital in the development of those provinces." ^° Mr. MacDonald strongly protested, whereupon the Yamen assured the British minister that the Russians were not interested in the scheme, and that no agreement admitting the Russo-Chinese Bank to par- ticipation would ever receive the Imperial sanction. ^^ In spite of all protests the Chinese signed the final contract of the Peking Hankow Railway early in August, admit- 9 See Rockhill, op. cit., No. 34. 10 See "China," No. i, 1899, Vol. CIX, No. 175. " See " China," No. i, 1899, Vol. CIX, Nos. 196, 263, 289. Z2 FOREIGN FINANCIAL CONTROL IN CHINA ting the Russo-Chinese Bank to financial participation.^^ The greatest objection which the British raised to the contract was that the receipt and payment of funds by the Russo-Chinese Bank, on behalf of the syndicate, would pave the way to a future interference with the construction and control of the line. Mr. MacDonald declared Russian admittance a " breach of faith " on the side of the Chinese and demanded " reparation." He informed the Yamen that " Her Majesty's Government considered that they had been badly treated by China in the matter of railway concessions, and now demanded from the Chinese Government the right for British merchants to build the following lines upon the same terms as those granted in the case of the Belgian line : — Tientsin to Chinkiang (to be shared, if desired, with the Germans and Americans), Honan and Shansi, Peking syndicate lines to the Yangtsze; Kowloon to Canton; Pukou to Sinyang; Soochow to Hangchow, with ex- tension to Ningpo. The lines from Shanghai to Nan- king, and Shanhaikuan to Newchwang, I added, were not included in this list, as preliminary agreements had already been signed for them, and they might be con- sidered settled." ^^ Mr. Balfour's instructions further- more illustrate the great amount of pressure exacted by Great Britain. Mr. MacDonald was authorized to in- 12 See " China," No. i, 1899, Vol. CIX, Nos. 347 and 383. 13 See " China," No. i, 1899, Vol. CIX, No. 382. GREAT BRITAIN 33 form the Yamen that, " unless they agree at once, we shall regard their breach of faith concerning the Peking- Hankow Railway as an act of deliberate hostility against this country, and shall act accordingly. After consulta- tion with the Admiral, you may give them the number of days or hours you think proper within which to send their reply.'' ^^ The Yamen, being aware of the concentration of the fleet, conceded everything.^^ Thus did Great Britain ob- tain her railway concessions. The total length of the lines conceded amounted to 2,800 miles extending over ten provinces, as compared to 1,530 Russian miles, the rest of the nations falling way below the Russian figure.^*^ To England fell the lion's share of the " battle of con- cessions," as Lord Salisbury properly styled this " peace- ful " conflict.i^ But with that the " battle of concessions " was not finished. Russia considered Manchuria and Pechili her exclusive sphere of interest. She therefore pressed Pe- king for the removal of Mr. Kinder, an Englishman, from his position as superintendent of the Tientsin-Shan- haikuan Railway, demanding that the " line north of Shanhaikwan should be constructed by Russian engineers and with Russian capital." ^^ Ignoring Russian de- 14 See " China," No. i, 1899, Vol. CIX, No. 286. "See "Qiina," No. i, 1899, Vol. CIX, No. 324. i« Detailed analysis will be given below. 1^ See " China," No. i, 1899, Vol. CIX. No. 232. 18 See " China," No. 2, 1899, Vol. CIX, No. 2. 34 FOREIGN FINANCIAL CONTROL IN CHINA mands, the Hongkong and Shanghai Bank entered into an agreement to furnish the capital to construct a railway between Peking and Newchwang, taking a mortgage on the line.^^ This caused much irritation in Russia and the relations between Russia and England became more strained than they were before. The friction which had arisen over railways rendered it desirable to come to an understanding in regard to mutual privileges and spheres of interest in China. After a long series of negotiations an exchange of notes was effected between the two coun- tries in April, 1899.^^ The text of the agreement is as follows: " I. Great Britain engages not to seek for her own account, or on behalf of British subjects or of others, any railway concessions to the north of the Great Wall of China, and not to obstruct, directly or indirectly, applications for railway concessions in that region sup- ported by the Russian Government. 2. Russia, on her part, engages not to seek for her own account, or on behalf of Russian subjects or of others, any rail- way concessions in the basin of the Yangtsze, and not to obstruct, directly or indirectly, applications for railway concessions in that region supported by the British Government." By a supplementary note, the rights of the British and Chinese Corporation, un- der the loan contract, over the section from Shan- 19 See " China," No. 2, 1899, Vol. CIX, Nos. 4 and 10. 20 See " China," No. 2, 1899, Vol. CIX, No. 129. GREAT BRITAIN 35 haikuan to Newchwang were reserved, " and the Chi- nese Government may appoint both an English engi- neer and a European accountant to supervise the con- struction of the line in question, and the expenditure of the money appropriated to it. But it remains understood that this fact cannot be taken as constituting a right of property or foreign control, and that the line in question is to remain a Chinese line, under the control of the Chi- nese Government, and cannot be mortgaged or alienated to a non-Chinese company ! " With this agreement the " sphere of interest " theory was considerably strength- ened. In the case of the other trunk line from the north, that from Tientsin to Chinkiang on the Yangtsze, Eng- land inevitably came into collision with the interests of Germany. The English were bidding for construction or at least participation in construction of this line. The German minister, in 1898, was objecting that no line could be constructed through Shantung without the con- currence of Germany. In August. 1898, Baron Heyking informed the British minister of his instruction from his home government, of which the respective passage reads as follows : " Should the Chinese Government decide to grant a concession for the Tientsin-Chinkiang Railway regardless of German claims, you are instructed to op- pose such a decision, and, should it be necessary, you may inform the Chinese Government that the German Gov- 36 FOREIGN FINANCIAL CONTROL IN CHINA ernment would consider as ' non avenu ' any concession in that province, and would reserve the right of making the Chinese Government responsible for any such conces- sion in the event of its being granted by them." ^^ It has to be remarked here, that England as early as April, 1898, had formally declared to Germany: " that in estab- lishing herself at Weihaiwei she has no intention of injuring or contesting the rights and interests of Germany in the Province of Shantung, or of creating difficulties for her in that province. It is especially understood that England will not construct any railroad communica- tion from Weihaiwei and the district leased there- with into the interior of the Province of Shantung." ^^ But a mutual official declaration as to the respective spheres of interest had not taken place. Both govern- ments considered that a specific delimitation would " not be opportune, and that a friendly understanding in each case as it arose would be preferable." ^^ Such friendly compromise was finally concluded between the respective German and British financial interests, on Sept. ist and 2nd, 1898, at London. The text reads, in parts, as fol- lows : ^^ I. British sphere of interest, viz.: " The Yangtsze Valley subject to the connection of the 21 See " Qiina," No. i, 1899, Vol. CIX, No. 305. 22 See "China," No. i, 1899, Vol. CIX, No. 31. 23 See " China," No. i, 1899, Vol. CIX, No. 307. 24 See " China," No. i, 1899, Vol. CIX, No. 312. GREAT BRITAIN 37 Shantung lines to the Yangtsze at Chinkiang; the prov- inces south of the Yangtsze; the Province of Shansi with connection to the Peking-Hankow line at a point south of Chengting and a connecting line to the Yangtsze Val- ley, crossing the Hoangho Valley." 2. German sphere of interest, viz. : " The Province of Shantung and the Hoangho Valley with connection to Tientsin and Chengting, or other point of the Peking-Hankow line, in the south with con- nection to the Yangtsze at Chinkiang or Nanking. The Hoangho Valley is understood to be subject to the con- necting lines in Shansi forming part of the British sphere of interest, and to the connecting line to the Yangtsze Valley, also belonging to the said sphere of interest." This was agreed to with the modification that the line from Tientsin to Chinkiang be financed jointly, con- structed separately according to the respective spheres through which the lines were to run, and, on completion, to be worked for joint account. The various railway questions had led to many crit- ical moments for Great Britain in 1898. In order to protect her own interests, she was forced to desist some- what from the traditional open door policy. Standing alone she had to fear that she might not be able to sustain China's absolute integrity against the aggression of other powers. A union of aim between her and any other nation or a combination of nations she recognized 38 FOREIGN FINANCIAL CONTROL IN CHINA would go far to end the rivalries which threatened to par- tition China. Consequently, she eagerly seized the op- portunity of expressing her adherence to the open door policy in replying favorably to Mr. Hay's propositions of 1899.^^ The United States, though it has never taken an active part in the opening up of China, had gradually developed a very considerable interest in the country, which it was eager to see preserved. In this year the United States sent a circular letter to the European Powers to seek information as to the possibility of com- ing to an understanding in regard to the maintenance of treaty rights, and the safeguarding of the integrity of the Empire. The requirements of the policy of equal opportunity known as the " open door " were categoric- ally set out in this circular,^^ with the object of obtaining the definite adherence of the various powers to its sup- port. The replies of all the powers concerned was in the affirmative. England's attitude is expressed by Lord Salisbury in his acknowledgment of the last of the com- munications from the American minister : " I may assure Your Excellency that the policy consistently advocated by this country is one of securing equal opportunity for the subjects and citizens of all nations in regard to com- mercial enterprise in China, and from this policy her Majesty's Government has no intention or desire to de- 25 See Rockhill, op. cit., No. 28, and Malloy, op. cit., I, 244 ff. 26 See Chapter VII. GREAT BRITAIN 39 part." ^^ A similar policy was contained in an agree- ment identical in its contents to the note of Mr. Hay, concluded between Great Britain and Germany in Octo- ber, 1900.^^ The unfortunate Chinese officials in the meantime had learned that in spite of all the assurances of the for- eigners, friendly intercourse might be as dangerous as open hostility. They took the lessons of the extorted concessions to heart and attempted to apply their experi- ence in dealing with the railway problem. Fearing that railways constructed by foreign capital might later be made an excuse for territorial claims, they put every pos- sible obstacle in the way of such undertakings. Thus they steadily refused the promised British concessions in Yunnan and decided towards the end of 1898 not to give any new railway concessions exclusively to foreign- ers. To that end they issued regulations on November 19, 1898, for mines and railways in China, which throw light on the real motives of Chinese policy.^^ In these it was stated that the concessions in Manchuria, Shan- tung and Luzchan (referring to the Russian, German and French spheres) " are affected by international relations, and therefore will not be allowed to form precedents either for Chinese or foreigners." In Article 9 it is re- quired that Chinese capital was to be employed as far as 2^ See Rockhill, op. cit., page 191. 28 See Rockhill, op. cit., No. 14. 29 See Rockhill, op. cit., No. 48, 40 FOREIGN FINANCIAL CONTROL IN CHINA possible, and that in all cases of concessions an endeavor must be made to have the Chinese part of the capital in such enterprises the greater proportion, at least a mini- mum of three-tenths of the total. By another rule, as an inducement to the natives, rewards were to be granted to Chinese promoters raising a capital of 500,000 taels, or contriving that half the shares in a company were Chinese-owned. The essence of the whole matter was summed up in the thirteenth clause : " In order to pro- tect the sovereign rights of China, the control of all railways and mining companies, irrespective of the for- eign capital concerned, must remain in the hands of the Chinese merchants." The regulations clearly meant noth- ing else than an absolute bar to the further investment of foreign capital. China once more tried to rid herself from the grip of foreign influence. But she found her- self unable to do so. While they were not at all without success as far as concessions are concerned they became, on the other hand, more and more dependent upon the foreigners in another phase of finance. The financial necessities of China, a result of the Japanese War, and the indemnity had provided another means of dependence on the for- eigners and a new lever for inducing the acceptance of western demands. The different loans contracted in this connection amounted to L54,455,ooo and were di- vided into one Franco-Russian Government loan and GREAT BRITAIN 4I two joint Anglo-German Government loans of 1896 and 1898, each being Li 6,000,000.^ ^^ The maritime customs served as security under the Inspector-General of Mari- time Customs. A special assurance to Great Britain was that the Inspector should be an Englishman so long as England should maintain her preponderance of trade.^^ This was necessary since Russia was trying to insist on a Russian for the post, which until then had so success- fully been administered by Sir Robert Hart. The permanent foreign pressure for concessions, the territorial acquisitions and the constant attempts at intro- ducing western ideas into China, or in other words, the period of 1 897-1 898, had brought about a strong anti- foreign sentiment all over China. The result was the Boxer Rebellion of 1900. Referring to its causes, Lancelot Lawton quotes from one of the proclamations issued by the rebel leader Yu Tung Chen, who wrote : ^^ " These foreigners, under pretext of trading and teach- ing Christianity, are in reality taking away the land, food, and clothing of the people ; besides overturning the teaching of the sages, they are poisoning us with opium and ruining us with debauchery. Since the time of Tao Kuang, they seized our territory and cheated us out of our money; they have eaten our children as food and 30 See "China Year Book," 1914; see Chapter VIII. 31 See " Qiina," No. i, 1899, Vol. CIX, No. 20. 32 Lancelot Lawton, " The Empires of the Far East," Vol. I, page 2. 42 FOREIGN FINANCIAL CONTROL IN CHINA piled up the public debt as high as the hills; they have burnt our palaces and overthrown our tributary states, occupied Shanghai, devastated Formosa, forcibly opened Kiaochau, and now wish to divide up China like a melon." This passage shows that the Boxer rising though primarily fanatical in its aspect, was none the less evidence of the awakening of a national spirit. But once more the Chinese were forced to recognize the superiority of foreign arms and foreign methods. The rebellion resulted in humiliation for China. In connection with the Boxer event and its sequels there are two points of supreme interest. The first is the resulting political constellation. The campaign dis- closed Russia's diplomatic duplicity. Her policy was to back up the Chinese against the European Powers in order that she might pose as the protector of China for her own ends. She displayed a friendship for China and a protective attitude directed against foreign, especially English, aggression.^^ England was well aware of the menace which Russia's policy meant to her. She saw in Russia her traditional enemy more than ever. She strongly resented the for- ward policy of Russia in China, but found herself unable to check it single handed. Consequently she looked for an alliance which might restore the equilibrium of power in the Far East. The ally she found in Japan. The *3 See Chapter III. GREAT BRITAIN 43 island kingdom considered itself equally menaced by Russia's aggression, which already extended to the southern shore of Manchuria and which began to make itself felt in Korea, the independence of which kingdom was of vital interest to Japan. In seeking among the powers one who would support and finance her in active opposition to Russia's, Japan's inclinations leaned to- wards Great Britain, who formerly had refused to join other powers in turning her out of Port Arthur. Great Britain, on the other hand, was almost forced to throw m her lot with Japan, since Japan otherwise had to come to an understanding with Russia which would have destroyed the British position in China almost entirely. The Anglo-Japanese Offensive and Defensive Alliance concluded on January 30, 1902, then, was. intended to check the encroachments of Russia upon Northern China and adjacent territories and to safeguard British and Japanese commercial and financial interests in those re- gions ; ^^ or as the treaty expresses it : the two govern- ments are " specially interested in maintaining the inde- pendence and territorial integrity of the Empire of China and the Empire of Korea, and in securing equal oppor- tunities in those countries for the commerce and industry of all nations." Its significance is, according to Aubert, the addition of a maritime sphere of influence policy to the already existing territorial sphere of influence policy, 3* See Rockhill, op. cit., No. 16. 44 FOREIGN FINANCIAL CONTROL IN CHINA — the English sphere being the Indian Ocean and the Japanese sphere the seas of the Far East.^^ The second point of importance in reference to the Boxer rising, is the indemnity imposed upon China ac- cording to Article VI of the Final Protocol signed on completion of negotiations by the various Powers at Peking on September 7, 1901.^^ The indemnity amounted to L67,50o,ooo, Great Britain's share being L7,425,ooo.^'^ It proved to be a tremendous burden upon China's budget. China certainly had to pay heavily for the Boxer rising, which, after all, was nothing else than a protest against the aggression of 1898. In Article XI of the Peking Protocol the Chinese Government had also agreed to negotiate the amendments to the existing treaties of commerce and navigation deemed necessary by the foreign governments. Ac- cordingly Great Britain concluded on September 5, 1902, a new commercial treaty with China, the so-called Mackay Treaty, which provided for further trade facili- ties and opened a few new treaty ports.^^ 35 L. Aubert, " Paix Japonaise," page 50: "A la politique des spheres d'influence territoriales en Chine, le traite anglo-japonais substitue nne poHtique de spheres d'influence maritimes. D'Aden jusqu'au detroit de la Perouse, Anglais et Japonais se partagent la maitrise de la mer. Les mers extreme-orientales sont laissees a I'influence speciale du Japon, tandis que I'Angleterre fortifie sa posi- tion dans I'ocean Indien; chacun son domaine." 36 See Rockhill, op. cit., No. 15. s'f See Chapter VIII. 38 See Rockhill, op. cit., No. 18. GREAT BRITAIN 45 After the successful conclusion of the alliance with Japan, and the treaty with China, England could, at least for the time being, breathe freer. Having cleared the horizon of menacing clouds, the government left the long deferred and hoped for expansion of trade and the devel- opment of the railroad schemes to the parties directly- interested. Excepting official support given to the Hong- kong and Shanghai Banking Corporation and its allied interests, the British Government retired from its labors, so to speak, and from now on did little in protecting or promoting national or individual interests. " Therefore when questions arose from the evasion or repudiation of China's obligations in the matter of railways and mining enterprises, not to speak of everyday commercial cases, the nature of the support rendered by His Majesty's Gov- ernment took the form of permitting the parties con- cerned to make the best compromise possible and pro- claiming the results (when there were any) as triumphs of British diplomacy." ^^ It is of importance to know that British policy at this period, as on former occasions, continued to be influenced primarily by the English business world in China. The Chinese trade had gradually built up predominant local interests in the hands of a few powerful firms. While British foreign policy usually is largely directed by pub- lic opinion, the constant absence of any public opinion 38 Bland, op. cit., page 273. 46 FOREIGN FINANCIAL CONTROL IN CHINA regarding China, based on a lack of interest in this re- mote country, had caused the poHcy of the Foreign Office to be guided by the advice of the individuals and firms most prominently associated with China. It was as- sumed that those who had long experience and repre- sented special interests should frequently be consulted by the Foreign Office. The " China Association," for in- stance, has for many years rendered notable services to the advancement of Great Britain's interests in the Far East. It was this body that attracted Lord Salisbury's attention to the dangerous activities of France in south- ern China and Russia in Manchuria.^ ^ As the problems of China became more and more involved and complicated, and as railway construction and finance began, the activities of the vested interests naturally widened and added the cares of finance to the former protection of trade. " As a direct result of the situation," writes the Far Eastern Review, " arising from the keen struggle for railway concessions in 1898 to strengthen the political hold of the European powers on China, the organization of a purely British company be- came essential to act as the official instrument for the execution of the concessions extracted from the Chinese Government." ^^ The forming of such company fell naturally to the Hongkong and Shanghai Banking Cor- 40 "China," No. i, 1899, Vol. CIX, No. 25. *i " Far Eastern Review," Vol. 10, page 297. GREAT BRITAIN 47 poration. This bank was the predominant British finan- cial institution, and its power can hardly be exaggerated, since the entire British community in China depended more or less on its credit facilities. The bank, having on its Board of Directors the principal partners of the great German trading firms, had up to this time been operating under an agreement with the official German Banking Syndicate for mutual partici- pation in administrative and railway loans to China.* ^ When the battle of concessions began and the " sphere of interest " policy became generally recognized, the Hong- kong and Shanghai Banking Corporation, foreseeing the great advantages and profits to be derived as the repre- sentative British organization for the railway develop- ment of British policy, terminated their working arrange- ment with the strong German syndicate, and the manager on April 4th, 1898, directed a note to the Foreign Office to the following effect : " I have the honor to acquaint you that the arrange- ments under which this bank has hitherto worked with the German Syndicate for the construction of railways in China has been terminated by mutual consent. It is now agreed that the German Syndicate and ourselves shall each work separately. " I may here mention that the German Syndicate, always ** See Kent, " Railway Enterprise in China," page 150. See also Chapter VIII. 48 FOREIGN FINANCIAL CONTROL IN CHINA a powerful combination, has of late consolidated its posi- tion very much, and now includes all houses of any importance in Germany. It also enjoys the confidence of, and receives the support of, the German Govern- ment. " In order that British commercial interests may be fully represented, and that we shall be in a better position to cope with the powerful combination now opposed to us in China, the bank has decided to form a strong repre- sentative and influential Syndicate to deal with railway construction in China. . . . " In the meantime, I trust the explanation I have given will warrant you in giving the necessary instructions to Sir Claude MacDonald to give Messrs. Jardine, Mathe- son and Co., and the bank such support as they may require." ^^ The result of this letter was the early organization of the British and Chinese Corporation, Ltd., formed by the Hongkong and Shanghai Banking Corporation and the firm of Jardine, Matheson and Co. This strong, repre- sentative and influential syndicate has been able since to command, with the exception of the Peking Syndicate — whose activities however lay in another direction — a monopoly of the British Government's support. This corporation contracted henceforth with the Chinese Gov- ernment the construction of all the great British built 43 See " China," No. r, 1899, Vol. CIX, No. 5. GREAT BRITAIN 49 railroads in China. " From time to time," says the Far Eastern Review, " other British railway constructors en- deavored to secure a footing in China, but were compelled to retire after severe financial losses and leave the field to the undisputed control of the official commercial organ- ization." ^^ Exclusive official support was still enjoyed during the international loan negotiations, when the Brit- ish Government repeatedly assured the syndicate of its protection.^'^ And it was mainly owing to the failure of these negotiations that the field for financial enterprise was finally opened to other British concerns. The monopoly exercised by the syndicate within the British sphere and under Government support was a monopoly of rights to contract railway construction at the exclusion of non-British as well as other British interests. On the strength of this monopoly the syndi- cate concluded agreements with the Chinese Government, by which it was granted a certain amount of " control " to be exercised within the sphere. " Control " indeed was uppermost in the minds of the syndicate as well as of the British Government. The fact that " foreign con- trol " was assured in the Peking-Hankow agreement, that foreign political influence might menace British pre- ponderance in the Yangtsze Valley, and that " by differ- ential rates and privileges the managers of the railways ^* See " Far Eastern Review," Vol. X, page 298. *5 See "China," No. 2, 1912, Vol. CXXI, No. i to 7; see also Chap- ter VIII. 50 FOREIGN FINANCIAL CONTROL IN CHINA may strangle our trade " worried British officials con- siderably.^® Terms and privileges equal to those ac- corded to other nations were vehemently demanded. But we have to emphasize that the British Government, though it had forced the Chinese Government to grant railway concessions to British subjects within the sphere, had no part whatsoever in construction or control and it was not even a party to the signing or wording of the railway agreements or other contracts — with the exception of railways and also loans to be under interna- tional control.*^ To determine the amount and degree of control exer- cised by the British syndicate we now have to turn to the respective clauses of the railway agreements. The first railway contracted was the section Shanhaikuan- Newchwang of the Imperial Railways of North China. The preliminary agreement was signed on June 7, 1898, and the final railway loan agreement on Oct. 10, 1898, between the syndicate and the Administrator General of the Railways of North China, acting under authority of the Imperial Chinese Governments^ The principal clauses, establishing control, read as follows: In Article i : The Corporation agrees to issue on be- half of the Administrator-General a sterling loan for the 46 See " China," No. i, 1899, Vol. CIX, Nos. 135 and 232. *'' See Chapter VIII. *^ See Rockhill, op. cit., Nos. 42 and 46. GREAT BRITAIN 5 1 amount of L2, 300,000. (The term of the loan being 45 years : Art. 9. ) In Article 3 : This loan shall be a first charge upon the security of the permanent way, rolling stock, and entire property, with the freight and earnings of the ex- isting lines between Peking and Shanhaikuan, and on the freights and earnings of the new lines when constructed. In Article 4 : The principal and interest of this loan are guaranteed by the Imperial Government of China, and in the event of default in payment of interest or re- payment of principal at due date, the Corporation shall immediately notify the Imperial Government of China thereof, and the Imperial Government of China will thereupon provide the funds necessary to meet such pay- ment in sterling in London. In the event of the Imperial Government of China being unable to provide the funds necessary to meet a payment of interest or principal, when called upon by the Corporation to do so in terms of this clause, the said railway lines and the entire property shall thereupon be handed over to the representatives deputed by the Corporation to manage, on their behalf, until prin- cipal and interest of the loan have been redeemed in full, when the management will revert to the Railway Admin- istration. . . . This arrangement, which differs from other contracts in that the Administrator-General retains control of the railway lines so long as the principal and interest of this 52 FOREIGN FINANCIAL CONTROL IN CHINA loan are regularly paid, has been agreed to in consequence of the friendly relations which have long existed between the Contracting Parties. In Article 6: During the currency of this loan the Chief Engineer of railway shall be a British subject. The principal members of the railway staff shall be cap- able and experienced Europeans, who shall be, as at present, appointed by the Administrator-General of the Railways. . . . In addition to the above, a capable and efficient Euro- pean Railway Accountant shall be appointed, with full powers to organize and direct the keeping of the railway accounts, and to act with the Administrator-General and the Chief Engineer of the railway in the supervision of receipts and expenditure. In Article 8 : All receipts and earnings of the lines ' herein specified shall be paid into the credit of the Rail- way Administration with the Hongkong and Shanghai Banking Corporation, Tientsin. . . . In reimbursement of expenses incurred in connection with the distribution of the service to the bondholders of the principal and interest of the loan, the Hongkong and Shanghai Banking Corporation, Tientsin, shall receive from the Railway Administration a commission oi % per cent, on the annual loan service, which will be in- cluded in the yearly Schedule for the same. In Article 14: All bonds and coupons and payments GREAT BRITAIN 53 made and received in connection with this loan shall be exempt from Chinese taxes and imposts forever. The next railway of importance contracted was the line from Shanghai to Nanking. The preliminary agree- ment was signed on j\Iay 13, 1898, and the final agree- ment on July 9, 1903, both between the syndicate and the Director General of the Chinese Imperial Railway acting under authority of the Imperial Chinese Govern- ment. The final agreement provided in particular for the following terms : "*^ The corporation agrees to issue a loan not exceeding L3, 250,000, for which Chinese Gov- ernment Bonds are to be issued. The duration is fifty years. The Chinese Railway administration undertakes to buy and pay for the land required. The loan shall be secured by mortgage on all lands, material, rolling stock, buildings and property and no further mortgage or loan shall be created on the said lines. In order to pro- vide for a final authority, a " Board of Control " is cre- ated to be composed of the Director General of the Chi- nese Railway Administration and nominee of his, to- gether with three representatives of the syndicate. The Chief Engineer, at the same time Chief Administrator, shall be nominated by the syndicate with the concurrence of the Director General, and shall be paid by the Chinese railway administration. The residue of the net profits in each year after paying the sum annually due for inter- *" See Rockhill, op. cit., No. 39. 54 FOREIGN FINANCIAL CONTROL IN CHINA est and redemption of the loan and all other sums which may be due to the syndicate, shall be divided into five shares, one to be retained by the syndicate as remunera- tion for superintendence and services; the syndicate shall receive five per cent, on the entire cost of all ma- terials purchased for the railway. Finally it is to be mentioned that all bonds are exempted from taxation. The money actually lent was L2,25o,ooo in 1904 and L630,ooo in 1907.^^ The Canton-Kowloon Railway agreement between the Board of Foreign Affairs of the Chinese Government and the British and Chinese Corporation, Ltd., concluded on the 7th of March, 1907, contains control provisions similar to those of the two preceding agreements.^^ Im- perial Chinese Government bonds are to be issued for the amount of L 1,500,000 similar to the bonds of the Shang- hai-Nanking Railway, with the railway as first mortgage security therefor. The loan is to be secured by a specific and legal first mortgage in favor of the Corporation upon all lands, materials, rolling stock, buildings, property and premises, of every description purchased or to be pur- chased for the raihvay, and on the railway itself, as and when constructed, and on the revenue of all descrip- tions derivable therefrom. A British Engineer-in-Chief and a British Chief accountant are to be associated with 50 See "China Year Book," 1913, Chapter XVI. 51 See Kent, op. cit., Appendix F, No. 4. GREAT BRITAIN 55 the Chinese I\Ianaging Director. It is also agreed, that if interest or principal in accordance with the amortization schedule is not paid on due date, the whole railway with all its appurtenances mortgaged to the Corporation for the bondholders, shall be handed over to the Corporation. The Corporation are appointed trustees for the bond- holders. In remuneration for all services rendered by the Corporation, during construction, the Corporation shall receive the sum of L35,ooo. The handling of all funds is entrusted to the Hongkong and Shanghai Bank- ing Corporation. Next in importance to the agreements concluded by the British and Chinese Corporation come those concluded by the Peking Syndicate, a powerful Anglo-Italian cor- poration.^^ Although the driving power of the syndi- cate was an Italian subject, Mr. Luzatti, the British For- eign Office used a considerable amount of " pressure " upon the Chinese Government towards obtaining the grant of the concessions in question.'"*^ By the agree- ment from May 21, 1898, the syndicate obtained the sole right to open and work the coal and iron deposits of central and southern Shansi and Honan and the pe- troleum deposits of the entire province, and secured the right to construct and operate all necessary railways to maintain trunk lines or navigable waters for exporting =2 See Kent, op. cit, Chapter XIII. °3 See "China," No. i, 1899, Vol. CIX, No. 6, 106, and otherwise. 56 FOREIGN FINANCIAL CONTROL IN CHINA the mining products. ^^ " All matters of administration, exploitation, employees, and finances shall be controlled by the Board of Directors of the Peking Syndicate, and the Chief of the Shansi Bureau of trade shall cooperate. . . , Each line must have one foreign and one Chinese manager, the foreigner to control the works, the Chinese to attend to all matters between natives and foreigners. Accounts will be kept by the foreign system." By the agreement for the Construction of a Railway from Taokow to Chinghua by the syndicate, the Chinese Gov- ernment agreed that the railway for all practical pur- poses was to remain under the control of the syndicate until the bonds have been secured. ^^ The amount of the loan was L700,ooo and was secured by a first mortgage on the railway, its line, rolling stock and earnings. A commission of one-fourth of one per cent, on the amount of interest coupons paid, and the like commission on all bonds drawn for payment was to be paid to the syndicate. Finally, according to the additional working agreement was the syndicate entitled to receive from the Imperial Chinese Railway Administration 20 per cent, of the sur- plus of each year. Although these control provisions appear to be very favorable to the syndicate, they remain nevertheless in- significant, since this railway is very short and of abso- ^* See Rockhill, op. cit., No. 40. 55 See Kent, op. cit, Appendix C, Nos. i and 2. GREAT BRITAIN 57 lutely secondary importance when compared with the valuable mining concessions. The " control " provisions are in substance similar to those of the British and Chi- nese Corporations' agreements. In order to reduce the above enumerated control provisions to their essence and true meaning we can not do any better than use the words of Mr. Willard Straight and Mr. Kent. Mr. Straight writes in " China's Loan Negotiations " : ^^ " Control in the at present accepted sense of the word was first embodied in the agreement made by the Chinese Government in 1898, with the British and Chinese Cor- poration, for a loan to the Imperial Railways of North China. " Under this agreement, and in several others concluded at about this time, the lenders, besides securing a first mortgage on the railway whose construction they financed, were entitled to a share in the profits of the line. " For this reason and also because of the inexperience of the Chinese in railway matters, the bankers required assurances that the loaned funds should be so expended that the mortgaged property would constitute a suf- ficient security. " They furthermore obtained a certain share in the management of these lines in order that there should be secured therefrom an adequate return (to a certain per- centage of which the banks were entitled), and to prevent ^•^ See Straight, op. cit., page 131. 58 FOREIGN FINANCIAL CONTROL IN CHINA the administrative inefficiency and fraud which they feared if the operation of these railways were placed en- tirely in Chinese hands." Mr. Kent's summary of the aspects of the contracts is similar : ^^ " Firstly, the syndicate is given the right to construct the line, and in return for its trouble in this connection it is in most cases allowed a sum equivalent to 5 per cent, on the total cost. It is this right which presumably gives rise to the idea of concession. " Secondly, on completion of the line it is placed in some cases under a theoretically joint Chinese and for- eign control, in which in practice the foreign element pre- dominates. In other cases the Chinese have merely a consultative voice. " Thirdly and lastly, at this stage, or rather from the time of the issue of the loan, the syndicate become trus- tees for the bondholders, and it is easy to see that, in the nature of things, the loan being secured by a first mort- gage upon the railway, the position of the syndicate for all practical purposes must be that of mortgagees in pos- session." Such are the underlying principles of the agreements which confer these rights, which for want of a more precise term we call, and shall continue to call, conces- sions. The details, of course, vary. ^'' See Kent, op. cit., page 95. GREAT BRITAIN 59 According to Mr. Kent the agreements are in the na- ture of underwriting contracts, and the indirect profits to the syndicate accruing therefrom are very hand- some. ^^ " The contracting syndicate undertakes to pro- vide 90 per cent., for example, of a loan of so many millions of pounds or dollars, as the case may be, re- payable at a certain specified time and bearing interest at the rate of 5 per cent, per annum ; it takes its chance of being able to float the loan upon the public at a higher percentage of its nominal value. What has happened in most cases is that on every Lioo bond, for example, issued by the Chinese Government the latter received L90, while the syndicate have succeeded in getting them taken up at L97 or thereabouts, thus securing a respect- able margin on the transaction," Another source of profit to the banks as well as to English industries, was the provisions which made the syndicate the purchasing agents of materials and rolling stock. Outside of the fact that the corporation was to receive on the average 5 per cent, commission of the entire cost of all materials purchased, the materials were naturally almost exclusively purchased in England.^" Although all materials were nominally to be purchased in the open market, the usual clause that " at equal rates and qualities, goods of British manufacture shall be given "'' See Kent, op. cit., page 94. 50 See also Chapter VIII. 6o FOREIGN FINANCIAL CONTROL IN CHINA preference over other goods of foreign origin " provided an opportunity for almost exclusive purchase in England. Thus writes the Far Eastern Review, referring to the open market provision : " We find, however, that, not- withstanding the specific agreement the purchases were made exclusively in London without reference to the lowest price or open tenders." ^"^ On the strength of the foregoing analysis we now draw the conclusion that British control in China consists of nothing more than safeguards for the protection of the bondholders and bankers, guaranteeing proper loan fund expenditure and adequate return. British control in China, exercised exclusively by private corporations, is therefore essentially financial and non-political. Its non-political character may be further illustrated by the fact that the syndicate, in spite of its monopolistic rights, admitted non-British interests to participation in its privileges within the British sphere. On February i, 1899, the British and Chinese Corpor- ation and the American China Development Company, the latter having no exclusive government support, made an agreement that each party should offer to the other a participation of one-half of its own interest in any busi- ness hereafter obtained by it in China, excluding, how- ever, a number of agreements which had been entered 6° See " Far Eastern Review," Vol. VIII, page 83. See also Straight, op. cit., page 123. GREAT BRITAIN 6l into previously by either party.^^ This agreement, how- ever, was terminated later. In 1905 the British and Chinese Corporation, the Pe- king Syndicate and French bankers joined for general participation as to railway construction in the Yangtsze Valley, and especially in the regions north of the Yang- tsze Valley,"^ namely, for the construction of the Pukow- Sinyang and Sinyang-Chengtu or Hankow-Chengtu rail- ways. One of the objectives of the British and Chinese Cor- poration had been a railway from Pukow to Sinyang and its eventual extension to Chengtu. The Peking Syndi- cate, however, had planned a line which would seriously compete with the British and Chinese Corporations' line. " This and other considerations led to an amalgamation of the two companies for all future railroad development north of the Yangtsze," says Kent.^^ The combination was henceforth known as the Chinese Central Railways, Ltd. At the same time a group of French and Belgian capitalists, headed by the Banque de ITndo-Chine, were also interested in securing the concession for a line from the Hankow-Sinyang district westwards to Chengtu.^'^ To avoid competition the British combination entered •1 See Rockhill, op. cit., No. 49. ^'~ See Laboulaye, " Les Chemin.s de fer en Qiine,'" pages 182 and 206. '•^ See Kent, op. cit., page 128. 8* See " Far Eastern Review," Vol. X, page 298. 62 FOREIGN FINANCIAL CONTROL IN CHINA into negotiations with the French capitaHsts for joint construction of the Hnes in question, absorbing their interests into the Chinese Central Railways, Ltd. The Pukow-Sinyang line was, however, eventually constructed as a purely British line.®" As early as 1895 the Hongkong and Shanghai Bank- ing Corporation had entered into an agreement with the Deutsch Asiatische Bank to share all Chinese Govern- ment business thereafter obtained by either party. The resulting financial transactions, done in common, and especially the Tientsin-Pukow agreement with its import- ant control provisions, shall be analyzed in the Chapter on " International Action." Their agreement as to mutual participation was terminated in 1898, with the exception of the Tientsin-Chinkiang-Pukow Railway, and the bank- ers agreed to respect their mutual spheres,®*' As a con-- sequence the Germans abstained for several years from demanding participation in the railway enterprises within the Yangtsze sphere. But, presumably owing to the political and economic changes after the conclusion of the Russo-Japanese War, and owing to the increasing com- petition for a share in the benefits of Young China's promised development of trade and industries, the Ger- man bank around 1908 changed its policy. It henceforth demanded rights of participation under the terms of the former agreement and intended to compete for railway •^ See below, page 76. ** See above, page 46. GREAT BRITAIN 63 and other Chinese Government loans, in the Yangtsze Valley and elsewhere, unless admitted on terms of equal- ity. The British financiers acquiesced in' the German demand for participation, and the Germans associated with the British and French interests in the syndicate known as the Chinese Central Railways, Ltd. The activ- ities of this " Tripartite " and, after the admission of the United States, the " Four Nations '' group from now on are cosmopolitan in character and consequently shall be dealt with in detail in the Chapter on " International Action." The admission of German participation with the An- glo-French Combination in the Yangtsze railway loans and in an area which had been recognized as reserved for the British, was an event sufficiently important to provoke criticism, such for instance as has been forthcoming from Mr. J. O. P. Bland in his excellent book on " Recent Events and Present Policies in China." ^' His criticism may be summarized as follows: That British and French financiers worked in common is easily explained by the excellent relation then and thereafter existing be- tween the two countries; but that German and British financial interests should continue to cooperate in the Far East, while there was friction between the two coun- tries at home, was a matter of much surprise to the English world, and the British bank having for years •^ Sec Bland, op. cit., pages 273 ff. 64 FOREIGN FINANCIAL CONTROL IN CHINA enjoyed a monopoly of British Government support and become identified with British enterprise of far-reaching poHtical importance, could not openly endorse the Ger- man claims without arousing opposition in England. The correspondent of The Times at Peking, expressed the general wonder that " the British Government should delegate to one British bank, which is naturally com- pelled to consider financial rather than national interests, the ris:ht to assist the extension of German influence." ^^ It was demanded that the Government should organize and direct the use of British capital as a weapon of offense and defense and that it should follow the example of other countries and notably that of Germany where the financiers are obliged to conform strictly to the polit- ical directions of their Governments who are profiting by the laisser-aller methods of Great Britain. The reasons that the Foreign Oflice showed no appre- ciation of the fact that other nations were successfully developing their rights of railway construction to the sup- posed detriment of Great Britain, and that no strong national policy could be expected, is on the one hand evidence of the absence of an effective force of public opinion. For with the exception of very rare cases Eng- land's policy follows and does not lead public opinion. This is illustrated in a manifesto issued by the China League in February, 1901, wherein the following passage «s London Times, May 9, IQOQ- GREAT BRITAIN 65 occurs : " At a time when the future of China hangs in the balance, when the maintenance of our position and trade in that Empire (that is to say, the welfare of Great Britain in years to come) depends on the imme- diate policy of her majesty's Government and the action of the British representative in the Concert of the Powers at Peking: at such a time, the Imperial Parliament, its attention apparently concentrated on personal explana- tions of unimportant matters, enunciates no policy on the Far Eastern question. Statesmen on both sides of the House, and publicists of all shades of opinion, remain silent in regard to the crises, offering no solution cal- culated to protect British interests. A debate on the China question attracts less attention than a minor ques- tion of parochial Government." ^^ Furthermore, considering the situation as a whole and having reference to the particular history of British- Chinese relations and the various experiences of the Gov- ernment, we are faced with the fact that the Government finally was wearied by the futilities of the many negotia- tions and the ever increasing complexities of the sit- uation. Great Britain's foreign policy in China, con- sistent with the traditions of British statesmanship, con- tinued to be guided by the old traditional " laisser-faire " and free trade principles, which had made the Empire great. Therefore it left the control of Britain's financial "" See Bland, op. cit., page 270. 66 FOREIGN FINANCIAL CONTROL IN CHINA interests to the parties directly interested. And there is little wonder that the business of the British Syndicate, being unhampered by governmental interference or re- striction, speedily assumed cosmopolitan character. For in its cosmopolitan tendencies, which are towards elim- ination of competition and towards consolidation, British finance is quite in harmony with leading British economic thought. According to Mr. Hobson and other prominent econo- mists the conception of nations as hostile competitors in world finance is economically unsound.'^" International finance is peace-loving, since the cooperation of the finan- ciers of the various countries in business enterprises in all parts of the world is binding up the prosperity ot each individual country intimately with the welfare of all other countries. Says Hobson : " Modern finance is the great sympathetic system in an economic organism in which political divisions are of constantly diminishing importance." "^^ That the policy of non-interference — barren of deep laid plans such as characterize the policies of other Powers in China, and at times criticized as suicidal to British prestige and British economic interests — has by no means handicapped the tremendous growth of British ^oSee J. A. Hobson, "Work and Wealth," Chapter XVII; see also Same, " An Economic Interpretation of Investment," passim, and J. H. Withers, " International Finance," pages 93 ff. ^1 See Hobson, " Investment," page 122. GREAT BRITAIN 67 railway interests in China, is amply illustrated by the various concessions contracted by British financiers in later years, especially in 1914. An authoritative text of the agreements was not available to the author, with the exception of one. The control provisions seem to be of a milder form similar to the so-called Tientsin- Pukow terms, which will be a subject of investigation in Chapter VIII. Since the fate of these railways is un- certain owing to the war, we shall only give a brief enumeration of the more important ones. The final loan agreement of the Pukow-Sinyang Rail- way was concluded on Nov. 14, 19 13, between the Chi- nese Government and the Chinese Central Railways, Ltd.''^ By Article 9, the Loan was secured by a mort- gage on the railway, all lands, materials, rolling stock, buildings, etc., and the revenues. And according to Arti- cle 16, the construction and control of the railway shall be vested in the Chinese Government with a Chinese Director General and a British Engineer in Chief. In July, 1914, an agreement for the construction of the Nanking-Pinghsiang Railway was entered into between the Chinese Government and the British and Chinese Corporation. ''^ And finally, also in July, 1914, a final agreement was signed between the Ministry of Posts and Communica- ''- See " Far Eastern Review," Vol. X, page 307. Ts See " Far Eastern Review," Vol. XI, page 49. 68 FOREIGN FINANCIAL CONTROL IN CHINA tions and Messrs. Pauling & Co., Ltd., of London for the construction of a railway starting from a point on the Yangtsze River opposite the city and port of Shasi, in the Province of Hupeh, through Lichow, Changteh, Shenchow, Yuanchow, Chenyuan, Kweiyang, Anshunfu to Shingyifu, in the southwestern corner of the Province of Kweichow, with a branch from Changteh to the city of Changsha, the capital of the Province of Hunan. '^^ The loan is for L 10,000,000 for 40 years at five per cent, interest. The railroad is to be built by contract, a firm of British consulting engineers acting with the Chinese managing director in drawing plans and supervising the work. The admission of Messrs. Pauling & Co. was due to a modification of British policy following the fail- ure of the International Loan Negotiations.'^^ Succeeding chapters will incidentally, by means of comparison, further emphasize the preponderance of British finance in China, based as it is upon the wealth and the extended and old established trade relations of Great Britain, both of which — at least previous to the Great War — were superior to those of any other country. "■* See " Far Eastern Review," Vol. xi, page 52. " See Chapter VIII. CHAPTER III RUSSIA Russia's policy in the Far East shows a marked con- trast to that of Great Britain. The causes of this contrast he in the differences in national character and governmental system of each.^ The administration of the Russian Empire under autocratic rule, resting nom- inally in the hands of the Tsar, was actually entrusted to a body of ministers and officers who were practically untrammeled in their action, and their freedom was restrained neither by the criticism of a free press, the influence of public opinion, nor the liability of being de- prived of office by a parliamentary vote of censure. It follows that the Russian diplomatist was in a position to attain any object he may have had in view. Russia has alvvavs contained statesmen who have guided her destinies along imperial lines ; statesmen who have seen beyond many generations and whose grand and far-reaching policy, in spite of grievous errors in local administration, has made the Russian Empire what it was before the war. But their system was entirely opportunist, the method often without scruple. In her ' The first point will be dealt with at the end of this chapter. 69 70 FOREIGN FINANCIAL CONTROL IN CHINA descent on Asiatic waters Russia has been impelled neither by the need of extended territory nor by the desire for commercial relations with other countries. Indeed Russia's trade with China was and is insignifi- cant and consists mainly of importing articles of Chinese manufacture into Russia, notably tea, silks and drugs. Her ambitions were political and her absorptions have been prompted partly by a craving for a seaboard, partly by a political instinct of expansion, and partly by the personal ambitions of a few statesmen. It may be said that the designs of Russia in regard to China first began to take serious shape in 1854, when the celebrated Count Muravieff seized the Amur River. Al- though this measure of aggression may have long been in the minds of Russian statesmen, it was precipitated by reason of the blockade of the Black Sea during the Crimean War. The severance of communication by sea compelled Russia to secure control over the river as a means of conveying supplies to her distant possessions in the East. It was Muravieff himself who had first aroused public interest in the Amur, when he defended Kamchatka via this river. To quote Vladimir : " The unexpected news of the gallant defense of Petropav- lofsk, a detached little-known episode of the Crimean War, an event of great importance in the Far East, aroused the greatest enthusiasm." ^ At the same time, 2 See Vladimir, " Russia on the Pacific," page 225. RUSSIA 71 as Douglas points out : " The Anglo-French expedition of 1857-60 enabled Russia to pose as the friend of China." ^ The result was the Treaty of Aigun of May 16, 1858, strengthened by another treaty of 1860.'* These treaties gave Russia the whole coast of Man- churia to the Korean frontier, the so-called Maritime Provinces, and provided for trade free of all duties and restrictions between Russia on the land frontiers. " This quiet transfer," says Vladimir, " was due more to the internal troubles and foreign wars of China, than to the shadowy nature of the sovereignty in the disputed territory." ^ The new territory thus acquired enabled Russia to found her great eastern seaport, Vladivostok. By the same treaty the right of Russia to retain an envoy at Peking was conceded, and from that time on to the present Russia has retained her most able diplomatists at the Celestial capital for the purpose of developing her aims and extending her interests in China. The extension of these interests is largely connected with the building of the Siberian Railway. It had be- come indispensably necessary, if the acquisition of the new Far Eastern territory as well as the whole of Siberia was to bear any fruit for Russia, that cheap and rapid means of communication should be established between European Russia and the head waters of the Amur. 3 See Douglas, " Europe and The Far East," page 190, * See Mayers, op. cit., page 105. ^ See Vladimir, op. cit., page 317. 72 FOREIGN FINANCIAL CONTROL IN CHINA The consequence was the construction of the Siberian Railway which Vladimir calls the " economic concomi- tant of Russian expansion on the Pacific." Although originally, as far as the motives which inspired the scheme of the Siberian Railway were concerned, these may be regarded as primarily economical, there can be no doubt that the strategical advantage began to loom up in large proportions, as soon as the construction of the line through to the Pacific coast was actually under- taken in 1 89 1. While up to this year the preoccupation of Russia in the Balkans and in Central Asia had pre- vented the advance of Russia south of the Amur and west of the Ussuri, she now began to give the problems of the Far East her full and undivided attention. Russia began to realize something of the immense possibilities of China, and last not least she recognized that her ambi- tion was only partially achieved as long as she had not found a harbor entirely free from ice, Vladivostok being icebound for several months in each year. The outcome of such considerations was found in an extension of the Siberian Railway through Eastern Mongolia and Man- churia to the coast of the Yellow Sea. To this end careful surveys were made by Russian experts in Man- churia, and the possibilities of the country studied at the instance of the Russian Government.^ Meanwhile, Russian diplomacy was exceedingly active * See Kent, op. cit., pages 40 ff. RUSSIA 73 at Peking in 1890 and 1891. and it was directed towards delaying the construction by China of the Manchurian railways projected by Li Hung Chang, in order that con- cessions for railways in this region should be granted to Russia. What relations between Li Hung Chang and Russia existed at this time, may perhaps never be known. He may or may not have intended from the beginning to concede these lines to Russia for a consid- eration. It was so much easier for the Russians to reach their ends as Li Hung Chang, that astute Chinese statesman, though alive to Russian antagonism, shared Russia's suspicion of the Japanese and set to work to secure Rus- sia's prospective help in his plans to thwart Japan. The trouble centering around Korea was boding ill for the peace of the Far East."^ To Russia, China always had looked as the mighty neighbor, for Russia in her con- tact with the Chinese never had failed to impress the celestials wuth a sense of her power. Li Hung Chang acted towards Russia in a friendly spirit and treated her as a Power which, being geographically and historically quite differently situated to the rest of Europe, was worthy of different treatment. The result of the Korean War, so disastrous to China, tightened the bonds of sympathy between Russia and China. The alarm experienced in Peking at the spec- "^ See Douglas, op. cit., page 304. 74 FOREIGN FINANCIAL CONTROL IN CHINA tacle of Japanese troops overrunning Korea and the Liaotung peninsula was shared in St. Petersburg. Japan, as will be shown later, had disclosed her hand, and in doing so had stimulated Russian diplomacy to the exer- cise of the greatest ingenuity in order to deprive her of the substantial fruits of her victory. It was inevitable that Russia should rely on diplomatic action, for military measures were not at that time practicable. The Sibe- rian Railway was not completed, and it would have been impossible for her to throw into Manchuria a force sufficient to effect the seizure of the Liaotung peninsula from Japan. She therefore used the Yellow Peril argu- ment with such effect that Germany and France joined her in insisting upon the withdrawal of Japan from Port Arthur and from Korea.^ Japan had to accept the in- evitable, and to withdraw, for she could not have with- stood a naval attack upon her shores by three allied powers. It is of great significance that Li Hung Chang had accepted the Japanese conditions without demur. He had apparently previously come to an understanding with the Russian representative at Peking, by which the in- tervention of the Tsar was promised to prevent the per- manent occupation of the Chinese territory by Japan, and he knew that the most important clause in the peace- treaty would not be allowed to be carried out. Natu- * See Le Roy Beaulieu, " The Awakening of the East," page 247. RUSSIA 75 rally his gratitude towards Russia was great, and his obligations soon resulted in a large increase of Russian influence at Peking.^ During the latter part of 1895, and the entire year of 1896, Russian diplomacy was very busy in impressing upon the Chinese the fact that it was Russia alone who had saved her from the fate of losing parts of Manchuria, that closer relations with Russia would ensure China's safety, and that a compensation should be given to Russia in some form. The visit of Li Hung Chang to St. Petersburg in 1895 paved the way for the striking events that were to follow in Manchuria.^*' Li Hung Chang was sent as Plenipo- tentiary Extraordinary to be present at the coronation of the Tsar in Moscow. During his visit to Russia there were rumors of the confirmation by him of a secret con- vention which had been entered into between China and Russia in 1895, the so-called Cassini Convention. Count Cassini, the Russian minister to China, was said to have had a series of interviews with the viceroy of Pechili, with whom he negotiated a secret treaty, which was subsequently ratified by Prince Lobanow, the Russian minister of foreign affairs. The alleged text of this agreement was published in the North China Daily 8 The mysteries of Li Hung Chang's relations to Russia have been expounded in almost every important hook on the Far East. Reli- able official data are not available and the author has merely pre- sented a brief summary of the situation. 1° See Kent, op. cit., pages 46 ff. yd FOREIGN FINANCIAL CONTROL IN CHINA News,^^ but official denials were at once published. Subsequent events, however, have proved that an under- standing had been come to between Russia and China, which for all practical purposes was in the terms of the document published in the Shanghai Journal. " Putting the matter briefly, the arrangement amounted to an exchange of guarantees, Russia undertaking to support China against foreign aggression in return for certain facilities for the extension of Russian interests and the construction of railways in Manchuria." ^- In the Cas- sini Convention we see according to Mr. Putnam Weale the three main points of view at work, which Russia wanted China to get accustomed to : ^'^ " The first was that Russia, being without any convenient bases in the Far East, free from ice all the year round, must be granted some port or ports, which she could share with China. The second point, leading as it were to the third, was, that unless Russia were able to exert her great strength as a land Power her friendship with China could not take the form of material support in case a fresh crisis in the Far East should arise, and Japan attempt to repay China for calling in the help of the West. And the third and concluding point was this : In order to bring her myriads of soldiers to the Far East, Russia had 11 See " North China Herald," October 30th, 1896. pages 739-741. A French text can be found in Cordier, op. cit., Vol. HI, pages 343 ff. 12 See Kent, op. cit., page 47. 13 See Putnam Weale, " The Reshaping of the Far East," page 263. RUSSIA 11 already begun, years before the Japanese War, a grand trunk railway at great expense to herself; but as the railway would have to follow the northern bank of the Amur, it would be indefinitely delayed unless a more convenient route could be granted by generous and mag- nanimous China, who had already bestowed the Pri- morsk." The Cassini Convention, it was believed, also made some provisions in regard to the acquisition of Kiaochau by Russia, while the Liaotung Peninsula was ear-marked in Russia's favor. ^"* Russia's propositions seem to have appealed to Li Hung Chang, though it is hardly to be doubted that he fathomed the true significance of the convention. He wanted an alliance; and the defensive alliance with Russia was the peg on which he hung the railway concession. " Li Hung Chang, in his communi- cations to the Chinese Government, laid all the stress upon this guarantee, stating that it was of inestimable worth to China, against whom England and Japan were hatch- ing plots. He treated it as the price to be paid for the raihvay charter, and all the other grants that were super- added to the charter." ^^ Shortly after his return to China, Li Hung Chang's arrangement with Russia began to bear fruit. The first manifestation took the form of the Manchurian Rail- 1* See Cordier, op. cit., pages 343 ff. 1^ Lawton, op. cit., Vol. II, page 1293. 78 FOREIGN FINANCIAL CONTROL IN CHINA way agreement between the Chinese Government and the Russo-Chinese Bank. This bank was destined to play a great role in the succeeding events and its estab- lishment marks the beginning of Russian " conquest by railroad and bank." The original inscription bearing imperial sanction was signed, it is important to note, by the " Manager of Affairs of the Committee of the Siberian Railway." ^^ In virtue of the charter, a joint- stock company was founded with a capital, originally fixed at six million roubles — increased later. Accord- ing to Part II, Article 14: "The object of the Russo- Chinese Bank is exclusively to develop relations with the East-Asiatic countries." Among the usual banking op- erations are : " The collection of duties in the Empire of China, and the transactions relating to the State Treasury of the respective place, the coinage, with the authorization of the Chinese Government, of the coun- try's money, the payment of the interest on loans, con- cluded by the Chinese Government, the acquisition of concessions for the construction of railways within the boundaries of China and the establishment of telegraph lines." Though the bank appears to be a private corporation under Government protection, its political aspect is quite apparent. " In addition to a banking department it has i« See Rockhill, op. cit, No. 31. See also Putnam Weale, " Man- chu and Muscovite," page 126. RUSSIA 79 a political side, to which the former is said to be sub- ordinated.'' ^^ On Sept. 8, 1896, the Russo-Chinese Bank entered into an agreement with the Chinese Government for the construction and management of the Chinese Eastern Railway.^^ The principal provisions, establishing Rus- sian control, are as follows : In Article i : " China and Russia establish a Com- pany to be called the Chinese Eastern Railway Co. to construct and manage this Railway. . . . The regvila- tions of the Company will be in conformity with those of Russian Raihvay Companies. Shares may only be bought by Chinese and Russians." In Article 6: "As regards the land required by the Company for constructing, managing, and protecting the line and adjacent land, for procuring sand, earth, stones and lime, if the land be government land, it will be given the Company without payment. . . . All the Com- pany's land will be exempted from land tax. As soon as the land comes under the management of the Com- pany, they may erect thereon any buildings and carry on all kinds of work, they may establish a telegraph line thereon worked by the Company for the Company's use." Article 7 : " All materials required by the Company ^^ See Kent, op. cit., page 47. 18 Sec Rockhill, op. cit., No. 32. 8o FOREIGN FINANCIAL CONTROL IN CHINA for the construction and repair of the Hne will be exempt from taxation." In Article 8 : " All Russian troops, naval or military, and munitions of war, moved by the Russian Govern- ment by this Railway, must be conveyed by the Company directly across the border." In Article lo: "As to goods conveyed by this line from Russia to China or from China to Russia, they will pay duty according to the Treaty Tariff, i.e., an Import or Export duty as the case may be, but subject to a reduction of one-third of the Tariff rate." On the strength of this agreement the " Chinese Eastern Railway Company " was formed " for the con- struction and working of a railway within the confines of China from one of the points on the western borders of the Provinces of Hei-Lun-Tsian, to one of the points on the eastern borders of the Province of Kirin and for the connection of this railway with those branches which the Imperial Russian Government will construct to the Chinese frontier from Trans-Baikalia and the southern Ussuri lines." ^^ The Company is, furthermore, empow- ered, subject to the sanction of the Chinese Government, to exploit, in connection with the railway or independ- ently of it, coal mines, as also to exploit in China other enterprises — mining, industrial, and commercial. The formation of the Company shall be undertaken by the 19 See Rockhill, op. cit., No. 33. RUSSIA 8l Russo-Chinese Bank. \\'ith the formation of the Com- pany all rights and obligations are transferred to it in regard to the construction and working of the line ceded in virtue of the above named Agreement of the 8th of September, 1896. In virtue of this Agreement the Com- pany shall retain possession of the Chinese Eastern Rail- way during the course of eighty years from the day of the opening of traffic along the whole line. But on the expiration of thirty-six years the Chinese Government has the right of acquiring the line. The railway is to be conducted subservient to the requirements of the Si- berian Railway. In the event of a difference of opinion arising between the two railways the Chinese Eastern Railway shall submit to the decision of the Russian Min- ister of Finances. The Russian letter and parcels post, as also the officials accompanying the same, shall be car- ried by the Chinese Eastern Railway free of charge. The preservation of law and order on the lands assigned to the railway and its appurtenances shall be confined to police agents appointed by the Company. The capital of the Company shall be formed by the issue of shares and bonds. The shares shall be fixed at 5,000,000 rubles. The remaining portion of the capital of the Company will be formed by the issue of bonds. The nominal amount and value of each issue of bonds shall be subject to the sanction of the Minister of Finances. The Rus- sian Government will guarantee the interest on and 82 FOREIGN FINANCIAL CONTROL IN CHINA amortization of the bonds. For the reahzation of these bonds the Company must have recourse to the Russo- Chinese Bank. The character of " control " estabHshed by the fore- going agreements can easily be ascertained. The fact that according to Article i of the last agreement " the Director of the Company will be appointed by China," and that " his duty will be to supervise the task dele- gated to the Company by China, and to ascertain whether his obligations are faithfully performed," does not alter the fact that the Company is a Russian joint stock company, run by Russians, with Russian money, and under Russian rules. One of the points, which is em- phasized by Kent, is that " no person except of Chinese or Russian nationality could become a shareholder, which meant, of course, a purely Russian company, for . . ." the Chinese had not reached that stage of education when the idea of joint-stock enterprise either inspires con- fidence or appears attractive." ^'^ And Kent continues : " In this company, which was to be known and ulti- mately came into existence as the Chinese Eastern Rail- way Company, the sole control of the line was vested, and also rights, in connection with the railway, and independently of it, of mineral, industrial, and commer- cial exploitation." But in addition to the fact that this railway company 20 See Kent, op. cit., page 48. RUSSIA 83 is of Russian ownership, we have to bear in mind, that the control over the owners is exercised by the Russo- Chinese Bank, a state-controlled institution. To justify this contention it would not even be necessary to ascer- tain who the owners of the shares are. It appears to us, on the strength of all " control " provisions, as self- evident that the road is state-controlled and that Rus- sian control in China is of a political nature. To dis- perse any doubt about the nature of Russian control we shall support our contention by the follow^ing considera- tions : Comparing the Russian control provisions with those to be found in the British agreements we find that no protection is made for the shareholders, who are the nominal owners. There is no mortgage on the railway, because there is no loan made to the Chinese Government. Only the bondholders are protected, namely, by a Russian Government guarantee! The management rests perma- nently with the company, though nominally under Chi- nese supervision. In fact all control provisions char- acteristic of English agreements are absent. This fact, however, would in itself not be sufficient to prove the political character of Russia's control. Nominally, Rus- sian control remains financial, since the contracts con- taining the respective provisions are on the Russian side concluded by private citizens and since the object of the contracts is a financial proposition, namely the building of a railroad. But what we are interested in, is the 84 FOREIGN FINANCIAL CONTROL IN CHINA spirit of the control provisions, and not their word- ing. The poHtical and military character of the railway is manifested in the railroad police, or so-called railroad guards. These were Russian soldiers and they formed a small army. These guards and the so-called railroad " zones," i.e., lands granted to the company upon which settlements were established under Russian administra- tions, will be an object of our investigation at a later occa- sion. As a further support of our contention we shall quote Kent once more. Referring to the two points between which the railroad was to run, Kent remarks : " In other words, permission was given to continue the Trans- Siberian line across Manchuria to Vladivostok instead of following the more circuitous route along the Amur, which presented almost insurmountable difficulties to railroad construction." ^^ The new railway through Chinese territory is, indeed, nothing else than part and parcel of the Trans-Siberian Railroad, which is owned and controlled by the Russian Government. Its pur- pose is mainly strategical. Such is at least the opinion of the British representative in China, Sir C. MacDon- ald, who wrote in 1898: "The Manchurian Railway Concession dates from 1896. As is well known, it was obtained as recompense for help given in securing the 21 See Kent, op. cit., page 48. RUSSIA 85 retrocession of Liaotung. . . . The concession is purely strategical." ^^ The agreement enabled Russia to dispense with the originally projected line along the north bank of the Amur, gave the Russians the permission of continuing the Trans-Siberian line across Manchuria to Vladivos- tok, and also prepared the way for further extensions southwards. In other words, the Manchurian Railway enabled Russia to dominate the whole of North Man- churia. The construction of the Chinese Eastern Railway was begun in 1897. Meanwhile diplomacy appears to have been active in preparing for the southern extension of the line towards the Gulf of Chili in order to secure a post which should be free from the disadvantage which attached to Vladivostok of being annually icebound for several months. Events again facilitated and hastened Russian movements. Germany had compelled the Chi- nese Government to give a lease of the region around Kiaochau Bay for ninety-nine years. It has been sug- gested that China was under promise to grant Russia a concession in the Kiaochau region,^'' and that Russia embraced the opportunity of the grant to Germany to insist upon a lease of the Liaotung peninsula, including the harbor and fortress of Port Arthur, for twenty-five 22 See " China," No. i, 1899, Vol. CIX. No. 459, Enclosure 2. 23 See below, page 86. 86 FOREIGN FINANCIAL CONTROL IN CHINA years, and upon the right to construct a railway to con- nect Port Arthur with the Chinese Eastern Railway. The lease of the Liaotung peninsula was granted on the 27th of March, 1898, including the right to build a rail- way connecting Port Arthur with Harbin, and another connecting Talienwan (later Dalny and now called Dairen by the Japanese) with Newxhw'ang.-^ The eighth clause provided for a branch of the railway southward : " The Chinese Government agree that the principle of the permission given in the twenty-second year of Kuang Hsu (1896) to the Manchurian Railway Company for the construction of a railway shall now, from the date of signature, be extended to the construction of a branch line from a certain station on the aforesaid main line to Talienwan, or, if necessity requires, the same prin- ciple shall be extended to the construction of a branch line from the main line to a convenient point on the sea- coast in the Liaotung Peninsula, betw^een Yingtzu (Nuo- chwang) and the Yalu River. The provisions of the agreement of the 8th of September, 1896, between the Chinese Government and the Russo-Chinese Bank shall be strictly observed with regard to the branch line abo^•e mentioned. The direction of the line and the places it is to pass shall be arranged by Hsu-Ta-jen and the Manchurian Railway Company." The article ends with the important proviso that " this railway concession is 2* See Rockhill, op. cit., Nos. 9 and 10. RUSSIA 87 ne\ er to be used as a pretext for encroachment on Chi- nese territory, nor to be allowed to interfere with Chinese authority, or interests." Article III of the Additional Agreement, signed at St. Petersburg on the 7th of May, 1898, provides that the terminus of the line should be at Port Arthur and Talienwan. It is further agreed in common that railway privileges in districts traversed by this branch line shall not be given to the subjects of other Powers. " Russia having gained her points, the Russification of the country proceeded fast. Port Arthur was forti- fied, a modern town built at Dalny, and railway con- struction pushed on. The line was now divided into three sections : the Western, from the Siberian frontier to Harbin; the Eastern, from Harbin to Vladivostok; and the Southern, consisting of the branch from Harbin to Port Arthur. The paramount importance of the last- named, in Russian eyes, w'as soon made manifest, for though the eastern and western section received merely ordinary attention, the Port Arthur branch was pushed on with the utmost dispatch. . . . The gauge adopted for the line was five feet, the Russian standard, which was especially stipulated for in the agreement in order that it might be uniform with the Trans-Siberian Road. So rapidly was the work pushed on, that by the time of the Boxer outbreak the line was almost through." ^^ 2'^ See Kent, op. cit., page 50. 88 FOREIGN FINANCIAL CONTROL IN CHINA The railway could be opened to traffic in 1901. "Con- trol " over the road is absolutely identical to that over the North Manchurian line. For the railway is merely a branch line of the Chinese Eastern Railway, and is thus subject to all the agreements referring to the latter, as explicitly stipulated in Article 8 of the convention of March 27, 1898. The whole Manchurian Railway places Russia in the possession of a direct route to Peking and at once gives her a predominance in North- ern China, which places other powers at a marked dis- advantage. It was especially the British colony in China that was worried about Russia's activity in the north. The China Association wrote on April 14, 1898, to Lord Salisbury: " The Association feels no confidence that the door of Manchuria will be left open by the Great Power which has obtained possession of lock, bolt, and bar. An ice- free port was a necessary concession to its commercial needs. The fact that that port has taken the form of a fortress, which can be rendered practically impreg- nable, violently changes the situation." ^^ But it is also important to notice the Russian point of view. In an Official Communication of the Russian Of- ficial Messenger of March, 1898, we read in reference to the lease of Port Arthur and the Russian railway rights in Manchuria : " This Agreement is a direct and 2« See " China," No. i, 1899, Vol. CIX. No. 25. RUSSIA 89 natural outcome of the friendly relations between great neighboring Empires, all of'whose endeavors should be directed towards the preservation of tranquillity along the vast extent of their neighboring possessions for the common benefit of the people of both of them. . . . Securing the inviolability of the sovereign rights of China, and satisfying the daily requirements of Russia in her capacity of a great and neighboring naval Power, this Agreement can in no w^ay injure the interests of any other Power; on the contrary, it gives to all nations of the world the possibility in the near future of entering into communication with this hitherto closed-up country on the coast of the Yellow Sea." ^" English objections to Russia's Manchurian enterprises were severely criticized by the Russian Press, to judge from extracts given in the British Blue Books. ^^ The Novosti says for instance that " Russia's recent action in the Far East meets with the sympathy of all countries excepting England. This shows how thoroughly the majority of foreign Powers believes in the sincerity of Russia's desire for peace. England, who always op- posed Russia's lawful aspirations, would obstruct her now were she not happily isolated. ... At present Eng- land is helpless before Russia, because the latter is sup- ported by France and Germany. There is no formal 27 See " China," No. i, 1899, Vol. CIX, No. i. 28 See "China," No. i, 1899, Vol. CIX, No. 14, Enclosures. 90 FOREIGN FINANCIAL CONTROL IN CHINA agreement between these three Powers, but there is a complete solidarity between them." England's isolation mentioned here, led eventually to the conclusion of the Anglo-Japanese alliance. But meantime the Russian and English Governments had long discussions in reference to railway enterprises in Manchuria.^*^ The British and Chinese Corporation had entered into a preliminary agreement with the Chinese Government on the 7th of June, 1898, for a sterling loan of 16,000,000 taels " for the construction of a rail- way-line from Chunghowsou to Hsinmintung, and a branch line to Ying-tzu, and for the redemption of ex- isting loans to the Tientsin-Shanhaikwan and Tientsin- Lukouchiao lines. The security for the loan shall be the permanent way, rolling-stock, and entire property. . . . In the event of default or arrears in payment of interest or repayments of principal, the said railway lines . . . shall be handed over to representatives deputed by the Syndicate, to manage them on their behalf, until prin- cipal and interest of the loan are redeemed in full, when the management will revert to the Railway Administra- tion." ^" Whereupon the Russian Representative in China protested against the arrangement, and especially against the provision of British control in case of de- fault. A long series of negotiations followed, until 29 A detailed account of these is given by Kent, op. cit., pages 51 ff. 30 See Rockhill, op. cit., No. 42. RUSSIA 91 finally a compromise was reached, which is expressed in Article 4 of the final agreement of Oct. 10, 1898.^^ " This arrangement, which differs from other contracts in that the Administrator-General retains control of the railway lines so long as the principal and interest of this loan are regularly paid, has been agreed to in consequence of the friendly relations which have long existed between the Contracting Parties." Sic! The ultimate outcome of the Russo-British negotia- tions was the official recognition of the respective " spheres of interest " as quoted in Chapter II. A sup- plementary note recorded the understanding arrived at in respect to the Shanhaikuan Newchwang section of the Imperial Railways of North China. \Vhile Russia thus excluded England from railway participation in her sphere, England was not able to exclude Russia entirely from hers. It had been Russia's great desire to secure control of a railway from the north which would join with a line from Indo-China, and to establish a through trunk route bisecting China and under control of Russia and her ally France. But bound by the agreement with England, she could only accomplish her ends through the medium of a third party. This Russia apparently did by entrusting her interests to oth- ers. She retired into the background, and confided the •''1 The correspondence between the British and Russian Govern- ments with regard to Railway interests in Manchuria are contained in " China," No. 2, 1899, Vol. CIX. 92 FOREIGN FINANCIAL CONTROL IN CHINA active work of advancing her interests to her aUies and financial agents, France and Belgium. In 1897 ^ Belgian syndicate obtained a concession for a line from Peking to Hankow. The hand of Rus- sia in the negotiations was clearly seen. In Article 18 ^^ it was stipulated that the Russo-Chinese Bank would be the agent for the bonds, and Article 20 provided that the Russo-Chinese Bank should be the bank of deposit and the medium for monthly payments. The British Government soon realized the significance of the Belgian venture and did not entertain any illusions as to the real character of the Belgian concessions. At the time the agreement was ready to be signed, Sir Claude Mac- Donald raised the strongest objection.^^ His principal criticism of the contract was that there was no security against the raihvay's transfer to a bank or syndicate of another nationality (namely Russian), that there is withdrawn from Chinese control all concern with the con- struction of the line, and all power of interference with the selection of the employees and the fixing of the rates and that the Russian Minister, together with the French and Belgian, was to be the judge in certain disputes; while his principal objection was directed against any participation of the Russo-Chinese Bank.^^ Any British objection, however, proved to be without avail, for China 32 See Rockhill, op. cit., No. 34. " See Chapter II. 3* See " China," No. i, 1899, Vol. CIX, No. 347- RUSSIA 93 seemed to have been determined and Russian pressure seemed to have been stronger than British demonstra- tions. The arrangement was embodied in two documents, a loan contract and an operating contract.^^ The latter confers wide powers of management upon the syndicate, and gives them complete financial control of the line. Article I provides as follows : " The Chinese Railway- Company (represented by the Viceroys of Chili and Hupeh) in accord with the Imperial Chinese Govern- ment, entrusts the Societe d'fitude de Chemins de Fer en Chine (the Belgian syndicate) which shall appoint rep- resentatives for that purpose, with the direction, adminis- tration, and operating of the line from Hankow to Pe- king." According to Article II, " The Societe d'fitude- or the representatives of it shall appoint . . . shall or- ganize the various services, shall have the right to hire the personnel, which it shall have absolute right to dis- miss, or disband, and to fix its salaries according to a fixed schedule previously communicated to the Director General of the Chinese Railway Company. It shall make all purchases necessary for operating, maintaining or repairing the road, it shall fix the schedule of rates in the terms of concession contracts, collect revenues of all kinds and pay the operating and management expenses of the Company." 3^ See Rockhill, op. cit., No. 34. 94 FOREIGN FINANCIAL CONTROL IN CHINA The loan itself is secured by a mortgage on the railway, rolling stock, etc. In short, the control provisions are in substance identical to those embodied in the English contracts; for we have to remember that the English control provisions were explicitly shaped after the Belgian contract.^^ In other words, the Belgian control pro- visions are financial in nature. Yet their ultimate po- litical purpose can hardly be denied. Later railways contracted or earmarked by the Bel- gian syndicate tended further to strengthen England's suspicions of Russia's political aims. " The significant point is," says the Far Eastern Review, " that the last performance of this Company brings into effect the iden- tical scheme which the Russians long ago cherished to obtain railway domination in certain spheres in China." ^^ The lines referred to as secured by the Belgian company are a continuation of the Trans-Caspian System of Rus- sia through Sinkiang (Chinese Turkestan) and Kansu, and leading from Lanchow to Sian, Honan, Kaifeng to the sea. The other Belgian project is a line longitud- inally through the province of Shansi and is to connect the above mentioned line with the Peking-Kalgan exten- sion, a Russian venture, at Tatungfu. The company has the option to extend this railway in the south to Chengtu, the capital of Szechuan. ^' See Chapter II. 37 See " Far Eastern Review," Vol. lo, pages 92 and 290. RUSSIA 95 To this the Far Eastern Rcznciv remarks : " No rail- ways in China are Hkely to have such an important bear- ing, however, upon the poHtical future of the country as these two routes which have now come under the dom- inance of the Belgian financial organization. Apart from its political bearing, however, the projected rail- way will place in the hands of the Belgian syndicate the greatest amount of mileage held by any individual nation in China, and the two routes will embrace an area of country of tremendous importance to Russia, whose financiers are alleged to be interested in the Com- pagnie Generale de Chemins de Fer et de Tramways en Chine. Considered from a purely economic standpoint the proposed line is likely to have a tremendous influ- ence upon the development of one of the richest mineral- bearing provinces of China." ^^ Our discourse on the Belgian schemes, though ap- parently a diversion from our theme, was to illustrate Russian political designs in the Far East. Aside from the improbability of an early construction of these rail- ways as a result of the war, and a consequent lack of practical value, the fact that the text of the agreements was not available to the author makes it inadvisable, if not impossible, to go into further details. The political character of Russian railways in China, at least previous to the Russo-Japanese War, is most ap- 38 See " Far Eastern Review," Vol. lo, page 89. 96 FOREIGN FINANCIAL CONTROL IN CHINA parent in Manchuria. Here events were favorable for further attempts at advance. In 1900 the Boxer dis- turbances threw the whole of North China into chaos; and Russia immediately occupied Manchuria, osten- sibly to secure the maintenance of order. Newchwang and Mukden were occupied and a military occupation was regularly instituted along the whole Russian railway in Manchuria.^^ Any intentions of a Russian occupation however were repeatedly denied by the Russian minis- ter to China.'*^ Nevertheless Europe continued to be alarmed at Russian activities and the Anglo-German con- vention of Oct. 16, 1900, was a direct outcome of the Manchurian situation.'*^ Its main object was to restrain any power which might be disposed to violate the prin- ciple of equal opportunity in China or her territorial integrity. Meanwhile the Powers were occupied with settling the questions arising out of the Boxer rebellion. After the legations had been relieved by the international ex- peditionary force, the Powers proceeded to negotiate with China upon the terms under which they would evac- uate Peking. Until a general treaty was concluded be- tween China and the cooperating Powers, it was obvious that it would be at least inappropriate for any individual power to seek to negotiate a separate treaty with China. 39 See " China," No. i, 1901, Vol. XCI, No. 391. ^'^ See " China," No. i, 1901, XCI, Nos. 234, 256, and others. *i See Rockhill, op. cit, No. 14. RUSSIA 97 But early in 1901 the news came out, of a draft of an agreement into which China was supposed to have en- tered with Russia respecting Manchuria. At the inquiry by Japan and England of the Russian and Chinese Gov- ernments as to the existence of the alleged convention, both governments kept a strict silence. Whereupon China was warned by Great Britain, Germany, Japan and the United States against entering into a separate agreement with one power while it was negotiating for peace with all powers collectively.'*" Strongly pressed by the powers, China finally communicated the text of the agreement and asked immediately thereafter the re- spective Foreign Offices to mediate between her and Russia.^^ The principal terms of the Agreement were: ^'^ Man- churia to be restored ; Assistance to be given to China by Russia in keeping order ; No army to be maintained by China until the completion of the Manchurian rail- way. The strength of the police is to be settled with Russia; they are not to possess artillery, and no for- eigners other than Russians are to be employed in it ; Abolition of Chinese administration in the town of Chin- chou. China is not to grant any mining, railway or other rights without the permission of Russia in the ter- ritory upon the Russian border, i.e., Manchuria, Mon- *2 See " China," No. 6, 1901, Vol. CXI, Nos. 79 and 106. " -See " China," No. 6, 1901. Vol. CXI, No. 137. " See " China," No. 6, 1901, Vol. CXI, No. 130. 98 FOREIGN FINANCIAL CONTROL IN CHINA golia, Hi, Yarkand, etc., and Russia's permission is to be obtained before China builds railways in these. With reference to the damages suffered by the Manchurian Railway these shall be made good. . . . Instead of this, concessions may be accepted or existing contracts modi- fied. Until the last provisions are carried out, Russia will maintain an additional force for the protection of the Manchurian Railway! This agreement shows better than anything else the true ambitions of Russia in the Far East and the kind of control she desired to exercise — if it had not been for Japan. Russia's duplicity during and after the Boxer troubles may be illustrated by a quotation from Putnam Weale: "During 1901, Russia had three distinct and separate roles to play in China: the part of ally to all Europe ; the part of China's dear and secret friend in Peking; and the part of Manchuria's real master in the invaded provinces ; whilst over and above in Europe she had to quiet the secret fears of numerous Chancelleries busily inquiring as to her real plans in the future." *^ Backed by the support of the Powers, China refused to sign and Russia withdrew temporarily.^^ Then fol- lowed the Anglo-Japanese alliance; whereupon Russia modified her demands in respect to Manchuria. On April 8, 1902, an agreement was concluded between Rus- *•' See Putnam Weale, " Reshaping of the Far East," page 263. « See " China," No. 6, 1901, Vol. CXI, No. 238. RUSSIA 99 sia and China containing the following principal terms.^^ IManchuria was to be restored to the Chinese Govern- ment; but China was to observe strictly the stipulations of the contract concluded with the Russo-Chinese Bank in 1896. Russia was to withdraw her troops gradually from Manchuria. Russia agrees to restore to the own- ers the Railway Shanhaikuan-Newchwang-Sinmintung. No other Power shall be allowed to participate in this railroad in any form nor to occupy the territory evacu- ated. Should extension of the line be contemplated, the Russian Government was to be consulted first; ex- penses for repair and working of said line were to be paid by China. The Russians did not observe these terms faithfully; on the contrary, they established themselves more firmly at the mouth of the Liao River.^^ The diplomacy of Russia was accompanied by hurried exploitation on the part of Russian speculators of the valuable timber re- gion of the Yalu River, by encroachments upon Korea, and by enormous expenditures at Dalny, which the Rus- sians destined for a great port. In these adventures and in the neglect of military precautions, Russia was simply playing the game of Japan and hastening the mo- ment when this Power was to take over Russia's railway rights in South Manchuria. *^ See " China," No. 2, 1904, Vol. CX, page 36 ff. See also Rock- hill, op. cit., No. 17. " See " China," No. 2, 1904, Vol. CX, page 63. lOO FOREIGN FINANCIAL CONTROL IN CHINA The Treaty of Portsmouth of Aug. 23rd, 1905, de- prived Russia of the southern part of the Manchurian Raihvay.^^ Article VI says : " The Imperial Russian Government engages to transfer and assign to the Im- perial Government of Japan, without compensation and with the assent of the Chinese Government, the railway between Changchun (Kuanchengtzu) and Port i\rthur and all its branches together with all rights, privileges, and properties appertaining thereto in that region, as well as all coal mines in the said region belonging to or worked" for the benefit of the railway." — The consent of the Chinese Government was, of course, forthcoming. — According to article VII Japan and Russia engage to ex- ploit their respective railways in Manchuria " exclusively for commercial and industrial purposes and in no wise for strategic purposes." Article III stipulates: " Japan and Russia mutually engage, ( i ) To evacuate completely and simultaneously Manchuria except the territory af- fected by the lease of the Liaotung Peninsula, in con- formity with the provisions of additional Article I an- nexed to this Treaty; and (2) To restore entirely and completely to the exclusive administration of China all portions of Manchuria now in the occupation or under the control of the Japanese or Russian troops, with the exception of the territory above mentioned. The Impe- rial Government of Russia declares that they have not *3 See " British and Foreign State Papers,"' Vol. 98, page 735. RUSSIA lOi in Manchuria any territorial advantages or preferential or exclusive concessions in impairment of Chinese sover- eignty or inconsistent with the principle of equal oppor- tunity." And in Article V : " The Imperial Russian Government transfers and assigns to the Imperial Governmment of Japan, with the consent of the Gov- ernment of China, the lease of Port Arthur, Talien, and adjacent territory and territorial waters and all rights, privileges, and concessions connected with or forming part of such lease, and they also transfer and assign to the Imperial Government of Japan all public works and properties in the territory affected by the above- mentioned lease." In other words, the Treaty of Portsmouth deprived Russia of her strategical stronghold in South Manchuria, of her railway rights in said region, and checked any possible Russian ambitions at political control of all IManchuria. Russian control in the Russian " sphere " i.e., in North Manchuria, could therefore — legally — be based exclusively upon the railway agreements be- tween the Russo-Chinese Bank, respectively the Chinese Eastern Railway Company and the Chinese Government. The control provisions have been analyzed above and the character and degree of control been stated. Two as- pects of Russian control in Manchuria, however, re- main to be investigated: the railway guards and the railway zones. As to the first point the writer has to -xr=.v----t^. I02 FOREIGN FINANCIAL CONTROL IN CHINA acknowledge his inability to secure accurate figures as to the number of soldiers employed. The amount has been constantly varying and the figures found in the liter- ature appear most unreliable. The figure is large or small according to the sympathies or antipathies of the writers. The supplementary agreement to the Treaty of Portsmouth provides, that " within a period of eighteen months from that date (i.e., immediately after the Treaty of Peace comes into operation) the armies of the two countries shall be completely withdrawn from Manchuria except from the leased territory of the Liaotung Penin- sula." The Russian title to railway " zones " in North Man- churia is based upon Article VI of the Russo-Chinese Bank's treaty with China of Sept. 8, iSqG.^*^ The re- spective phrases read as follows : '* As regards the land required by the Company for constructing, managing, and protecting the line and adjacent land, ... it will be given the Company without payment. ... As soon as the land comes under the management of the Company, they may erect thereon any buildings and carry on all kinds of work." . . . Lawton, how^ever, informs us that the French text reads quite differently : " La Societe aura le droit absolu et exclusif de I'administration de les terrains." '^^ On the strength of these clauses, Russia 5" See Rockhill, op. cit., No. 32. ^1 See Lawton, " Empires of the Far East," Vol. I, page 1303. RUSSIA 103 founded townships such as Harbin and Tsitsihar, which were under Russian administration, together with all other settlements and all the extensive tracts of lands held by the Company. China objected to the extensive ad- ministrati\e powers exercised by Russia, until the dispute was finally settled by an agreement of May loth, 1909. According to Harrison, " The last agreement between the Russian and Chinese Governments arose out of the protest of the Chinese Government against that part of the 1896 Treaty which bears upon the introduction of public administration in Harbin and other settlements of the railway zone. In a strictly legal sense, China had a very weak case, and Russia's consent to the new arrange- ment was in the nature of a concession, but one which is to be welcomed as creating a wholesome precedent in the direction of a wider recognition of China's sovereign rights within her own territory, the true reason for the original grant of special privileges being plain enough." ^^ The agreement is simply an appendix to the railway agreement of 1896. To use the text,^'' " In view of the mutual misunderstandings which have arisen in the interpretation of the contract for the construction and working of the Chinese Eastern Railway, dated 27th of August, 1896, on consideration of the question of the organization and introduction of public administra- •''2 See Harrison, " Peace or War East of Baikal? " page 199. •''3 See " British and Foreign State Papers," Vol. 102, page 396. I04 FOREIGN FINANCIAL CONTROL IN CHINA tion on the lands of the Railway, the Governments of Russia and China have established the following general rules : 1. On the lands of the Chinese Eastern Railway, as a fundamental principle, are recognized the sovereign rights of China, which must not be prejudiced in any way. 2. All sovereign rights of China on the lands of the Chinese Eastern Railway are exercised by China, and neither the administration of the Railway nor public administrations shall under any pretext obstruct the ex- ercise of these rights, if such do not infringe any of the treaties which have been concluded by the Chinese East- ern Railway Company. 3. All the treaties of the Chinese Eastern Railway at present in operation remain as before in full force. 6. On the lands of the Chinese Eastern Railway Com- pany in settlements which possess commercial import- ance public administration shall be formed. The inhab- itants of these settlements, in conformity with the com- mercial importance of a given settlement and the number of its population, shall elect delegates who, in their turn, shall choose an Executive Committee, or the inhabitants themselves shall directly superintend public affairs and elect from their number one representative who shall carry into effect the resolutions of the general assembly. 7. On the lands of the Chinese Eastern Railway Com- RUSSIA 105 pany, both the Chinese and foreign population enjoy the same rights and assume the same obHgations, without the sHghtest difference between them. 8. All inhabitants who own a certain amount of im- movable property or pay a certain annual rental and established taxes enjoy the right of participation in the election of delegates. 9. The President is elected by the Assembly of Dele- gates from their midst, irrespective of nationality. 10. All matters which concern the management and good order of the settlements are subject to the jurisdic- tion of the Assembly of Delegates, etc., etc. 11. The Assembly of Delegates elects "from its midst, irrespective of nationality, members of the Executive Committee. Their number must not be more than three. Besides this, the President of the Tsiao-she-tsui (Chi- nese Railway Bureau) and the President of the Railway appoint one delegate each. The members of election and the delegates together with their President constitute the Executive Committee. 12. The President of the Assembly of Delegates is at the same time President of the Executive Commit- tee. 13. The President of the Tsiao-she-tsui and the Pres- ident of the Railway, occupying a position higher than that of the President of the Assembly of Delegates and Executive Committee, are invested with the power of lo6 FOREIGN FINANCIAL CONTROL IN CHINA control and the right of personal revision, which they exercise when this is deemed to be indispensable, etc., etc. 14. In the event of the disagreement of the President of the Tsiao-she-tsui or the President of the Railway with the resolutions of the Assembly of Delegates, these must be transferred to the Assembly for additional inves- tigation. Its resolution shall be deemed binding if it is passed by three-fourths of the votes of members present at the sitting of the Assembly. 15. Important public and financial questions arising in the settlements of the expropriated Zone of the Railway, on consideration by the Assembly of Delegates, are trans- ferred to the President of the Tsiao-she-tsui and to the administration of the Chinese Eastern Railway for joint consideration and confirmation, 16. Lands which have been allotted specially for the needs of the Railway are subject to the independent con- trol of the Chinese Eastern Railway, i.e., for stations, workshops, and so forth, etc. In commenting in a very favorable way upon the provisions of this agreement as not establishing special privileges for Russia and as not being materially different from the privileges enjoyed in any other international settlements such as Tientsin, Shanghai and others, Har- rison says : " The Russian position is made all the more impregnable in the light of the perfect freedom which RUSSIA 107 every other Power enjoys to establish, if it so wishes, its own settlements at Harbin. Hitherto, however, no effort has apparently been made to take advantage of this right, and all foreigners, with singular unanimity, prefer to live in the Russian settlement." ^^ And further : " Happily, it now seems probable that the Powers will yield on the point of municipal adminis- tration, it being clearly stipulated on Russia's part that she does not claim any right of legal jurisdiction over the persons of foreign subjects resident in the Russian set- tlement of Harbin or elsewhere within the railway zone. Extraterritoriality obtains at Harbin, as it does else- where throughout China, and though the Russian police may arrest a foreigner caught in flagrante delicto, they must at once surrender him to his consul for trial." ^^ Extraterritoriality and the legal status of interna- tional settlements however are not the object of our investigation. We have given a lengthy quotation from the latest Russo-Chinese railway zone agreement to prove our contention that the post-bellum control exercised by Russia in China is — legally — non-political. Though Russia may or may not have had an ultimate absorption of North Manchuria in view, the Russian control exer- cised in North Manchuria is strictly based upon the rail- way agreements including the supplementary interpreta- ^■* See Harrison, op. cit., page 201. ^^ See Harrison, op. cit., page 204. lo8 FOREIGN FINANCIAL CONTROL IN CHINA tion of the agreements to be found in the agreement of 1909. " The spirit which animated the Russian side of the negotiations for the agreement concluded with China on the loth of May, 1909, was indeed so concihatory that the Chinese at first suspected therein some deep-laid and sinister designs. The high-handed methods of the auto- cratic Russian Railway Company were replaced by a sweet reasonableness which the Peking Government were quite unable to understand, but of which they soon pro- ceeded to take every advantage. No sooner had they realized that Russia was prepared to allow the exercise of their sovereign rights in the Manchurian Railway set- tlements, than they proceeded to encourage American and German ambitions, sedulously fomenting dififerences at Harbin, Khailar, and other places, by which means they hoped to obtain full administrative control of the municipalities." Such are the words of Mr. Bland, when commenting on Russia's post-bellum attitude. ^^ Harri- son uses a similar language : " Russia was inclined to be too self-assertive before the war, and the inevitable nemesis overtook her : to-day, on the other hand, her representatives appear to have gone to the other extreme, with the result that Russian vested interests are in dan- ger of being seriously jeopardized." ^'^ ^* See Bland, op. cit, page 336. ^'' See Harrison, op. cit., page 209. RUSSIA 109 Of course during the evacuation period, Russia was rather slow in handing the sovereign rights over North Manchuria back to China. " Russians seem to have watched the Japanese and followed their lead in political matters. As the Japanese armies were withdrawn, so also, in about the same ratio, were the Russian armies removed from China's provinces." ^^ The same writer continues : " In one important matter, however, Rus- sia's post-bellum policy in Manchuria differed from that of Japan. This is in commercial affairs. The Rus- sians never have pursued a niggardly policy in regard to the trade of other nations in Manchuria. On the con- trary, during the Russian regime before the war foreign trade in the country greatly increased, especially that of the United States, owing to the fact that a condition of comparative order prevailed, and that the Russians interposed no obstacles to commerce. The present in- dustrial situation of Russia does not require special ex- ploitation in her favor of eastern markets. . . . After the war, Russia resumed this policy which was more sharply thrown into relief because of Japan's opposite attitude in the south. Russia made no attempt to pre- vent foreigners from entering the country after peace was established. Instead of interposing obstacles, to the im- portation of products, as Japan did in her sphere, Rus- •''8 See Millard, " America and the Far Eastern Question," page 276. no FOREIGN FINANCIAL CONTROL IN CHINA sian officials smoothed their way by providing routes of access." But while the control exercised by Russia in Man- churia, of late, was very moderate, she nevertheless strengthened her position considerably by new railway enterprises in these regions. In the agreements of July 30th, 1907, July 4th, 19 10, and July 3rd, 1916, Japan and Russia mutually guarantee their vested and future interests in their respective spheres and promise each other support in case of foreign interference.^^ The agreements suggest that Japan and Russia have made up their minds, eventually to divide Manchuria between them, and the first fruits of these agreements are to be seen in several new railroad contracts as well as in the effective exclusion of other powers. Russia had, immediately after the war, begun calmly to conduct surveys in the provinces of Amur and Baikalia with a view to providing for the regeneration of Rus- sian policy in the Far East by means of a colossal rail- way undertaking — the Amur Railway. A provision for connection of the Amur Railway at Blagoveshchensk was made in 1914 by means of a new Manchurian rail- way contract. A detailed account of this contract can- not be given for the same reasons which hindered us from investigating any other railway agreements con- 5^ The agreements will be analyzed in Chapter VI, since they are of greater importance to Japan than to Russia. RUSSIA III eluded within the last three years. We take our infor- mation on the project from the Far Eastern Review, which says : ^^ " An important agreement was signed in Peking on March 27th last between the Russo-Asiatic Bank, represented by i\Ir. L. de Hoyer, and the Chinese Government, represented by Mr. Liang Tung-yen, the Minister of Communications, and Mr. Chou Hsu-shih, Minister of Finance, for the construction of a railway connecting the cities of Harbin, Mergen, Aigun, and Tsitsihar, in Northern Manchuria. Harbin is at the junction of the Siberian Railway and the line running south to Changchun and thence to Dalny, while Tsit- sihar is connected with the Siberian Railway by a light line which will be taken over under the agreement just signed. Mergen is a little more than half way between Tsitsihar and Aigun, which is on the Amur River. North of Aigun, on the opposite side of the Amur, is the city of Blagoveshchensk, which the new^ railway is des- tined to serve. Connection will be made by means of ferry boats with what is now the village of Heiheifu, opposite Blagoveshchensk, where the railway will termi- nate. The total length of the proposed railway is ap- proximately 1,000 kilometers. It will link up the Sibe- rian Railway with the Amur River, and will consolidate Russian interests, and incidentally develop great areas of valuable territory, in North Manchuria. An inter- «<>See "Far Eastern Review," Vol. 11, pages 150 and 385. 112 FOREIGN FINANCIAL CONTROL IN CHINA esting point is that it will cover the northern section of what is known as the Chinchow-Aigun project, the agreement for which is held by the American group of bankers, but which was rendered void by the energetic protests of Japan that the proposed line would parallel the South Manchuria Railroad. " The agreement is for a loan of 50 million roubles, and an additional amount which might be required to complete the project. The loan is to be floated when financial conditions may permit after the war, and in whatever markets the Russo-Asiatic Bank may deem money to be available. The agreement is regarded as an improvement on other railway agreements in China where the interest of the financiers are concerned with control of expenditure, etc., while the Chinese Govern- ment gains a distinct pecuniary advantage owing to an arrangement being made whereby the working of ex- change cannot be so disastrous as in the case of other railroad lines. . . . The bondholders receive ample pro- tection in the usual way by having the line, etc., as secur- ity, by the employment of qualified engineers and ac- countants, etc., and in addition by the arrangement that the earnings of the railway shall be deposited in branches of the Russo-Asiatic Bank." Furthermore Russia demands from China a concession for a railway from Kiakhta to Urga and through Mon- golia to Kalgan, which is to connect the Siberian system RUSSIA 113 with Peking via the Peking-Kalgan Hne. But this pro- ject is of the future.*^^ Another project, namely, for a railway from Kokand, the terminus of the Central Asian line, through Kashgar, Hami, Soochow, to Lanchow-fu, in China, has also been set aside for Russia to finance and construct.*^^ These lines would be purely for the advancement of Russia's strategical position in Mongolia and China, and would bring the northwest and western provinces within the Russian sphere. The first steps towards the establishment of a Russian sphere, if not a Russian protectorate, have been taken under the Russo-Mongolian agreement and Protocol of the 2 1st of October, 3rd of November, 19 12, respec- tively.®'^ The agreement provides for the exclusion of Chinese influence in Mongolia. According to Article I, Mongolia is " to admit neither the presence of Chi- nese troops on her territory nor the colonization of her land by Chinese." The main provisions of the pro- tocol are as follows : Russian subjects shall enjoy the right to trade freely without payment of any duties, taxes or other dues and to open financial institutions and fac- tories wherever they choose. Russian subjects shall be empowered to enter into agreements with the Mongolian ^^ See U. S. Consular Reports, No. 245, Oct. 20, 1913, page 354. "2 See " Far Eastern Review," Vol. 10, page 290. '3 The text of all Mongolian agreements, etc., is found in the American Journal of International Law, Vol. 10, No. 4, supple- ment, pages 239 ff. 114 FOREIGN FINANCIAL CONTROL IN CHINA Government respecting the working of minerals and tim- ber, fisheries, etc. Russians shall retain the ri^ht to institute a postal service for the dispatch of letters and the transit of wares between all points of Mongolia and Russian consuls in case of need shall avail themselves of Mongolian Government postal establishments. China had to acknowledge this state of affairs and in the Peking agreement of Nov. 5th, 191 3, agreed not to deal with the Mongols without consent or assistance of the Russian Governrhent, though she remains suzerain over Mongolia. On Sept. 30th, 1 914, Russia entered into another agree- ment with Mongolia which strengthened Russia's influ- ence in that country as far as railways are concerned. ^^ By this agreement Russia obtained the right to advise Outer Mongolia in deciding what railway lines to build and the method of procedure. Russia recognizes Mon- golia's right to build the railways within its own boun- daries if the funds can be raised there, but Mongolia is pledged to consult Russia before making concessions for railway construction to other nations. Since Mongolia is notoriously poor, it is evident that Russia has the ex- clusive right to build railways in this- country. The tripartite agreement of June 7th, 191 5, is the final acknowledgment of the existing state of affairs.^^ Both ** See Am. J I. of Int. Law, Vol. 10, No. 4, page 249. "^ See Am. Jl. of Int. Law, Vol. 10, No. 4, page 251. RUSSIA 115 China and Russia agree to abstain from all interference with the internal administration of Outer Mongolia. Russian right to free trade is confirmed, while China is nominally acknowledged as suzerain. Practically, how- ever, Outer Mongolia is under joint Russian and Chi- nese protection. Mr. E. T. Williams sums up Russia's position in Mon- golia: "These agreements, then, have considerably in- creased the political and commercial rights of Russia in Mongolia, and they thus tend to restore, if not to en- hance, Russian prestige in the Far East which had been somewhat lessened by the result of the Russo-Japanese War." «« To the beneficent efifects to be expected from Russia's position in Mongolia, Mr. M. D. Carruthers bears wit- ness in his splendid work on " Unknown Mongolia." '^'^ " Taking for granted an autonomous Mongolia under the protection of Russia, we can prophesy far-reaching and fundamental changes in the lives of the people and in the future of the Mongol race. Mongolia will become — indeed, probably has already become — a land of ac- tivity and progress instead of, as formerly, a land of stag- nation and suppression." And again : " The Russian influence has obviously an advantage over that of the Chinese. The Russians fraternize with the Mongol «8 See Am. J I. of Int. Lazv. Vol. 10, No. 4, page 808. «T See Carruthers, "Unknown Mongolia," pages 315, 317, and In- troduction, page IV. Ii6 FOREIGN FINANCIAL CONTROL IN CHINA races, the race-barrier between them being much less marked than that between the Chinese and the Mongols." While Lord Curzon says in an introduction to the book : " We see the Mongolian tribesmen, heirs of a mighty past, long withered under the blighting influence of de- generate Lamaism, but now turning to the risen sun of Russia to find a warmth and a protection which Chinese suzerainty has failed to give them." These quotations lead us to a few concluding remarks about the secret of Russian success in Eastern Asia, based as it is on a national character and a disposition, different from the rest of Europe. We began our chap- ter by contrasting English and Russian governmental methods and shall now conclude with a few words about the differences in attitude. The attitude of Russia to- wards Asiatic peoples and the rule of her of subject races in Asia, may have been less humane, conscientious, and educative than the attitude of England and the rule by her of Asiatic subject races; but the Russians who exercise the administrative functions in the East are naturally more affable than the English, and are more indifferent to moral and religious propagandas. From origin, temperament, and personal habits, and through intimate contact with Asiatics from the dawn of history, the Russian is nearer to the Asiatic point of view than the Englishman. Says Wirt Gerrare : " Rus- sia's . . . occupation of Northern and Central Asia has RUSSIA 117 been of benefit to the inhabitants. It was only her methods of conquest which were unnecessarily severe. . . . Generally the Russian treatment of the native and subdued races if not perfect, or ethically correct, is not worse than that of other civilized Christian nations." ^^ Vladimir maintains that " Russian annexation in Eastern Asia has been favorable to the Chinese people, opening new fields for their trading enterprise. The Russians have had the greatest toleration for the customs of the Chinese and for their local self-government, even when it was prejudiced to their legal sovereignty." ^^ Even Lord Curzon in his book " Russia in Central Asia " ad- mits that Russia has in her career of Asiatic conquest achieved a successful and a salutary end, and that Rus- sia's dominion is " loyally accepted by the conquered races." '^ Finally the relations between Russia and China cannot be understood without taking into account the fact that in spite of encroachments upon China by Russia, the two countries have never actually been in a state of war, excepting a few minor boundary disturbances. While European powers in general were not permitted to send diplomatic representatives to Peking until 1858, Russia had maintained a semi-official embassy there from 1692,'^^ "" See Wirt Gcrrare, op. cit., page 317. "^ See Vladimir, op. cit., page 317. "" Sec Curzon, " Russia in Central Asia," Chapter X. '1 See Ravcnstein, "The Russians on the Amur," page 71. Ii8 FOREIGN FINANCIAL CONTROL IN CHINA and the expenses of the embassy even were partially sustained by China. The Russian representative has always been persona grata at the Court of China and has thus been able to enjoy a confidence denied to others. Apparently nothing could shake Russia's faith in her Far Eastern policy. Russian policy in Asia has never changed ; it may have been checked at times, but Russia quietly awaited her opportunity and at the right moment pressed forward and regained lost ground. It is the absence of a definite or at least ulterior aim which distinguishes the Chinese policy of England from that of Russia; for in regard to Russia we have a clear and declared Asiatic policy, which during centuries has remained fixed. No wonder then, that even in 191 5, a Russian writer having in mind Manchuria and Mongolia, could write: " We find ourselves on the eve of new colonial adven- tures. In a word, the historical phase which was passed through before the Revolution, is about to be renewed." '^^ In brief, Russia's chances to reach her aims were greater than those of all other Powers and she would have been able to carry out her plans, if it had not been for two factors that were a curb to her expansion : Japan and the unrest within the Russian Empire. "2 See Alexinsky, " Russia and the Great War," page 22. CHAPTER IV FRANCE Of all Western countries, it has been the intercourse of France with China which, apart from trade, has been considerable. Both the earlier knowledge of the West acquired by China and that of China acquired by the West were mainly achieved by French missionaries, who also have played an important part politically. The acci- dent of the dispatch of an envoy by the King of Annam to the court of Louis XIV turned the eyes of that mon- arch and of the ecclesiastics eastward to the possibility of obtaining political influence in Indo-China. In 1787 Bishop Pigneaux de Bretaine tried — though in vain — to bring Tonkin under French rule. His designs were frustrated by the French Revolution and only in 1858 another French force was dispatched to Indo-China. This time French attempts were successful, culminating in the final annexation of Cochin-China in 1862. A protectorate over Cambodia was established in 1863. In the treaty of 1874, France acknowledged the inde- pendence of Annam; but Annam ceded — in Article V 119 I20 FOREIGN FINANCIAL CONTROL IN CHINA — to France all territory already taken by France in the south. ^ In 1884 the " Convention Fournier " was signed by which France bound herself to protect against all aggres- sion by any nation whatever, and in all circumstances the southern frontiers of China and Tongking. This con- vention was confirmed by China in the treaty of 1885 under which France engaged herself to " re-establish and maintain order in those provinces of Annam which bor- der upon the Chinese Empire." ^ In Article VII China agreed that in case she should decide on constructing railways, she would have recourse to French industries. This protectorate then formed the basis for further advance on China proper, the first and most important means of which was to be a railway into Yunnan. And the first step towards a railway policy was marked by the convention of 1895, the fifth clause of which says: " It is understood that China, for the exploitation of its mines in the provinces of Yunnan, Kwangsi, and Kwang- tung may call upon, in the first instance, French manu- facturers and engineers, the exploitation remaining nevertheless subject to the rules proclaimed by the Im- perial Government as regarding national industries. It is agreed that railways either those already in existence 1 See " British and Foreign State Papers," Vol. 65, page 375. 2 See " Documents diplomatiques. Afifaires de Chine et du Ton- kin, 1884-1885," page 283 ff. FRANCE 121 or those projected in Annam may, after mutual agree- ment and under conditions to be defined, be continued on Chinese territory." ^ On the strength of this agreement French railway en- terprise in the south of China was seriously thought of and proposed to China in the years 1897 and 1898, when the construction of a comprehensive system of railways in Indo-China was mooted. The growth of French influence and railway enterprise in Southern China marks the commencement of the realization of certain French ambitions for the further- ance of which Tongking was occupied. The most remark- able utterance in reference to France's policy is to be found in a most valuable work by M. Doumer, the late Governor-General of Indo-China, entitled, " LTndo- Chine Frangaise." He writes : " Le chemin de fer de penetration au Yunnan, par la vallee du Fleuve Rouge, avait une importance politique qui n etait pas moindre que son importance commerciale indeniable. Long- temps, le Tonkin ne nous avait paru valoir que par I'acces qu'il donnait au Yunnan. On a tres justement reconnu par la suite qu'il avait une valeur propre; mais 3 See Rockhill, op. cit., No. 3. The French text is to be found in "Documents diplomatiqnes. Chine, 1894-1898," pages 16-19, and reads : " La Chine pourra s'adresser a des ingenieurs et a des industries frangais pour I'e.x- ploitation des mines . . . les voies ferrees pourront ttre prolongees sur Ic territoire Chinois," etc. 122 FOREIGN FINANCIAL CONTROL IN CHINA ce n'etait pas une raison pour oublier le but de notre pirse de possession." •* In other words, Tongking was occupied in order to pro- vide a convenient means for the penetration of South- ern China by a railway. But what were the motives for penetration? This question may in part be answered by going back to the motives behind the acquisition of the rest of French-China. They are thus summarized by Dubois et Ferrier in their work " Colonies Frangaises." ^ " L'acquisition de la Cochinchine, le protectorat du Cam- bodge, sont dus, en effet, comme nos progres en Afrique occidentale, a la tenacite des officiers. . . . Sans la guerre anglo-frangaise de Chine qui, vite achevee, laissa disponibles des forces militaires en Extreme-Orient, nos amiraux n'auraient point sans doute obtenu les resources indispensables au succes. Au reste une politique essen- tiellement commerciale et dont I'espoir principal reposait sur la conquete de nouveaux marches en pays peuples devait tenir a prendre position a proximite de I'Empire Chinois. D'autres mobiles, en particulier le desir d'appuyer la propagande religieuse, renforcerent cette premiere conviction. L'intelligence de nos d'escadre, le point d'honneur de ne pas lacher prise, une fois engages, * See Doumer, " L'Indo-Chine Frangaise," page 330. See also P. Leroy Beaulieu, " De la Colonisation," Vol. II, Chap. XI. Table de Matieres, page 695 : " Le but primitif de notre etablissement an Tonkin : I'utilisation du ' fleuve Rouge ' pour la penetration en Chine." ° See Dubois et Ferrier, " Colonies Franqaises." pages 287 and 810. FRANCE 123 firent le reste " . . . and again: " C'etait aussi la revelation de la richesse miniere du Yiin-nan, noiivel attrait, et nouvelle raison pour les Franqais de s'interesser aux provinces septentrionales de I'empire d'Annam. Occupation d'un pays plus salubre d'un debouche et d'une voie d'acces de I'empire chinois, d'un fleuve plus maniable que le Mekong, tels se presentaient aux esprits les avan- tages d'une entreprise conseillee par Jean Dupuis et que I'amiral Dupre esperait mener a bonne fin, grace a I'ex- perience particuliere de Francis Garnier." Mr. Hazen, the American historian, writes in his book " Europe Since 1815 '': under the masterful influence of Jules Ferry, prime minister in 1881, and again from 1883 to 1885, the Republic embarked upon an aggressive foreign policy. She established a protectorate over Tunis; sent an expedition to Tonkin, to Madagascar; founded the French Congo. This policy aroused bitter opposition from the beginning, and entailed large ex- penditures, but Ferry, regardless of growing opposition, forced it through, in the end to his own undoing. His motives in throwing France into these ventures were various. One reason was economic. France was feel- ing the rivalry of Germany and Italy, and Ferry believed that she must gain new markets as compensation for those she was gradually losing. Again, France would gain in prestige abroad, and in her own feeling of con- tentment, if she turned her attention to empire building 124 FOREIGN FINANCIAL CONTROL IN CHINA and ceased to think morbidly of her losses in the Ger- man war. Her outlook would be broader. Moreover, she could not afford to be passive when other nations about her were reaching out for Africa and Asia. The era of imperialism had begun. France must participate in the movement or be left hopelessly behind in the rivalry of nations. Under Ferry's resolute leadership the policy of expansion was carried out, and the colonial possessions of France were greatly increased, but at the expense of political peace at home." ^ France had to fall in line with the race for Empire and economic expansion. She w^as feeling the economic competition of all other nations. Furthermore France had retained her position as a great money-lending coun- try; and she naturally preferred to invest her money in colonies and spheres of interest of her own. Therefore, when in 1897, the era of spheres of in- terest, and the battle of concessions in China began, France lost no time in asserting herself. The greatest instrumentality of French ambitions in South China was M. Doumer. This energetic and ambitious statesman urged the adoption of a considerable railway program upon the French Government. In his speech to the Conseil Superieur de I'lndo-Chine he referred to the aggressive attitude of other Powers, and emphasized the necessity of outbidding France's rivals in the South of ® See Hazen, " Europe Since 1815," page 3S3- FRANCE . 125 China. To use his own words : ** La question des chemins de fer dans tout rExtreme-Orient est aujourd'- hui a I'ordre du jour, comme en temoignent les efforts des rivaux de la France et les missions officielles en- voyees en Chine. . . . L'Angleterre, avec une har- diesse que, de notre cote, nous n'avons pas montree jusqu'ici, se met en marche par la Birmanie vers le Yun- nan et le Ssetchouen qui semblaient reserves a notre penetration commerciale. Pourtant, si nous savons vouloir, nous devons triompher dans cette lutte pacifique. Nous nous trouvons favorises grace aux facilites que nous donne la vallee du Fleuve Rouge pour atteindre le Yunnan. Mais il faut profiter de cette situation et join- dre aux efforts faits par le Gouvernement de la Metropole Taction de la Colonic pour construire le reseau indo- chinois qui servira de base a notre penetration en Chine." ' A similar view is expressed by Dubois et Ferrier: " L'interv^ention directe de plusieurs puissances europeen- nes en Chine fait a nos hommes d'etat un devoir pressant d'assurer cette nouvelle expansion de notre colonic, con- stituee d'hier, vers un pays librc de quatre cent millions d'habitants. ... It faut done pour rendre efficace le bienfait de ce voisinage, prendre I'initiative d'une penetration qui nous rapproche le plus tot possible des regions les mieux dotees. Aussi I'oeuvre de notre ' See Doumer, op. cit., page 326. 126 FOREIGN FINANCIAL CONTROL IN CHINA diplomatic commerciale des dix dernieres annees en Chine, est-elle une oeuvre profondement solidaire de notre expansion indo-chinoise." * In 1897 ^"d early in 1898, France used a policy of pressure upon China, similar to that exercised by other Powers. On April loth the Chinese Government ac- quiesced in the following demands of France : ^ 1. The Chinese Government grants to the French Gov- ernment, or to the French Company, which the latter may designate, the right to make a railway from the frontier of Tonking to Yunnanfu : the Chinese Gov- ernment having no other responsibility but to furnish land for the road and its dependencies. The route of this line is actually surveyed, and will be fixed later on in agreement with the two Governments. Regulations will be jointly made. 2. The Chinese Government, in consideration of its friendship for France, leases the bay of Kuangchouwan, for 99 years, to the French Government, which may establish a naval station and coal depot there. The boundaries of the Concession will be fixed hereafter by agreement between the two Governments, after examina- tion on the spot. The question of rental will be arranged later on. ® See Dubois, op. cit., page 824. ° See " Documents diplomatiques, Chine, 1894-1898," pages 49 to 51. English texts given by Rockhill, op. cit., Nos. 36 and 24. See also "British Blue Book, China," No. i, 1899. Vol. CIX, No. 17. FRANCE 127 3. When the Chinese Government organizes a definite Postal Service and places a high functionary at its head, it proposes to call for the help of foreign officers, and declares itself willing to take account of the recommenda- tions of the French Government in respect to the selec- tion of the staff. 4. With the purpose of assuring the relations of neighborliness and friendship between China and France ; with the purpose, equally, of seeing the territorial in- tegrity of the Chinese Empire maintained and, further, because of the necessity of taking care that no change be introduced in the existing situation as regards the provinces bordering on Tongking,^*^ the Government of the Republic would attach particular value to receiving from the Chinese Government an assurance that it will not cede to any other Power all or a part of the territory of those provinces, either definitely or temporarily, or on lease, or by any title whatsoever. A declaration concerning the non-alienation of the Island of Hainan had been given by the Chinese as early as March 15th, 1897.^^ Having gained their points the French began railway construction. M. Doumer proposed to the Conseil Superieur a comprehensive railway scheme for the 1" The French text reads here : " Par suite de la necessite nc comte de veiller a ce que dans les provinces limitrophes du Tonkin, il ne soit apporte aucune modification aletat de fait et de droit existant." 11 See "Documents diplomatiqucs, Chine, 1894-1898," page 33. 128 FOREIGN FINANCIAL CONTROL IN CHINA French colonies, including a line from Haiphong to Hanoi with an extension to Yunnan. After the author- ization of the scheme by this body M. Doumer proceeded to Paris to obtain the sanction of the French Chamber. The law authorizing the Government of Indo-China to borrow 200,000,000 francs for exclusive use of a rail- road system was promulgated on the 25th of Dec, 1898.^- In Article HI the Government of Indo-China is author- ized to grant a guarantee of interest to the Company which was to become the " concessionaire " of this line. The money which the colonial government might be called on to furnish is, in turn, guaranteed by the French Republic. Owing to the Boxer troubles, little was done towards commencing railroad building in Yunnan and only the construction of the French colonial line from Haiphong to Hanoi and thence to Laokay was undertaken. ^^ But in 1 90 1, M. Doumer succeeded in constituting a syndi- cate composed of the principal financial houses of Paris, and in concluding with this syndicate a convention for the building of the railway from Laokay to Yunnan- hsien and for the working of the whole line from Haip- hong to Yunnanhsien.^'* The syndicate is the exclusive 12 See Doumer, op. cit., page 329; and "Documents diploma- tiques, Chine, Juin-Octobre, 1900." 13 See Kent, op. cit., page 162. " See Doumer, op, cit., pages 343 ff- and " Documei-.ts Diploma- tiques." See also Rockhill, op. cit., page 405. FRANCE 129 concessionaire and is to build the railway from Laokay to Yunnan, with a total length of 468 kilometers at its own expense and risk, while it receives from the govern- ment of Indo-China, entirely constructed and ready for exploitation, the road from Haiphong to Laokay, being 385 kilometers long. The total line is conceded to the syndicate for 75 years, and is to be exploited at the ex- pense and risk of the concessionaire with eventual share in the profits by the colonial government (avec partage eventuel des benefices entre celui-ci et le Gouvernement general). The capital required for construction of the railway to Yunnan and for exploitation of the entire line from Haiphong to Yunnan was 101,000,000 francs and was constituted as follows: The stock capital of the syn- dicate, 12,500,000 francs; a subvention from the Gov- ernment of Indo-China, another 12,500,000 francs; the rest, or 76,000,000 francs, in bonds guaranteed by the home government to the limit of an annuity of 3,000,000 francs yearly. This convention was signed on the 15th of June. 1901, was presented three days later for ratification to the Chamber of Deputies by the Minister of the Colonies and the Minister of Finance, and was finally ratified by law of July 5, 190 1. Immediately thereafter the " Companie frangaise des chemins de fer de ITndo-Chine et du Yun- nan " was organized and the bonds issued. I30 FOREIGN FINANCIAL CONTROL IN CHINA On October 28th, 1903, the conditions under which the extension was to be made on Chinese territory were finally settled between the Chinese Government and the French Minister. ^^ They comply with the concessions granted to France on the loth of April, 1898. France was to build, manage, and own the railway for eighty years. But " China retains full sovereign rights over the line, which in the event of China's being at war will not be considered neutral, but be placed under Chinese orders. China undertakes the sole responsibility of policing and protecting the railway, and on no account can the railway ask for the assistance of foreign troops." There is to be no Chinese Government guarantee. In- deed the Chinese have nothing whatsoever to do with financing or managing of the line and they are deprived of all control and profit. In this latter respect French railway rights in China are at variance with those enjoyed by Russia in Man- churia. For Russia, as we have seen, had admitted the Chinese to financial and even administrative participa- tion — at least nominally. But otherwise, there is little distinction between French and Russian " control " ; al- though French " control " is nominally exercised by a private company and is therefore financial, the close association of this Company with the French Govern- ment as manifested in the several conventions as well 15 See Rockhill, op. cit., page 405. FRANCE 131 as the motives behind French railway enterprise in Yun- nan, leave no room for doubt that French control in China, embodied in this French railway concession, is in spirit, somewhat political. The railway policy of France, like that of Russia, and as we shall see like that of Japan, and to some extent that of Germany, " has been a means to an end, an incident in a larger policy, which can only be described as in intention a policy of colonization." ^'^ Nevertheless French policy in China proper has been by no means as aggressive as that of Russia before the Russo-Japanese War. With the exception of a few un- successful attempts at further concessions in the south- ern provinces, which were to be extensions of the existing railway system, France did little in exploiting her sphere politically. Commercially, however, France took full advantage of her privileged position: her " control '' enabled her to establish her trade at the expense of other nations by means of preferential tariffs to the furtherance of French commerce. No doubt the exceedingly high costs of con- struction and operation of the Yunnan railway forced France to exact high charges. But these high charges were not the only reason that prompted wealthy Chinese citizens to contemplate a railway from Yunnan to Nan- king which would break the French monopoly of the i« See Kent, op. cit., page 93. 132 FOREIGN FINANCIAL CONTROL IN CHINA carrying trade of Yunnan towards the sea. The best illustration of the unsatisfactory state of affairs is to be found in a consular report by Mr. G. E. Anderson, American Consul General at Hongkong.^" According to this report the railroad to be constructed by Chinese is " to open Yunnan with the seaboard through Chinese territory and thus avoid present unfavorable conditions found in the transit tax charged for the transfer of foreign goods not of French or Indo-French origin crossing Indo-China and also to avoid the high freight rates over the French railway into Yunnan which now obtain." In another Report, Mr. Anderson remarks: " The restricted use and general unsatisfactory working of the railway is due to the abnormally and prohibitive high freight rates." ^^ The principal reason for such discrimination was, of course, to protect and advance the industries of France and her colonies. But it is interesting to note that in this France had no success. The British Minister to China, commenting on French railway enterprise in Yunnan, had remarked as early as 1898: "The im- pression in French railway circles is that a railway through Yunnan will not pay expenses." ^^ And the railway did in fact not pay expenses for two reasons: Firstly, French trade in Southern China remained in- ^^ See U. S. Consular Reports, 1912, No. 233, page 1488. 1^ See U. S. Consular Reports. 1912, No. 27, page 503. 19 See "China," No. i, 1899. Vol. CIX, No. 459. Enclosure. FRANCE 133 significant. Referring to the articles of the treaty of 1885 by which preference was to be given to French trade and industries, Air. Douglas says : " The bulk of the trade of the country has. in the natural order of things, fallen into the hands of the Chinese, the British, and the Germans." -^ All preferential treatment of French goods has not increased French trade materially. Secondly : The exorbitant charges drove foreign trade away. To quote the Far Eastern Revirtv: " As a nat- ural consequence traders are again taking to the older and cheaper river and caravan routes." -^ So much for French penetration of Yunnan. French ambitions were also reaching towards railway enterprise in Kwangsi, Kwangtung, and Szechuan. Especially Szechuan was earmarked for railroad exploitation. M, Doumer considered that the Laokai-Yunnanfu line w^ould only demonstrate its true value when continued to Chengtu via Chungking. And the French Minister actually secured from China the right to construct the Yunnan-Szechuan railway for French interests.^- Thus France gained for the loss of her share in the Pukow- Sinyang line. " At Chengtu she would link up with the * Great achievement ' of the Russo-Belgian combina- tion, thus clasping hands across China with her ally on the north, and also would have the control of a large 20 See Douglas, op. cit., page 387. 21 See " Far Eastern Review." Vol 9, page 167. 22 See " Far Eastern Review," Vol. 10, page 304. 134 FOREIGN FINANCIAL CONTROL IN CHINA section of the line eastwards to the Hupeh border as provided for in the Paris meetings of the Hukuang negotiations." ^^ Aside from this hne various other railways were planned and partly conceded by China.^^ But only a few of these will stand a chance of eventual construction. The most important of the Franco-Russian-Belgian com- bination in which the French had a share of three-fifths of the capital, was the Peking-Hankow line.^^ We have seen that the terms of this concession were as favorable to the Chinese as the terms of the British concessions. They were purely financial. The policy of France as far as the entire Far East is concerned was dominated by France's European policy which stood under the sign of the Russo-French Entente. The French nation is the great creditor of Russia and served as such, together with Belgium, as financial agent for Russian schemes in the Far East. The first joint financial enterprise was the Franco-Rus- sian Government Chino-Japanese War Indemnity Loan of 400,000,000 francs, contracted in 1895. The money was almost exclusively subscribed in France. The first French railway loan contracted with Russian proclivities, as we have seen, was the Peking-Hankow line designed 23 See ibidem. 24 See Rockhill, op. cit., No. 59, " Kent Railway Enterprise in China," Chapter VXI. 25 See " Far Eastern Review," Vol. 10, page 292. FRANCE 135 to assist the achievement of the long cherished ambi- tion of France to join hands across China with her great northern ally, Russia. Another Franco-Russian com- bination was the Shansi Railway Loan, contracted by the Russo-Chinese Bank and floated in France.^*^ In 1903. the French and Belgians financed the Kaifenfu- Honan Railway, with Li, 000,000, a supplementary loan of L640,ooo having been floated in 1907. Both these latter railways and the French Taynan-Chengting line serve as feeders to the Peking-Hankow line. Another project of the Franco-Russian-Belgian combination is the Lung-Tsing-U-Hai line from Lanchow to Tungchow. The possibility of an early construction of most of the recent projects is very remote. Finally French financiers participated with England, Germany, and America in the Four Power Negotiations, which will be a subject of investigation in Chapter VIII. France was to build the Kweichow-Chungking-Chengtu section as an extension to the so-called Hukuang system. According to the Far Eastern Review: " The financial arrangements will be equally shared by the four groups, but the French will benefit principally in the matter of construction as no share of the construction of the sys- tem provided for by the Hukuang Agreement was allotted to them." ^^ 2« See " Far Eastern Review," Vol. 10, pa}?e 294. 27 See " Far Eastern Review," Vol. 9, page 305. 136 FOREIGN FINANCIAL CONTROL IN CHINA In concluding this chapter we want to remark that France, in attainment of her pohtical ends, finds con- siderable aid through a close cooperation between her foreign finance and her foreign policy. Or, as Bland expresses it : " In France, where cosmopolitan finance has attained its highest form of organization, the Gov- ernment has long since recognized the necessity for safeguarding the interests of French rentiers and at the same time for controlling capital as a source of national strength, by legislation which virtually prevents any French loan from going abroad without the full knowl- edge and approval of the French Government." ^^ In this direction France finds herself only surpassed by Germany and Japan, in which countries the coordina- tion between political and financial activities is even closer and is not directed towards aiding the political designs of an ally but is employed to strictly national ends. -s Sec Bland, op. cit., page 287. CHAPTER V GERMANY The rise of Germany on the Chinese horizon is of quite recent date. Suggestions for the acquisition of a port on the Chinese seaboard had been made by German traders on various occasions, and poHtical relations have existed between the two countries since 1861. Treaties were concluded in this year and in 1880. But nothing was accomplished in the direction of gaining a foot- hold in China until Kiaochau was occupied in 1897-98. The occupation of Kiaochau had been decided upon in principle in 1896. Kent summarizes the events leading up to the occupation as follows : ^ "In that year — 1895 — it will be remembered. Li Hung Chang paid his cele- brated visit to Moscow, being present at the coronation festivities of the present Tsar. On his return he passed through Germany. It was suspected at the time that Russia had secured valuable rights in North China and Manchuria. On being pressed Li Hung Chang stead- fastly denied that this was so. Shortly after he had left the country, however, the German Government received ^ See Kent, op. cit., page 140. 137 138 FOREIGN FINANCIAL CONTROL IN CHINA certain information that their suspicions had been cor- rect. Thereupon Kiaochau, in anticipation of Russian aims, was mentally earmarked as a future territorial acquisition of Germany, who was badly in need of a naval station in Chinese waters, with the province of Shantung as their sphere of influence." The opportunity to act upon this decision arrived in November, 1897, when two German missionaries were murdered in the province of Shantung. Immediately the incident became known, a German squadron anchored off the harbor of Kiaochau and landed troops, which occupied the town of that name. After a series of negotiations, Germany demanded and achieved the lease of Kiaochau for the purpose of a naval base, supposedly in compensation and guarantee for the crime. The ces- sion found its expression in the convention of Peking on March 6, 1898:- "With the intention of meeting the legitimate desire of His Majesty, the German Emperor, that Germany, like other powers, should hold a place on the Chinese coast for the repair and equipment of her ships, for the storage of materials and provisions for the same, and for other arrangements connected herewith, His Majesty the Emperor of China cedes to Germany on lease, provisionally for ninety-nine years, both sides of the entrance of the Bay of Kiaochau." ~ See Rockhill, op. cit., No. 8. See also Reichsanzeiger, April 29th, 1898. GERMANY 139 It may be said that to Germany, perhaps, more than to any other country, the future of China at that period was indifferent. While ready to commit herself to the " Open Door " she also was prepared to benefit by the " Sphere of Interest " policy or a direct partition of China almost without preference as to which prevailed. The important thmg to her was not the policy, but the benefit. If China attempted reconstruction, Germany was ready to lend her assistance. A strong China to her would be able to act as counterpoise to Russia, Great Britain, France and Japan. Should, however, the long threatened break-up of China become imminent, Tsing- tau, the capital of Kiaochau, immediately became the kernel for a future German colony in the Far East. And Germany would have had her " place in the sun " in that part of the globe. This policy of foresight and precaution was summar- ized by Baron von Biilow shortly after the cession of Kiaochau : " Es ist von der Aufteilung von China gesprochen worden. Eine solche Aufteilung wiirde jedenfalls nicht von uns ausgegangen sein; wir haben nur beizeiten dafijr gesorgt, dass wir. was auch kommen moge, nicht ganz leer ausgehen. Wann sich ein Eisen- bahnzug in Bewegung setzt hangt nicht immer von dem Belieben des Reisenden ab, wohl aber, dass er nicht den Anschluss versaumt. Den letzten beissen die Hunde. Wir wiinschen aber nicht — und das mochte ich mit I40 FOREIGN FINANCIAL CONTROL IN CHINA besonderem Nachdruck betonen — , dass es zu einer Aufteilung des Chinesischen Reiches komme. Ich glaube auch heute noch dass es zu einer solchen Aufteil- ung in absehbarer Zeit nicht kommen wird. Jedenfalls haben wir — und damit meine ich am besten sowohl die Griinde, welche uns nach Kiaochau gefiihrt haben, als die Bedeutung von Kiaochau fiir uns zusammen-zufassen — in Kiaochau eine strategische und poHtische Position gewonnen, die uns einen bestimmenden Einfluss auf die kiinftigen Geschicke Ostasiens sichert. Von diesem festen Punkte aus konnen wir die weitere Entwicklung der Dinge mit Ruhe und mit Gelassenheit abwarten. Wir haben eine so grosse Aktionssphare vor uns und so bedeutsame Aufgaben, dass wir andere Machte um die ihnen gemachten Zugestandnisse nicht zu beneiden brauchen. Die deutsche auswartige PoHtik wird, wie iiberall, so auch in Ostasien, ihren Weg ruhig, test und friedlich zu verfolgen wissen. Den Storenfried werden wir nirgends spielen, das Aschenbrodel aber auch nicht." 3 3 See Penzler, " Fiirst Bulow's Reden," Berlin, 1907, page 30. An English text is given in "China," No. i, 1898, Vol. CV, No. 67. and reads as follows : " Mention has been made of the partition of China. Such a partition will not be brought about by us at any rate. All we have done is to provide that, come what may, we our- selves shall not go empty-handed. The traveler cannot decide when the train is to start, but he can make sure not to miss it when it does start. The devil takes the hindmost. But we do not desire, — and I beg to impress this point on you — we do not desire a par- tition of China, and I do not believe that there is an immediate prospect of such a division. But in any case (and here, I think, I GERMANY 141 The German demands following the occupation of Kiaochau naturally included a railway concession as one of the principal objects of the occupation. The lease of Kiaochau and a section of the hinterland, signed on the 6th of March, 1898, was followed by a railway con- vention of the same date under which the following pro- visions are made : * "I. The Chinese Government sanctions the construction by Germany of two lines of railway in Shantung. The first will run from Kiaochau and Tsinan-fu to the boundary of Shantung province via Weihsien, Tsinchow, Pashan, Tsechuen and Suiping. The second line will connect Kiaochau with Chinchow, whence an extension will be constructed to Tsinan through Laiwuhsien. The construction of this extension shall not be begun until the first part of the line, the main line, is completed, in order to give the Chinese an opportunity of connecting this line in the most advan- tageous manner with their own railway system. . . ." " II. In order to carry out the above mentioned rail- can best resume the advantages secured to us by the occupation of the port, as well as the reasons which induced it) ; in any case, I say, we have secured in Kiaochau a strategical and political posi- tion which assures us a decisive influence on the future of the Far East. From this strong position we can look with complacency on the development of affairs. We have such a large sphere of action and such important tasks before us that we have no occasion to grudge other nations the concessions made them. German diplo- macy will pursue its path in the East as everywhere else — calmly, firmly, and peacefully. We will never play the part of mischief- maker, nor will we play that of Cinderella." * See Rockhili, op. cit., No. 8. 142 FOREIGN FINANCIAL CONTROL IN CHINA way work a Chino-German Company shall be formed, with branches at whatever places may be necessary, and in this Company both German and Chinese subjects shall be at liberty to invest money, if they so choose, and appoint directors for the management of the undertak- ing." Article III provides among other things that " the object of constructing these lines is solely the develop- ment of commerce. In inaugurating a railway system in Shantung, Germany entertains no treacherous inten- tion towards China, and undertakes not to unlawfully seize any land in the province." In conformity with the spirit of this provision : " The Chinese Government binds itself in all cases where foreign assistance, in per- sons, capital or material, may be needed for any purpose whatever within the Province of Shantung to offer the said work or supplying of materials, in the first instance to German manufacturers and merchants engaged in undertakings of the kind in question." Following the acquisition of these rights Kiaochau was established as a commercial and strategic " point d'appui." The place was immediately declared open to foreign trade without distinction of nationality and an official report to the German Reichstag announced that no duties would be levied in the port of Kiaochau upon goods intended for consumption in German territory, ex- cepting the excise duty on opium.^ 5 See Monthly summary of Commerce and Finance, U. S. Treas- ury Dept. Series, 1899-1900, Nos. 321, 323 b., Dec, 1899. GERMANY 143 Furthermore in accordance with above mentioned convention the Chancellor of the Empire on the first of June, 1899, granted the concession for the construction and management of a railway from Tsingtau via Weih- sien to Tsinan Fu, the provincial metropolis of Shantung, with a branch line to Poshan to a syndicate closely con- nected with the Deutsch Asiatische Bank and represent- ing a wide circle of German industries and mercantile interests. This company was organized on the 14th of June, 1899, as The Shantung Railway Co., with head- quarters in Berlin.*^ The capital was to be 54,000,000 marks. The company was to be a German-Chinese Company. " Care is to be taken that Germans as well as Chinese may participate in the public subscription to the stock of the Company. More especially, shall subscriptions be opened in the suitable commercial centers of East Asia, and the amounts there subscribed shall receive proper consideration." " The election of the President of the Board of Direc- tors as well as the Chief Operating Official must be approved by the Imperial Government." " German material shall be used, as far as possible, in the construction of the railways." " The railway is to be equipped in due time with roll- ing stock according to the requirements of traffic. The « See Rockhill, op. cit., No. 52. 144 FOREIGN FINANCIAL CONTROL IN CHINA material used shall be, as far as possible, of German origin." Several articles provide for a control by the Governor of Kiaochau over the number of trains, fixing tariff and rates. Article VI authorizes the Imperial Government in case of such culpable action of the Company relative to one of the imposed obligations contained in the docu- ment, as should result in the railway's not being con- structed or operated in due course, " to take over itself or cause to be taken over by a third party, the construc- tion or extension of the railway and the organization or continuation of the traffic, all at the expense of the com- pany." Article X gives the Company the option until the end of 1908 to construct a railway from Tsinan to Ichow and from Tsingtau to Ichow, thus forming a triangle of rail- ways covering all of the Province of Shantung. Article XI provides for a contribution from the yearly net profits of the railway to be applied to the expenditures of the Government of Kiaochau, which contribution is to be estimated as follows: "If after the opening of the traffic of the railway from Tsingtau to Tsinan, the net earnings of the railway would permit the payment of a yearly dividend of more than 5 per cent, of the paid- up capital which is used in operating the railway, there shall be paid into the Government-funds of Kiaochau the twentieth part of any surplus over 5 to 7 per cent., GERMANY 145 the tenth part of any surplus over 7 to 8 per cent, and so forth. . . ." In Article XII " The Imperial Government reserves the right to purchase the railways to be constructed by the company in accordance with this concession after the end of sixty years, calculated from the date of the grant of the concession. The Imperial Government further reserves the right to buy at the end of every five years, including a one year's previous notice, all establishments, rolling stock, appurtenances, inclusive of the reserve and renewal funds earned by the railway enterprise, upon payment of twenty-five times the amount of the average dividends paid during the last five years from its earn- ings, or, at least, however, the commercial value of the actual existing railway plants, workshops and rolling stock." The German railway line in Shantung, it may be finally remarked, is the only line of which China has not secured the right, some time or another, to assume the sole con- trol. In addition to or better, based upon these specific rail- way rights, Germany secured the dominating voice in the Province of Shantung with regard to employment of foreign capital, considering Shantung and adjacent terri- tories as her " sphere of interest." The first step towards a recognition of the German sphere was the Ger- man participation in the Tientsin-Chinkiang. respec- 146 FOREIGN FINANCIAL CONTROL IN CHINA tively — Pukow Railway following the German Minis- ter's claim that the Shantung section of this line should be German.'^ The German sphere of interest found con- firmation by an arrangement between the British and German capitalists concerned. It estimated the Ger- man sphere of interest to be : The peninsula of Shan- tung and the Hoangho Valley with connection to Tientsin and Chengting, or other point of the Peking-Hankow line, in the south with connection to the Yangtze at Chinkiang or Nanking. The Hoangho Valley is under- stood to be subject to the connecting lines in Shansi forming part of the British sphere of interest, and to the connecting line to the Yangtze Valley, also belong- ing to the said sphere of interest.^ German control within the German sphere is based upon the railroad concession in Shantung. At first sight, the principal control provisions quoted above show a similarity of German control to that exercised by France and Russia. The concession was granted to the German Government, which, in turn, designated leading German financial interests, united in the Deutsch- Asiatische Bank, to form a railroad company for the actual construction of railways within the sphere. Since this Company is a private concern, the control provisions are nominally financial. But the final supervision over traffic, tariff, and rates as well as the share in profits by ^ See above, page 45. * See above, page 46. GERMANY 147 the Government of Kiaochau, and the provision, that the hne, under certain conditions, may or shall be taken over by the Imperial Government shows that German control is also political. Indeed, as Prince Billow has suggested in his speech, the railroads extending from Kiaochau could be considered the first step towards German colon- ization in China, in case other Powers should set the example. Nevertheless German control differs in so far from Russian control, as Germany has taken no direct steps towards establishing a political influence such as was contemplated by Russia in Manchuria previous to the Russo-Japanese War. Neither has Germany, by rates or any other means, discriminated against the free enjoyment of the treaty rights of other nationals within her sphere. Germany considered Shantung as a field for commer- cial exploitation — much as England considered her sphere in the Yangtze in the light of its economic possi- bilities. Both Powers, though alive to a possible parti- tion of China, had the political independence and terri- torial integrity pi China in mind. German and English policy found its expression in a mutual Agreement, con- cluded during the Boxer troubles, namely on Oct. i6th, 1900. The agreement reads: ^ I. " It is a matter of joint and permanent international interest that the ports on the rivers and littoral of China 9 See Rockhill, op. cit., No. 14. 148 FOREIGN FINANCIAL CONTROL IN CHINA should remain free and open to trade and to every other legitimate form of economic activity for the nationals of all countries without distinction; and the two Gov- ernments agree on their part to uphold the same for all Chinese territory as far as they can exercise influence. 2. " Her Britannic Majesty's Government and the Imperial German Government will not, on their part, make use of the present complication to obtain for them- selves any territorial advantages in Chinese dominions, and will direct their policy towards maintaining un- diminished the territorial condition of the Chinese Em- pire. 3. "In case of another Power making use of the com- plications in China in order to obtain under any fonn whatever such territorial advantages, the two contracting Parties reserve to themselves to come to a preliminar}' understanding as to the eventual steps to be taken for the protection of their own interests in China." To Germany Kiaochau was the economic key to Shan- tung and Shantung the economic key to northern China. On the completion of the Tsingtau-Tsinanfu Railway Germany endeavored to derive the full pecuniary ad- vantages of her monopoly. To quote the Far Eastern Reineiv: " When Tientsin is closed by ice during the winter months the export trade of North China is paralyzed, with the exception of the small volume which finds its way out of the harbor of Chinwangtao. A GERMANY 149 glance at the map will show that much of the trade now enjoyed by Tientsin, could be diverted to Tsingtao with considerable advantage to a vast section of North China, and consequent profit to Germany. The construction of any line or lines connecting the Northern or German Section of the Tientsin-Pukow with the Peking-Hankow Railway, would create a revolution in the old established channels of trade, and instead of flowing northwards to Peking and then down again to Tientsin the products of Southern Chihli, Shansi, Shensi and Honan would fol- low the shortest and most direct route to the sea, over the German lines to Tsingtao." German diplomacy has been keenlv alive to this fact, and the German Minister has on several occasions approached the Chinese Govern- ment to secure a concession to construct a line to con- nect Chengtingfu with Techow and Kaifeng with Yen- chow. According to Mr. P. C. Kent, in his valuable book on " Railway Enterprise in China " : " the German Minister has only succeeded in arriving at an under- standing with the Chinese Government to the effect that in the event of the Chinese Government deciding upon the construction of these lines and requiring the assist- ance of foreign capital, German capitalists will be allowed the first refusal of the Concession. A glance at the map is sufficient to indicate the commercial import- ance of these railways to Shantung and Tsingtao. . . . With the thoroughness characterizing her foreign trade I50 FOREIGN FINANCIAL CONTROL IN CHINA policy, Germany has carefully protected and insured her position in Shantung, and as the construction of these lines will ultimately become imperative for the develop- ment of China, she may well afford to bide her time with the calm assurance that her plans will mature. Her position is further safeguarded by the terms of the Tientsin-Pukow Loan Agreement, Clause 19 of which reads : Branch lines in connection with the railway line mentioned in this Agreement may be built by the Im- perial Chinese Government with funds at their disposal from Chinese sources, if thought advisable, and if foreign capital is required preference will be given the Syndicate." ^^ In 19 1 3 Germany made another step forward. On December 31st of that year, a preliminary agreement was signed between China and Germany for the con- struction of two new railways in Shantung province, one from Kaomi, west of Tsingtau, to Ichowfu and Han- chuang, on the railway line connecting Pukow with Tientsin, and the other from Tsinanfu to some point on the Peking-Hankow Railway. In the final agree- ment the line from Kaomi was to run to Hsuchowfu and to form a junction with the Tientsin-Pukow Rail- road. " Under the Kiaochow Convention of March 6, 1898, China conceded Germany the right to build rail- ways in Shantung under German Company laws, and 10 See " Far Eastern Review," Vol. 9, page 156. GERMANY 151 while the railroad from the port of Tsingtau to Tsinanfu was so constructed, Germany decided not to follow the same practice in the future, agreeing to forego the privileges in that direction and permitting China to build the lines upon conditions similar to those under which other railroads have been constructed.^^ These new lines then were to be Chinese-state-owned, but German capital and materials were to be employed in their con- struction and the Chief Engineer and the General Manager were to be German subjects." A construction of these lines in the near future is of course very un- likely. The comparatively large and speedy successes of Ger- man finance in China were, last not least, due to the forward methods of the German bankers. German finance and industry are more highly organized and coordinated to the specific purpose of extending national interests abroad than is the case with any other power in the world. And at the same time German diplomacy, in cooperation with German industry and finance, is striving to extend and promote the trade secured by the foresight of German business men. " Not only does the German Foreign Office keep in touch with the move- ments of its financiers abroad . . . but it has come to pass, as part of a regularly organized system, 1' See "Far Eastern Review," Vol. 11, page 18. See also Vol. 10 Dec, 1913. 152 FOREIGN FINANCIAL CONTROL IN CHINA that all the great financial industries are directly asso- ciated with groups of manufacturers and industrialists, so that the whole force of politics, industries and finance moves forward, along predetermined lines, to a comm.on goal." ^^ This goal is the extension of markets for Ger- man goods and the purpose of German foreign invest- ment within such markets is to help home enterprise. That the participation of German banks in industrial enterprises and in capital investments abroad has to be concentrated upon exclusively German success is main- tained by all the foremost German authorities on finance. Riesser says:^^ "Internationale Geschaftsbeziehungen und internationale Emissionen diirfen immer nur Mittel zur Erreichung nationaler Ziele sein und mussen sich in den Dienst der nationalen Arbeit stellen." And in Wal- tershausen's book " Kapitalsanlagen im Ausland " we find the following passages:^'* "Fur die Zukunft der deutschen Volkswirtschaft ist es von Wichtigkeit, dass der Kapitalsexport planmassig im nationalen Sinn ge- leitet wird. . . ." " Die Auslandsbanken, obwohl Er- werbsinstitute, iibemehmen mit ihrer Tatigkeit national- wirtschaftliche Funktionen zugunsten des Waren und Kapitalsexports." And in order to illustrate that a 12 See Bland, op. cit., page 287. See also Withers, op. cit., page 109. 13 See J. Riesser, " Die deutschen Grossbanken," page 293. 1* See Sartorius von Waltershausen, " Kapitalsanlagen im Aus- land," page 293. GERMANY 1 53 monarchical form of Government like the German is, according to German opinion, best fitted for carrying out a broad national foreign policy we quote a passage from Treitschke : ^^ " Der Konig kann sehr viel gen- auer beurteilen. wie es in der Welt draussen wirklich steht, als der einzelne Untertan oder auch eine republi- canische Parteiregierung. Eine weit in die Zukunft rechnende Politik wird nur dem moglich sein, der wirk- lich in Zentrum steht." It was then to the specific purpose of preserving and expanding markets for German industry that a number of leading financial institutes as early as 1889 founded the Deutsch-Asiatische Bank, which we have mentioned before. The formation of a group or syndicate for Asiatic business in 1890 was the natural consequence of the establishment of the bank.^'^ The purpose of the syndicate was to be concerted underwriting of state and provincial and railway loans in China, Japan and Korea and the establishment of railroad and mining companies. The spirit that animated the syndicate may be illustrated by a further quotation of Riesser : "Die Ubernahme von Anleihen fiir China wurde ein Kampfobject zwischen alien den Staaten, die da wussten, dass in erster Linie der financielle Einfluss dem politischen die Wege bahnt." One of the first greater successes of the syndicate i"' See Treitschke, " Politik," IT, page 55.. ^*'' See Riesser, op. cit., page 403. 154 FOREIGN FINANCIAL CONTROL IN CHINA represented by the Deutsch-Asiatische Bank was the cooperation with the British Hongkong and Shanghai Bank in contracting one-half of the Chino-Japanese War indemnity loan of 1896 and 1898.^' The two banks furthermore cooperated in 1905 in the Exchange Adjust- ment of the Boxer Indemnity (being L 1,000,000), in 1908 and 1909, in contracting the Imperial Chinese Gov- ernment Tientsin-Pukow Railway Loan totaling L5,ooo,- 000 of which the Deutsch-Asiatische Bank issued Li 3, 1 50,000 — and finally in 19 10 in the Tientsin-Pukow Railway Supplementary Loan of L4,8oo,ooo.^^ The participation of the Syndicate in international loan negotiations will be dealt with in the respective chapter. Though the means of Germany deviate materially from Anglo-Saxon means and therefore have even before the war provoked misunderstandings, there is neverthe- less to be found a frequent financial cooperation between the two countries. Even as late as the spring of 19 14, English-Gennan cooperation in certain railway enter- prises was found desirable. The latest German attempt to connect the Tientsin-Pukow Railway with the Peking- Hankow Railway was made by a German industrial or- ganization apparently independent of the Deutsch- Asiatische Bank. Referring to this organization the Far Eastern Reviczu remarks : " The scheme is doubt- less intended to comprise all the most important German " See Chapter VIII. " See Chapter VII. GERMANY 155 industrial concerns, and there is some reason to suppose that it is desired to secure English cooperation. The theory that Germany and England are now natural partners in Chinese business is being systematically propagated." ^^ British-German cooperation, however, has been shat- tered through the present war. The elimination of Ger- many's interests and " control " in China and the ap- pearance of Japan as the — at least for the time being — arbiter of Eastern Asia has changed the whole aspect of the Far Eastern question. 13 Sec " Far Eastern Review," Vol. XI, page 98. CHAPTER VI JAPAN The advance of Russia into Eastern Asia had for many years given rise to anxiety on the part of Japan, whose island home Hes so close to the shores of the neigh- boring continent that the possession of the Asiatic coast line by a strong Western Power would, it was recognized, be a standing menace to the independence of the Empire. " In 1873 the Iwakura embassy had returned from Europe deeply impressed by the power and activity of the Western world, and especially by the aggressive designs of Russia. A memorandum drawn up by Okubo Toshimichi declared that Russia, always pressing south- wards, is the chief peril for Japan. It is not surprising, then, that the safeguarding of Japanese interests in Korea became the first aim of Japanese policy." ^ Japan's very safety demanded that neither of her great neighbors, Russia and China, should obtain an undue share of influence in the Far East. It was therefore with some alarm that in 1891 Japan learned that the Tsar's government had determined to construct a line 1 See Douglas, op. cit., pages 191, 192. 156 JAPAN 157 of railway through Siberia to connect European Russia with Vladivostok. As a first countermove, Japan, upon realizing the designs of Russian policy and the weakness of the Chinese Government, sought to establish Korea as an independent state, the latter then being under Chinese suzerainty. But while it was in Japan's interest to strengthen and reform Korea, it was to China's in- terest to keep the Korean government corrupt and weak and to withstand Japanese aspirations. The opening of the Korean question, then, marked the beginning of a new era of Chino- Japanese rela- tions. In this period there are three great events which may serve as landmarks, namely the Chino-Japanese War of 1894-95, the Russo-Japanese War of 1904-05, and Japan's participation in the present world war. Early in 1894, a rebellion broke out in Korea, Japan- ese troops occupied Seoul , Korea renounced Chinese suzerainty, all of which finally resulted in the Chino- Japanese War, at the very beginning of which Japan concluded a treaty of alliance with Korea against China.^ This war may be said to be a direct outcome of Japan's resolution to reconstruct Eastern politics on a modern basis and of China's persistence in the old methods. Its result was a clear evidence of the superiority of the modern methods which Japan had adopted. The effects of the war upon the situation in the Orient 2 See Rockhill, op. cit., page 429. ' 158 FOREIGN FINANCIAL CONTROL IN CHINA were far-reaching. Japan's rise as a modern nation in the estimate of the world may be said to date from this time, especially since the same year saw a treaty of com- merce and navigation between England and Japan, which serves as the Magna Charta of Japan in regard to her dealings with foreign states. The conclusion of peace by the treaty of Shimonoseki on the 17th of April, 1895,^ was received with universal enthusiasm throughout Japan. It was realized that this treaty, coming after the trimphant victories which had everywhere distinguished Japanese arms, must place the country in the front rank of nations; and the extension of territory awarded by the cession of the Liaotung pen- insula and Formosa served to flatter the pride of the people. But when, a week later, the joint protest against the occupation of the Liaotung peninsula, or any other portion of the mainland of China, made by Russia, France and Germany, reached Japan, the people evinced the utmost indignation. It was realized, however, that it would be hopeless to enter on a contest with three first-class Powers, and, after a moment's hesitation, the government decided to renounce the Liaotung peninsula, and demand an additional indemnity of seven and a half million pounds sterling in its place. These terms were agreed to by China. The lesson was not lost on the Japanese; the humilia- ^ See Rockhill, op. cit., page 14. JAPAN 159 tion to which they had been subjected, left an indehble impression upon their minds; and they at once deter- mined so to strengthen their position as to enable them to hold their own on all future occasions. They set on foot an elaborate scheme of naval and military expan- sion which it was hoped would yield the expected results within a few years. If the enforced surrender of the Liaotung peninsula left in the minds of the Japanese a burning sense of wrong, subsequent events forced upon them the convic- tion that, sooner or later, Japan would have to enter on a life-and-death struggle with the Muscovite power. Further machinations of Russia in Korea led Japan to come to agreements and to make arrangements relative to the independence of Korea and neutral rights.'* Of still greater importance was the circumstance that the absorption of Manchuria by Russia had begun. The greatest event in this direction — and of far reaching consequences — was the taking of Port Arthur ; the manner in which Russia obtained possession has been already described. The news of the lease produced a wild excitement in Japan. Not only had Russia ousted Japan by the force of specious pleas, but in direct conflict with those pleas she had taken possession of one of the most hardly- won prizes of the late war. The nation was stirred to its * See Rockhill, op. cit., Nos. 67, 68, 69. l6o FOREIGN FINANCIAL CONTROL IN CHINA depths; and it was only by the wise and weighty pres- sure which was brought to bear by the Elder Statesmen and the Government that war was averted. Here again Japan showed a great self-control. Her only answer to Europe's aggression on Chinese territories — of the " battle of concessions " — was a demand on China that the province of Fuh-kien opposite Formosa shall not be alienated to any other government.^ In the troublous times to follow Japan had further occasion to show growing strength, vigor and thorough- ness. This was especially the case during the Boxer movement, the immediate consequence of which was to see Japan's position in regard to China vastly improved. The most important thing that contributed to this state of affairs was the admirable behavior of the Japanese troops during the occupation of Peking, by which Japan also gained Europe's admiration. To enumerate further successes of Japan in Korea against Russian aspirations and to go into detail as to the immediate causes of the then impending war is here of little interest. The main point is that from the day on which Japan was forced to forego the cession of the Liaotung peninsula as part of the hard-won spoils of the China war, she had steadfastly kept in view the prospect of one day having to fight Russia for her na- tional existence. In the nine years which had elapsed * See Rockhill, op. cit., No. 26. JAPAN l6i behveen the last incident of the Chinese War she had made every preparation that human foresight and energy- could ensure to fit herself for the conflict which her statesmen felt to be inevitable. Consequently the war was a success. Before treating the most important and far reaching consequences of the war and the events following it, events which are of particular interest to our investiga- tion, we have to understand the motives and forces which have been at the root of the foreign policy of Japan and all the great changes which have taken place. At the outset we cannot doubt that the intense feeling of patriotism among the Japanese and the determination to make their country stand in a position of equality with foreign nations were the most important factors in the movement which has profoundly changed all the conditions of Japan. The great national mission of Japan is, according to Count Okuma," " to harmonize Eastern and Western civilizations in order to help bring about the unification of the world, to effect a right har- mony between its own and the outside civilization." The main ideas with which the Japanese started. when they decided to adopt Western methods were embodied in the principles proclaimed on oath by the late Emperor on the occasion of his accession to the throne on March 14, 1868, the principal passage of which reads as fol- " Naoichi Masaoka. "Japan's Message to America." 1 62 FOREIGN FINANCIAL CONTROL IN CHINA lows : " " All purposeless precedents and useless cus- toms being discarded, justice and righteousness shall be the guide of all actions. . . . Knowledge and learning shall be sought after throughout the whole world, in order that the status of the Empire of Japan may be raised ever higher and higher." Behind the patriotic motives there are strong economic and political forces which have influenced the foreign policy of Japan. The rapid increase in population and the necessity for outlets not only for the surplus popula- tion but also for the surplus industrial products, has been forcing Japanese statesmen to consider the prob- lems involved, and like the statesmen of other countries they have sought them in the settlement of numbers of their people in foreign countries and in an extension of their foreign markets. The development of industry in Japan is making the country directly dependent on the produce of other countries for the food of its population and on raw materials. Japan's difficulties were increased through the finan- cial situation. Baron Yamamoto, minister of finance, several years ago warned the nation as follows : ^ " As we are all aware, this country bears a heavy burden of foreign loans and has to pay yearly a large amount of money both in principal and interest. To relieve this ■^ Henry Dyer, " Dai Nippon," page 27. 8 Whelpley, " The Trade of the World," page 243. JAPAN 163 situation, means to be resorted to must be those of the development of export trade, while it is equally import- ant to check the growth of all that tends to increase the outflow of specie and to make efforts to lighten the bur- den of national debt." The whole industrial situation in Japan up to late years w^as critical. Whelpley remarks : " " The dissem- ination of Western ideas and the increasing cost of liv- ing are bringing about a state of restlessness and dis- satisfaction potent with serious possibilities. Industrial unrest, strengthened by the increasing spirit of individual freedom may ultimately prove a serious check to the pace which now marks the progress of Japanese foreign trade. Increased wages, shorter hours of labor and even the most elementary protection of women and children now working in factories will threaten the present advantage of the Japanese in the cost of production." Reasons such as enumerated make it clear that Japan found it difficult to compete with European and Ameri- can goods and all of the circumstances referred to force Japan to look towards the mainland of Eastern Asia as the principal outlet of her goods and surplus population, and as the source of raw materials. The most desirable outlets from a geographical position, sparse-peopled ter- ritory and undeveloped resources are Korea and Man- churia, a part of Mongolia, and probably Eastern Siberia, * Whelpley, op. cit., page 253 flf. i64 FOREIGN FINANCIAL CONTROL IN CHINA while China proper offers the multitude of people as a basis for a wide market. All of the circumstances mentioned above furthermore may be said to be responsible for the tendency of Japan in the earlier years of her occupation to monopolize such parts of Manchuria as she held in control. They also are responsible for the methods employed by Japan, in those regions, and for the measures taken. Of great significance in this connection is a statement of Baron Makino, Minister of Agriculture and Com- merce : ^^ " China has people, and population is what makes trade. No other country in the world offers so vast a field for trade. With the growth of education and the development of material progress possibilities of commercial enterprise in China are simply unlimited. The anxiety of the powers to enter into more and more intimate trade and political relations with China cannot but excite intense interest in Japan; for China is our nearest neighbor, our best customer; and our commer- cial and political relations with that country are superior to those of any other nation. ... It is true that Japan enjoys a profitable trade with many countries of the West; . . . but this occidental trade at its best is diffi- cult to handle with any satisfactory degree of achieve- ment; for it is always more difficult to deal with highly developed commercial nations than with those less ad- 1° See Whelpley, op. cit., page 247 ff. JAPAN 165 vanccd in modern progress. Trade with peoples of lower social standards is always more easy and profit- able. . . . To-day the mind of Japan is all toward China as the commercial hope of our future, not to say any- thing of our geographical and racial advantages with that country. It is our ambition to be to the East what Great Britain is to the West. ... It is not too much to say that a great part of our hope for future financial rehabilitation in Japan depends upon how we can fur- ther develop trade with China." It is now our purpose to investigate measures taken and methods used by the Japanese in their relations with China in accordance with the task set in the introduction. The terms of the Treaty of Portsmouth in 1905 gave an inadequate result to Japan for all her costly sacri- fices. Japan had to take the entire financial burden on her own shoulders, not being able to force Russia to pay her an indemnity. But on the other hand, Russia ceded to Japan her leasehold rights in the peninsula of Liaotung including the fortress of Port Arthur and in Article VI, the ownership of the southern section of the Manchurian Railway, from Port Arthur to Kwang- chengtze, and all its branches, " together with all rights, privileges, and properties appertaining thereto in that region, as well as all coal mines in the said region, be- longing to or worked for the benefit of the railway." ^^ 11 " British and Foreign State Papers," Vol. 98, page 735. 1 66 FOREIGN FINANCIAL CONTROL IN CHINA In Article VII " Japan and Russia engage to exploit their respective railways in Manchuria exclusively for com- mercial and industrial purposes and in no wise for strategic purposes." The arrangement was subject to the consent of the Im- perial Chinese Government, which was promptly forth- coming in a convention of Dec. 22, 1905. ^^ In Article I the Imperial Chinese Government consents to the transfers and assignment made by Russia to Japan, while in Article II " The Imperial Japanese Government en- gages that in regard to the leased territory as well as in the matter of railway construction and exploitation, they will, so far as circumstances permit, conform to the original agreements concluded between China and Russia." In Article VI, " The Imperial Chinese Govern- ment agrees that Japan has the right to maintain and work the military railway line constructed between An- tung and Mukden and to improve the said line so as to make it fit for the conveyance of commercial and indus- trial goods of all nations." With the transfer to Japan of Russia's railway in- terests in South Manchuria, the policy of acquiring influence by economic means was adopted by Japan as the last of the Powers and was practiced with great skill. The exploitation of South Manchuria was not undertaken by the Japanese Government directly but 12 " British and Foreign State Papers," Vol. 98, page 740. JAPAN 167 by a powerful joint-stock company in which the Government is the largest shareholder. On June i, 1906. the South Manchurian Railway Company was promulgated for the purpose of operating tlie railway between Dalny and Changchun, including branch lines, the line between Antung and Mukden, and the rich coal mines of Fushun an Yentai.^'"^ The " authorized capital " of the concern was Yen 200,ooo,(X)0, of which the Government held Yen 100,000,000. Of the rest only Yen 20,000,000 were subscribed by and issued to the public.^'* The Govern- ment shares represent the value of the lines, as agreed upon when the company took them over, together with the Yentai and Fushun collieries. The railroad is actually run by the proceeds of Li 2,000,000, of deben- tures issued in London and mostly held by British in- vestors. These debentures are guaranteed, both as to capital and interest, by the Japanese Government, The Japanese Government also guaranteed the shareholders six per cent, on the capital, wdiile the Company pledged itself to repay the Government as soon as the railway should begin to yield sufficient revenue. The South Manchurian Railway Company was for- mally established on Nov. 13, 1906, with Baron S. Goto 13 For the status of the South Manchurian Railway, see Harrison, op. cit., pages 258 ff. See also " Far Eastern Review," Vol. 11, pages 385 ff. 1* See " China Year Book, 1914," Chapter on Communications. l68 FOREIGN FINANCIAL CONTROL IN CHINA as President, and the railways and mines were taken over by this company from the Japanese Government in the spring of 1907. The new company engages largely in enterprises other than those of a public carrier. The scope of the new undertaking indeed was large : The company runs a regular service of ships between Dairen and Shanghai, and owns the fleet of the Dairen Steam- ship Company, coasting in the Gulf of Pechili. The Fushun Colliery, about twenty-five miles east of Muk- den, as well as coal fields and mines at various other places, are under its control. It constructed the great harbor works at Dairen and owns the wharves and shipping facilities of Port Arthur. It provides electric current for many towns and gas as well, where required. It has large hotels at all these places. The Japanese furthermore encouraged industries and brought new ones. They have settled in the country by large num- bers, and to-day it is estimated that there are 100,000 Japanese in South Manchuria. They, last not least, keep an army in the country, the so-called " railroad guards." For in a supplementary agreement to the Portsmouth Treaty " The High Contracting Parties reserve to them- selves the right to maintain guards to protect their re- spective railway lines in Manchuria. The number of such guards shall not exceed fifteen per kilometer, and within that maximum number the Commanders of the Japanese and Russian armies shall, by common accord, JAPAN 169 fix the number of such guards to be employed, as small as possible, having in view the actual requirements." ^^ Full advantage of this clause has been taken by both parties and in the absence of accurate figures the length of line controlled may be taken as the measure of the local military strength. The 700 miles of the South Man- churian Railway system together with other substantial concessions aggregating to over one thousand miles en- able Japan to keep a formidable army in the country. Apart from the system itself, the Company owns from 46,000 to 50,000 acres of land, capable of very profit- able cultivation, the so-called " zones." ^^ About these zones Harrison remarks : ^^ " On receiving from the Russians the expropriated lands within the railway zone, with numerous buildings, the Japanese set aside a cer- tain proportion for the needs of the railway, and trans- ferred the remainder to the settlement administrations to be made use of." According to Harrison " the settlement chief, or socho, superintends the lands and buildings of his division, looks after scholastic, medical, and sanitary matters, and is responsible for proper pre- cautions against accidents from fire or other cause. He is also responsible for the preparation of the annual estimates and accounts of revenue and expenditure. To 15 See " British and Foreign State Papers," Vol. 98, page 739. " See Lawton, "Empires of the Far East," Vol. II, pages 1166 ff. 1^ See Harrison, op. cit., page 256. See whole Chapter XIV of Harrison. T70 FOREIGN FINANCIAL CONTROL IN CHINA this official also belong the imposition of taxes, super- vision of the development of trade and industry in his division, and inspection of public property. . . , All the orders and arrangements of the socho must be submitted to the Chief Director of the railway, by whom they must be sanctioned." In addition to this and as an additional precaution against hasty legislation there exist special committees in several places, subordinate to the Chief of the settle- ment, " but nevertheless at liberty to complain to the Chief Director of the railway against what, in their opinion, constitutes illegal action on the part of the above official." " The subjects of every nationality are free to settle in the railway zone, but they must con- form to all the rules and regulations of the railway com- pany, and must also pay a specific tax for public pur- poses." In the zones the railway builds schools, main- tains hospitals, provides for medical and technical col- lege training, creates townships, erects public buildings, makes roads, constructs telegraph lines and installs tele- phones. In short, this great and most efficient concern exer- cises not only commercial privileges but also administra- tive functions. The company runs the whole railway system, including all lands connected with it, for the Japanese Government; the South Manchurian Railway Company is merely another name for the Japanese Gov- JAPAN 171 ernment. The Japanese Government owns four-fifths of the paid-up capital; the bonds are guaranteed by the Government; and the railway is under supervision of the Japanese Railway Board, which controls all the nationalized railways of Japan. ^^ And through the " guards," the company works hand in hand with the military authorities. While Chinese sovereignty is respected within the concession, the railway with all its lands constitutes an imperium in imperio. Not only do the Japanese enjoy immunity from taxation by the Chinese authorities but the preservation of law and order in the concession is intrusted to the railway com- pany, and the Japanese Government enjoys a correspond- ingly large influence within the whole of the Japanese Sphere of Interest, i.e., all of South Manchuria. Japanese control in South Manchuria, then, as based upon the railway concession inherited from Russia, is much similar to that exercised by Russia in all Man- churia previous to the Russo-Japanese War, although the South Manchurian Railway Company is much more of a commercial enterprise than the Chinese Eastern Rail- way. In order to firmly establish Japanese commerce on a definite basis Millard informs us''' that "the Gov- ernment called some prominent financiers and merchants 1^ See Harrison, op. cit., page 279. 18 See Millard, op cit., page 206. 172 FOREIGN FINANCIAL CONTROL IN CHINA into consultation, and a somewhat extraordinary pro- gram was advanced. For purpose of directing, under the Government, an energetic campaign to monopoHze the foreign trade of Manchuria, what is known as the Manchurian Export Guild was formed in 1906. It in- cluded most of the greater commercial guilds in Japan, such as the Osaka Boseki, Mige Boseki, Kanakin Seis- hoku, Tenima Ormono, and the Okayama Boseki. It was announced that Mitsui and Company were to act as general agents for the guilds and the Government, through its branches in Manchuria; and the Yokohama Specie Bank, the Government's fiscal agent in Manchuria, was to lend its cooperation." Foreign traders thus were confronted by the competition of the Japanese mer- chants, financiers and Government combined. A great aid to Japan's trade was, as the Far Eastern Reviezv remarks, " the economic paternalism of the Japanese Government, which takes the shape of subsidies to steamship lines and the provision of cheap capital to merchants. Assistance is also freely given to the Japan- ese firms by the Japanese semi-official bank in Man- churia." 20 In the matter of railways, Japan also took advantage of the post-bellum situation in order to secure substan- tial advantages for herself or at least to obstruct designs of outsiders, contrary to her interests. A significant 20 See "Far Eastern Review," Vol. 11, page 488. JAPAN 173 and interesting case is offered by the Hsinmintung- Fakumen project. In November, 1907, the Chinese Gov- ernment made a contract with the British firm of Paul- ing and Co. for the construction of an extension of the Imperial Railways of Northern China from the north- em terminus Hsinmintung to Fakumen,^^ fifty miles in length. When the matter became known at Tokyo, Japan objected to further extension of this line on the ground that it would injure the South Manchurian Rail- way. The Far Eastern Revieiv remarks to this : " The Peking Agreement of Dec. 22, 1905, entered into be- tween China and Japan contained a secret clause which bound China not to construct prior to the recovery of the South Manchurian Railway any main line in the neighborhood of and parallel to that railway or any branch line which might be prejudicial to its interests. This self-denying claim, in which China in effect sur- rendered her sovereign rights to construct railways in Manchuria, was made public and successfully invoked by the Japanese Government to obstruct and cause the abandonment of the projected Fakumen Railroad, a branch line of the Northern Railways from Hsinmintung to the market town of Fakumen. China had entered into a signed agreement with a British financial corpora- tion to supply the funds and contracted with a British construction firm to build the line. China's undoubted 21 See " Far Eastern Review," Vol. 11, page 383. 174 FOREIGN FINANCIAL CONTROL IN CHINA intention was to test the strength of the secret agree- ment referred to, and if Japan acknowledged her right to build the Fakumen extensions, the line was to be carried on northwards towards Changchun." ^^ The final triumph of Japanese diplomacy found its expression in Article I of the Sino-Japanese Agreement of Sept. 4, 1909, referring to Manchuria: " The Government of China engages that in the event of its undertaking to construct a railway between Hsimintun and Fakumen, it shall arrange previously with the Government of Japan." -^ The British-American project from Chinchow to Aigun met with a similar fate owing to joint Russo- Japanese representations. Other objects of Japanese policy were the Hsinmintung-Mukden and Antung Muk- den railroads.-^ During the war Japan had constructed a narrow gauge railway between Hsinmintung and Muk- den. This line was transferred to China in 1908. The Japanese, however, knew how to retain control over the line. The Antung Mukden railroad likewise was con- structed during the war by the Japanese army for mili- tary purposes, and Japan insisted after the war, that she be permitted to reconstruct and operate the line as a branch of the South Manchurian Railway. The respec- tive clause VI in the Sino-Japanese Peking Treaty reads 22 " Far Eastern Review," Vol. 9, page 153. 23 See " British and Foreign State Papers," Vol. 102, page 393- 24 See "Far Eastern Review," Vol. 11, page 383. JAPAN 175 as follows : " The Imperial Chinese Government agrees that Japan has the right to maintain and work the mili- tary railway line constructed between Antung and Muk- den and to improve that said line so as to make it fit for the conveyance of commercial and industrial goods of all nations." ^' Finally, Japan secured the Kirin-Changchun Railway and extensions from China. Section b, Clause 3, of the Convention between Japan and China signed at Peking April 15th, 1907, provides as follows: "If the Kirin- Changchun line should hereafter build branch lines or an extension the construction of such lines shall rest of right with the Chinese Government, but if there shall be a lack of capital, application should be made to the South Manchurian Railway Company for an arrange- ment." "^^ The branch lines as well as a participation in the construction of the Changchun-Kirin line were con- ceded to Japan in the above mentioned agreement of Sept., 1909. Referring to several of the later railway concessions the Far Eastern Revieiv remarks : " By securing from China the control and administration of the Kirin- Changchun Railway, and extension of the agreements governing the South Manchurian and Antung-Mukden railways, as well as the refusal of foreign loans for 25 See " British and Foreipn State Papers," Vol. 98, page 740. 26 See " British and Foreign State Papers," Vol. lOi, page 275. 176 FOREIGN FINANCIAL CONTROL IN CHINA railway purposes in South Manchuria, Japan has the satisfaction of knowing that she is now dominant in the country so far as railways are concerned even if she is eventually unable to extract from China the consent necessary to establish her overtly in a supremely favored position politically." -' All the railways in Southern Manchuria, constructed or projected, belong to the one great Japanese state-con- trolled system, and have connection with the Korean military system. They consequently will, aside from commercial advantages, afford Japan further facilities for the movement of troops in case of necessity. This is the opinion of Harrison, who writes : " It can scarcely be doubted that, in the event of hostilities with Russia or China, Japan would not be long about avail- ing herself of the Chinese railroads, which would render her position even stronger." -® In this connection it has to be remembered that South Manchuria stands simultaneously with the supervision of the railway company under the military regime of Japan, based upon an addition to Article III of the Treaty of Portsmouth which grants the right to Japan to main- tain " guards " to protect the railway lines in Man- churia. 27 See " Far Eastern Review," Vol. n, page 375- 28 See Harrison, op. cit., page 292. JAPAN 177 For the first two years after the war. the miHtary grip of Japan upon Manchuria was a tight one and not without legal basis. Japan and Russia in Article III of the Portsmouth treaty mutually engaged : ^^ 1. "To evacuate completely and simultaneously Man- churia except the territory afifected by the lease of the Liaotung Peninsula, in conformity with the provisions of additional Article I annexed to this treaty " ; and 2. " To restore entirely and completely to the ex- clusive administration of China all portions of Man- churia now in the occupation or under the control of the Japanese or Russian troops with the exception of the territory above mentioned." The war then was followed by a " legal " evacuation period during which Manchuria was under Russian and Japanese military control. The end of the so-called evacuation period however, was set as late as March, 1907, thus giving Japan and Russia the right to a two years' military administration of the country. It was mainly during this period that many accusations by Western journalists were heard, pointing to breaches of the doctrines of the " open door." " equal opportunity " and " integrity of China " on the part of Japan. But inasmuch as it is the purpose of this treatise to investi- gate and analyze well-founded facts, we cannot pay any 29 See " British and Foreign State Papers," Vol. 98. page 735. 178 FOREIGN FINANCIAL CONTROL IN CHINA attention to alleged breaches of obligations. Besides, Japan has at several occasions acknowledged and bound herself to adherence to the principles in question. First of all Japan had answered favorably to Mr. Hay's " Open Door Policy " circular sent to the Great Powers in 1899.^° ^^ January 30, 1902, the Anglo- Japanese Offensive and Defensive Alliance was con- cluded,^^ which clearly sets forth that the two govern- ments are specially interested in maintaining the " inde- pendence and territorial integrity of the Empire of China and the Empire of Korea, which pledge has been broken since by Japan, and in securing equal opportunity in those countries for the commerce and industry of all nations." The same words recur in the agreement between Japan and Great Britain of August 12, 1905, made public September 27, 1905 — being a renewal of the alliance — which in its preamble gives the preservation of the integrity of China and maintenance of equal opportunity for all as one of its principal objects.^^ The alliance was reaffirmed in 191 1. In Article IV of the Portsmouth Treaty " Japan and Russia reciprocally engage not to obstruct any general measures common to all countries which China may take 30 The text of the circular, etc., will be dealt with in its proper place in the following chapter on the United States. 31 See Rockhill, op. cit.. No. 16. 32 " British and Foreign State Papers," Vol. 98, page 136. JAPAN 179 for the development of the commerce and industry of Manchuria." ^^ In 1907 two understandings were arrived at by Japan as one party, reaffirming the adherence to the principles in question. Namely: On June 10, 1907, an agreement was concluded between Japan and France, in which the following words occur: "The Governments of Japan and France, being agreed to respect the independence and integrity of China, as well as the principle of equal treatment in that country for the commerce and sub- jects or citizens of all nations," etc.^'* And on July 30th of the same year, a convention between Japan and Russia took place in which the two parties " recognize the independence and territorial integ- rity of the Empire of China, and the principle of equal opportunity in whatever concerns the commerce and in- dustry of all nations in that Empire." *^ On November 30, 1908, a more explicit understanding than that of 1899 was reached between Japan and the United States. At that date notes were exchanged between the two countries, declaring their policy in the Far East as follows : *'^ Article II: The policy of both Governments unin- fluenced by any aggressive tendencies, is directed to the 33 " British and Foreign State Papers." Vol. 98. page 735. 34 See " British and Foreign State Papers." Vol. 100, page 913. 35 See "British and Foreign State Papers," Vol. loi, page 462. 38 See American Journal of International Law, January, 1909. i8o FOREIGN FINANCIAL CONTROL IN CHINA maintenance of the existing status quo in the region mentioned (Pacific Ocean) and to the defense of the principle of equal opportunity for commerce and industry in China. Article IV : They are also determined to preserve the common interests of all powers in China by supporting by all pacific means at their disposal the independence and integrity of China and the principle of equal oppor- tunity for the commerce and industry of all nations in that Empire. And finally two years later Japan and Russia, in the convention of July 4th, 19 10, in relation to Manchuria declared in Article II: ^'^ " Each of the High Contract- ing Parties undertakes to maintain and respect the status quo in Manchuria resulting from all the treaties, conventions, and other arrangements concluded up to this date either between Russia and Japan or between those two powers and China." The different conventions, agreements and so forth, clearly prove that Japan is committed as deeply as other powers are, to the policy of the " open door," " equal opportunity " and " integrity of China." It has always been Japan's emphatic contention that so far no measure she has taken is inconsistent with the doctrines to which she has pledged herself. Indeed strict adherence to the principles of international law 3" See " British and Foreign State Papers," Vol. 103, page 586. JAPAN i8l has according to Count Okuma always been considered the wisest diplomacy. Count Okuma says : " I desire here to emphasize the fact that foreign intercourse must above all things be planned on a large scale, for all diplomatic projects have immediate interest for the whole world ; and that, since foreign policy, or rather, national policy, must be fixed, unchanged, and contin- uous, the best method of diplomacy is to adhere strictly to all principles of international law." ^^ In further defense of Japan against any accusations we have to consider that Japan could not afford to be altogether altruistic in her methods as long as Russia's policy in the north remained a menace to Japan. Con- cerning Japan's justification of her actions in Manchuria by reference to Russian precedent we only need to refer to our chapter on Russia. There we find that the Man- churian Railway, which according to Article VI of the Portsmouth Treaty was transferred to Japan " together with all rights, privileges and properties appertaining thereto " and which according to Article VII was in no wise to be exploited for strategic purposes, had enabled Russia to dominate the whole of Manchuria and at once had given her a predominance in North China which placed other Powers at a marked disadvantage. Russia's railways in that region were specific means for encroach- es See A. Stead, " Japan by the Japanese," chapter Foreign Policy by Count Okuma, page 221. l82 FOREIGN FINANCIAL CONTROL IN CHINA ment upon China, that is, for Russian imperialistic ex- pansion. The Russification of the country had pro- ceeded at a fast pace and other Powers — as for instance Great Britain — were effectively excluded from railway participation. So also was China, and, although accord- ing to the original agreement the Chinese Eastern Rail- way was to be under Chinese direction, only Russians managed the lines. Is it not surprising, then, that Japan, when she fol- lowed Russia in the possession of the railroads and in the control of the country, was detemiined to reap the fruits of her hard won victories without restriction and that Japan, however altruistic her professions might have been, would not readily subordinate her own in- terests to those of China or other foreign powers. For, on behalf of Japan it has been urged that any special advantages she has secured in Manchuria are merely in" the nature of reward for her vast expenditure in blood and treasure, and that, moreover, the control over Man- churia and other parts of Eastern Asia that might fol- low — together with the exploitation of those regions — is a matter of life and death for her welfare and national existence, especially in the face of international economic competition. In this connection it is not only curious but also very significant to observe that Russia in the North followed — or at least pretended to follow — Japan's policy in JAPAN 183 the South. Behind the attitude of both was the ever present en\'>- and mistrust of the other. Both have been enemies and might have continued to be had it not been for the Russian revokition. Therefore we have been given books bearing titles such as the " Coming Struggle in Eastern Asia." The impartial observer, then, must not permit himself to be deceived by the apparent amity between the two Powers which was established in 1907. The Russo-Japanese business agreements in relation to Manchuria concluded on July 30th, 1907, and on July 4th, 1910 — being of the most friendly nature — lead to the assumption that Japan and Russia had made up their minds for matter of convenience — and for the time being — to divide their interests in Manchuria be- tween them, to strengthen their positions in their respec- tive " spheres " and to guarantee to each other the status quo against any possible intruder: for such had supposedly appeared in the person of Mr. Knox, who had urged internationalisation of certain railways in Manchuria and construction of new lines under inter- national auspices.^'"' The efforts of the American state department only hastened the conclusion of the second agreement which took place on the Fourth of July. We quote the text in full : ^^ 38 See Chapters VIT and VIII. *o See " British Foreign and State Papers," Vol. 103, page 586. i84 FOREIGN FINANCIAL CONTROL IN CHINA 1. With the object of facihtating communications and developing the commerce of the nations, the two high contracting parties agree to extend to one another their friendly cooperation with a view to the improvement of their respective railway lines in Manchuria, and the per- fecting of the connecting services of the said lines, and to abstain from all competition prejudicial to the realiza- tion of this object. 2. Each of the high contracting parties undertakes to maintain and respect the status quo in Manchuria result- ing from all the treaties, conventions, and other arrange- ments concluded up to this date, either between Russia and Japan or between those two Powers and China. Copies of the said arrangements have been exchanged between Russia and Japan. 3. In the event of anything arising of a nature to threaten the status quo mentioned above, the two high contracting parties shall enter each time into communi- cation with each other with a view to coming to an under- standing as to the measures they may think it necessary to take for the maintenance of the said status quo. The agreement having been happily concluded, Japan endeavored to take full advantage of the special position she held in South Manchuria. William Blane, in an article, "The Japanese in China." ^^ writes in 1915: 41 See Journal of the American Asiatic Association of July, 1915, page 175- JAPAN 185 " When I went over the works of the South Manchurian Raihvay Company two years ago I was struck by the permanent nature of everything that had been done and that was in progress . . . extensive additions and costly improvements were in progress at the great harbor of Dairen, and the main hne track was being doubled throughout. The Company was making huge profits and sinking the greater part of them in constructional works which will serve for a century after the present agreements expire. The Engineer of the 13th of November, 1914, after describing the railways and drawing attention to the brief tenure of the company adds : In the face of these things Japan, instead of pre- paring to reap returns, keeps putting more money into the business every year." This Russo-Japanese agreement of 19 10 then was the crowning achievement of Japan's Manchurian policy. What are the principal reasons for Japan's success? In the pursuance of her foreign policy it was primarily the monarchical-military and at the same time somewhat oligarchical-paternalistic form of her government — partly traditional, partly copied from Germany — which being well adapted to the special means of Japan has made her so successful. That diplomacy has to rest with the crown and the crown's advisers, and that the goal, once set must not be changed, has been early recognized by Japanese statesmen. Says Count Okuma : " The l86 FOREIGN FINANCIAL CONTROL IN CHINA kind of diplomacy that changes with its director is most pernicious and dangerous.""^- And Douglas, comment- ing upon the Proclamation of the Japanese Constitution, says : " Foreseeing that, in order to maintain national independence and to fulfill what they regard as their mission in the East, unity of control and the unfettered power of employing all the forces of the nation would be indispensable conditions of success, they resolved, while enlisting the sympathies of the people, to secure the crown against excessive popular interference." '^^ Among other means by which Japan has attained her predominant po- sition in Asia is to be placed first in historic importance the alliance of Japan with Great Britain. The immedi- ate practical benefit of the alliance to Japan, renewed during the Russo-Japanese War and again in July, 191 1, was the readier sale of Japanese bonds. The surplus from war funds borrowed in England enabled .the Japanese Government to invest in the South Manchurian Railway. Debentures floated in England have resulted in the expansion of that great corporation at the expense of others, last not least, of Great Britain herself. While Britain, France, Belgium, Germany, and even Russia to some extent have financed their railways themselves, Japan alone has constructed and equipped her railways on *2 See Count Okuma in A. Stead, " Japan by the Japanese," page 222. *3 See Douglas, op. cit., page 201. JAPAN 187 the mainland of Asia almost exclusively with foreign capital, and that capital — thanks to the alliance — is British. But above all, the alliance permitted Japan's entry into the present World War. \\'hen Japan took pos- session of the territory originally leased to Germany, she did so as the representative of Great Britain and her European Allies. At that time Count Okuma claimed that:^'* "Every sense of loyalty and honor obliges Japan to cooperate with Great Britain to clear from these waters the enemies who in the past, the present and the future menace her interests, her trade, her shipping, and her people's lives." And the Japanese Foreign Office addresses the United States as follows : '^^ " Aside from the history of the seizure of the place by Germany and her conduct dating back to and including her intervention, in conjunction with Russia and France after the Chino-Japanese War, it is absolutely necessary to eliminate such possession completely if Japan is to restore immediately complete peace in the Far East in accordance with the terms of the Anglo-Japanese alli- ance." Japan's interference, then, is based upon Article A, of the Preamble in conjunction with Article I, of the treaty ** Journal of the American Asiatic Association, Vol. XIV, No. 8, page 231. *^ Ibidem. i88 FOREIGN FINANCIAL CONTROL IN CHINA of July 13, 191 1, the Preamble stating as object of the treaty,'*^ " the consolidation and maintenance of the general peace in the regions of Eastern Asia and India." The seizure of Kiaochau was connected with various substantial advantages to Japan : Japan occupied the Kiaochau-Tsinanfu Railway. This seizure apparently meant a violation of Chinese terri- tory and the Chinese protested against it as falling en- tirely out of the German territory which has been leased. But from the Japanese standpoint it would be dangerous to leave the railway in the hands of the enemies. Furthermore, the Japanese secured from China sub- stantial and exclusive concessions in Shantung. To that end the two countries concluded a treaty respecting the Province of Shantung and exchanged notes respecting the restoration of the leased territory of Kiaochau Bay — both on the 25th day of the 5th month of the 4th year of Taisho.*^ We quote the important passages of the treaty, etc. : Article I : The Chinese Government agrees to give full assent to all matters upon which the Japanese Govern- ment may hereafter agree with the German Government relating to the disposition of all rights, interests and con- cessions which Germany, by virtue of treaties or other- *^ See " British and Foreign State Papers," Vol. 104, page 173. *'' The text of the treaties and exchange of notes is to be found in the Supplement to American Journal of International Law, Vol. 10, No. I, pages i ff. JAPAN 189 wise, possesses in relation to the Province of Shan- tung. Article II : The Chinese Government agrees that as regards the railway to be built by China herself from Chefoo or Lungkow to connect with the Kiaochau- Tsinanfu railway, if Germany abandons the privilege of financing the Chefoo-W'eihsien line, China will approach Japanese capitalists to negotiate for a loan. And as to Kiaochau : " When after the termination of the present war, the leased territory of Kiaochau bay is completely left to the free disposal of Japan, the Japanese Government will restore the said territory to China under the following conditions : " I. The whole of Kiaochau bay to be opened as a com- mercial Port. " 2. A concession under the exclusive jurisdiction of Japan to be established at a place designated by the Japanese Government." Finally, on the same day Japan and China concluded a treaty and exchanged \'arious notes respecting South Manchuria and Eastern Inner Mongolia. The respec- tive agreements of this date may be summed up as fol- lows:'*® The lease of Port Arthur and Dalny and the terms of the South Manchuria Railway and the Antung- Mukden Railway shall be extended to 99 years. *^ See American Journal of International Lazv, Vol. 10, No. i, Supplement pages 5 fF. igo FOREIGN FINANCIAL CONTROL IN CHINA Japanese subjects in South Manchuria and Eastern Inner MongoHa receive further privileges as to trad- ing, travehng and leasing properties. China will open suitable places in these regions as commercial ports. Railroad agreements between Japan and China may be revised as soon as more advantageous terms than those existing are granted to other foreigners. Japanese subjects shall investigate and select mines in specified areas within said regions. Loans for building railways in said regions may be negotiated with Japanese capitalists jn preference to other foreigners. If foreign advisers or instructors on political, finan- cial, military or police matters are to be employed in South Manchuria, Japanese may be employed first. Finally, China and Japan agreed upon cooperation in the working of the Hanyehping Company, China not being permitted to convert it into a state enterprise nor to cause it to borrow and use foreign capital other than Japanese. These agreements require but little commentary. They strengthen Japan's position in Southern Manchuria through the extension of all leases to 99 years and through the provision of foreign advisers, if such are to be employed, they give to Japan more exclusive con- cessions and privileges in Shantung, Eastern Inner JAPAN 191 Mongolia and Southern Mancliuria; and they gi\e pref- erence to Japanese financiers in the building of new rail- roads in said regions. There are three points we now mean to emphasize: Firstly, the United States-Japan agreement of November 2, 19 1 7, has dispersed much of the doubt and suspicions about Japan's ulterior aims in China which had been voiced so freely throughout the world. "'^ Referring to Japan's special interests in China the agreement says : " The United States has every confidence in the repeated assurances of the Imperial Japanese Government that, while geographical position gives Japan much special interests, they have no desire to discriminate against the trade of other nations or to disregard the commercial rights heretofore granted by China in treaties with other powers." The agreement also denies that the two gov- ernments " have any purpose to infringe in any way the independence or territorial integrity of China." Secondly, Japan's control over her new spheres will again primarily be exercised through railways ; in other words, it will be financial. Thirdly, Japan is extending her control in China while the control of other nations is declining. Japan has taken over the protection of British interests in Eastern Asia. She has eliminated Germany. She has concluded a treaty with Russia, which came near ** See especially F. McCormick, " The Menace of Japan." 192 FOREIGN FINANCIAL CONTROL IN CHINA to being an alliance. The text of this treaty, concluded on July 3rd, 1916, reads as follows: ^^ " The Imperial Governments of Japan and Russia, having resolved by united efforts to maintain permanent peace in the Far East, have agreed upon the following. *' Article I : Japan will not become party to any arrangement or political combination directed against Russia. Russia will not become party to any arrange- ment or political combination directed against Japan, " Article II : In case the territorial rights or special interests in the Far East of one of the contracting parties recognized by the other contracting party are menaced, Japan and Russia will act in concert on the measures to be taken in view of the support or cooperation neces- sary for the protection and defense of these rights and interests." Mr. Kawakami makes the following comment upon this treaty : " To call the new convention an alliance is, perhaps, not quite correct. A treaty of alliance must provide mutual obligations on the part of the high con- tracting parties to render armed assistance to each other in case their respective interests are in danger. The most significant part of the convention lies in the wide application which it apparently permits. While it is obvious that the covenant aims chiefly to secure the respective interests of the contracting parties in Man- ^'^ See American Journal of hitcrnat'wnal Law, Siippl. X, 239. JAPAN 193 churia and Mongolia, its scope is not restricted to these two countries but covers the entire Far East." ^^ An additional agreement between Russia and Japan throws considerable light upon the real value of the convention to Japan. ^' The Chinese Eastern Railway has been sold by Russia to Japan from Changchun to Lao- shaokou for six million yen. The length is 71 miles. Russia furthermore has extended to Japan the privilege of navigating the Second Sungari River. In other words Japan's interests in Manchuria are expanding. Russia was under considerable obligation to Japan for war supplies, and otherwise ; the convention was the quid pro quo. Last not least has Japan welcomed the decision of the United States to enter the war. She has gladly offered the protection of American interests on the whole Pacific and a close cooperation with the United States in the pursuance of the war. In return for these services she has now received an acknowledgment of her " special interests " in China by the government of the United States. Aside from the declarations of adherence to the " open door " and " independence and territorial integrity of China " principles, the agreement of Novem- ber 2, 19 1 7, contains the following most important pas- sage : " The governments of the United States and ■"■i See K. K. Kawakami, Review of Reviews, Sept.. 1916. •'•2 See Kawakami, ibidem, and " Far Eastern Review," Aug., 1916. 194 FOREIGN FINANCIAL CONTROL IN CHINA Japan recognize that territorial propinquity creates special relations between countries, and, consequently, the government of the United States recognizes that Japan has special interests in China, particularly in the part to which her possessions are contiguous." This agree- ment is doubtless one of the greatest achievements of Japanese diplomacy. It removes all danger of friction between the United States and Japan; it secures the in- dependence and territorial integrity of China and the " open door " and equal opportunity for commerce and industry in China; it opposes "the acquisition by any government of any special rights or privileges that would affect the independence or territorial integrity of China or that would deny to the subjects or citizens of any country the free enjoyment of equal opportunity in the commerce and industry of China " ; and last, not least, it recognizes Japan's predominant position in Eastern Asia; Thus is Western control in China gradually declining while Japanese control is in the ascendancy. All treaties, conventions, agreements, and alliances through which Japan is consolidating her position are concluded for the consolidation and maintenance of a permanent peace in Eastern Asia. This is by no means merely a phrase. It is the crux, the key, to the whole Far Eastern Ques- tion : A Permanent Peace, but a Japanese Peace, a Pax Japonica. Such is the secret, then, of Japan's control in China : an Eastern Asiatic Doctrine with Japanese Hege- JAPAN 195 mony — Japan to be Sovereign Arbiter and High Pro- tector of Eastern Asia. To quote the words of Aubert: " Paix Japonaise de I'Extreme-Orient, comme jadis il y eut une Pax Romana dans le monde mediterraneen, comme aiijourd'hui il y a ime paix Britannique aux Indes, une paix Americaine dans les deux Ameriques, c'est-a-dire la paix dans une partie du monde imposee par un peuple fort qui ne tolere point de querelles privees ou d'agression etrangere sur le territoire qu'il protege. Arbiter souverain entre les peuples Extreme-Orientaux et leur defenseur contre toute attaque des puissances occidentales, tel peut apparaitre le Japon." ^^ =« Aubert, " Paix Japonaise," page 37. CHAPTER VII UNITED STATES The United States is the only great nation that has maintained throughout its relations with China a con- sistent attitude of unselfishness and of a decent consid- eration and respect for the sovereign rights of the Chinese people. Not only has the United States done this in her own relations, but she has frequently attempted to make others do likewise, be it indirectly through her example or directly through soliciting adherence to the open door principle. It is obvious then that without a reference to America's policy our investigation would be incomplete — although the United States has herself never exercised any " control " whatsoever. From the inception of American relations with China at the birth of the republic, when George Washington commissioned as consul Major Shaw, down to the present day America has made no attempt to obtain an acre of Chinese territory. She has contented herself with the development of an extensive trade and diplomatically with the establishment and maintenance of friendly relations. Thus the American Secretary of State de- clined in 1857 to Lord Napier to participate in the 196 UNITED STATES 197 Chinese War.^ In the instructions to the American representative in China of IMay 30th, 1859, "^^'^ ^^^ ^^'^^ following significant passage : ^ " This country, you will constantly bear in mind, is not at war with the Govern- ment of China, nor does it seek to enter that empire for anv other purposes than those of lawful commerce, and for the protection of the lives and property of its citi- zens. The whole nature and policy of our Government must necessarily confine our action within these limits, and deprive us of all motives, either of territorial aggrandizement or the acquisition of political power in that distant region." In the following year the United States concluded a Treaty of Peace, Amity, and Com- merce with China. In this treaty, made at a time when the Chinese Government appeared to be peculiarly friendless, we find the remarkable stipulation that "if any other nation should act unjustly or oppressively (towards China) the United States will exert its good offices, on being informed of the case, to bring about an amicable arrangement of the question, thus showing their friendly feelings." •"' It was the American envoy to China, Anson Burlin- game, who first advocated the " open door " and called a halt to the attempts at selfish exploitation which appeared to guide the foreign powers in their attitude 1 See Senate Document 35th Congress, ist Session, Vol. 12, No. 47. 2 See Senate Document 35th Congress, ist Session, Vol. 12, No. 47. » See Malloy, " Treaties," Vol. i, page 212, Article I. 198 FOREIGN FINANCIAL CONTROL IN CHINA toward China. So well had he gained the sympathy and friendship of the Chinese people that he was invited to become the head of a Chinese embassy to all the treaty powers. The Burlingame treaty, negotiated between China and the United States, was strikingly fair and gave full recognition to China of her rights of eminent domain over all her territory, even including that occu- pied by foreign merchants.'* In Article VIII " The United States, always disclaiming and discouraging all practices of unnecessary dictation and intervention by one nation in the affairs or domestic administration of another, do hereby freely disclaim and disavow any inten- tion or right to intervene in the domestic administration of China in regard to the construction of railroads, tele- graphs or other material internal improvements." The formal declaration of the open door doctrine was made in 1899. Towards the close of the nineteenth century the commercial and political position of the United States in China had begun markedly to decline. The reason for this is mainly to be found in the activities of other Powers. "When in 1894, — remarks Rock- hill ^ — the new era of rapid encroachment on China by its powerful neighbors began, it became apparent to the United States that if it did not take measures to check the movement its trade would be wiped out, its * See Malloy, " Treaties," Vol. I, page 236, Article I. ^ See Journal of the American Asiatic Association, Vol. XIV, No. II. UNITED STATES 199 religious and educational interests restricted, and its influence and prestige with the Chinese reduced to naught." The W^ashington Government readily recog- nized the danger and initiated international action in China's favor. \\'ith a view to securing equal oppor- tunities in the development of China's trade, which was believed to offer vast fields for commercial and financial enterprise, America's first object was to prevent the par- tition of China, and particularly the absorption of Man- churia by Russia, and also the acquisition by any single Power of exclusive interests and " rights." To that end 'Mr. Hav sent his famous notes to the several Powers. The so-called policy of " open door," for the first time officially pronounced at that occasion, demanded formal assurances that each power within its respective sphere of whatever influence : " " First : Will in no way inter- fere with any treaty port or any vested interest within any so-called ' sphere of interest ' or leased territory it may have in China. " Second: That the Chinese treaty tariff of the time being shall apply to all merchandise landed or shipped to all such ports as are within said ' sphere of interest ' (unless they be ' free ports '), no matter to what nation- ality it may belong, and that duties so leviable shall be collected by the Chinese Government. •5 See Rockhil], op. cit., No. 28. Sec also " Foreign Rclntions of the United States," 1899, pages 128 ff. 20O FOREIGN FINANCIAL CONTROL IN CHINA " Third : That it will levy no higher harbor dues on vessels of another nationality frequenting any port in such ' sphere ' than shall be levied on vessels of its own nationality, and no higher railroad charges over lines built, controlled or operated within its ' sphere ' on mer- chandise belonging to citizens or subjects of other nation- alities transported through such ' sphere ' than shall be levied on similar merchandise belonging to its own nationals transported over equal distances." All powers promptly acknowledged adherence to the principle of the " open door " as set out in the circular. But the proposition, as Mr. Willard Straight remarks, " favorably received at first and reaffirmed in the nego- tiations which followed the relief of Peking, won the adherence of other nations not because of any particular consideration for China but because of their mutual jealousy and their realization that partition would im- pose upon them responsibilities which they might find it difficult to bear. They did not therefore surrender the ports which they had forcibly leased, but their accep- tance of the ' open door ' doctrine nevertheless marked the beginning of a financial and commercial, rather than territorial, definition of their respective interests." ^ The United States should find several other occasions to reen force the demand for " open door." The next step taken in China's favor was a circular note of July ' See W. Straight, " China's Loan Negotiations," page 124. UNITED STATES 20I 3, 1900, inviting the Powers cooperating in China against the Boxers to adhere to the principles maintained by the United States on the Chinese question.^ In this circu- lar Mr. Hay declared the policy of the United States to be : " To seek a solution which may bring about permanent safety and peace to China, preserve Chinese territorial and administrative entity, protect all rights guaranteed to friendly powers by treaty and international law. and safeguard to the world the principle of equal and impartial trade with all parts of the Chinese Em- pire." In 1901 the United States refused to assent to the imposition of an oppressive indemnity upon China which would make her the fiscal vassal of foreign powers for an indefinite period. Later on the American Gov- ernment remitted to China a substantial proportion of its Boxer indemnity. On February 1st, 1902, Mr. Hay sent a memorandum to the Powers protesting against monopolistic concessions made to Russia by China, which would " distinctly contravene treaties of China with foreign Powers, affect rights of citizens of the United States by restricting rightful trade, and tend to impair sovereign rights of China and diminish her ability to meet international obligations." '-* America's adherence to the '' open door " doctrine found finally an expression in the agreement between the 8 " Foreign Relations of the United States," Appendix to 1901, Af- fairs in China, page 12. » See " Foreign Relations," 1902, page 275. 202 FOREIGN FINANCIAL CONTROL IN CHINA United States and Japan of November 30th, 1908/'^ in which we find the following passages : " The policy of both Governments, uninfluenced by any aggressive ten- dencies, is directed to the maintenance of the existing status quo in the region above mentioned and to the defense of the principle of equal opportunity for com- merce and industry in China. . . . They are also de- termined to preserve the common interest of all powers in China by supporting by all pacific means at their dis- posal the independence and integrity of China and the principle of equal opportunity for commerce and indus- try of all nations in that Empire." The year 1908 saw also an unofficial reaffirmation of the same policy, when Mr. William Howard Taft addressed the Chamber of Commerce at Shanghai. Since the foreign policy of the United States was subsequently to be directed by Mr. Taft, the respective passage of his speech requires quo- tation : " The United States and others who sincerely favor the open door policy will, if they are wise, not only, welcome, but will encourage this great Chinese Em- pire to take long steps in administrative and govern- mental reform, in the development of her natural resources and the improvement of the welfare of her people. In this way she will add great strength to her position as a self-respecting Government, may resist all " See Malloy, " Treaties," Vol. I, page 1046. UNITED STATES 203 possible foreign aggression seeking undue, exclusive or proprietary privileges in her territory, and without foreign aid enforce an open door policy of equal oppor- tunity to all. I am not one of those who view with alarm the effect of the growth of China with her teem- ing millions into a great industrial empire. I believe that this instead of injuring foreign trade with China would greatly increase it, and while it might change its character in some respects, it would not diminish its profit. A trade which depends for its profit on the backwardness of a people in developing their own resources and upon their inability to value at the proper relative prices that which they have to sell and that which they have to buy is not one which can be counted upon as stable or permanent. . . . For the reasons I have given, it does not seem to me that the cry of ' China for the Chinese ' should frighten any one. All that is meant by that is that China should devote her energies to the development of her immense resources, to the elevation of her industrious people, to the enlargement of her trade and to the administrative reform of the Empire as a great national government. Changes of this kind would only increase our trade with her. Our greatest export trade is with the countries most advanced in business methods and in the development of their particular resources. In the Philippines we have learned that the policy which is best for the Filipinos is best in 204 FOREIGN FINANCIAL CONTROL IN CHINA the long run for the countries who would do business with the Islands." ^^ Besides its political importance Mr. Taft's speech is of great significance since it inaugurates a period of more vigorous participation on the part of America in the financial development of the Chinese Empire. Ameri- can finance in China had up to then been singularly un- successful, and had met with several failures. The first instance of this kind was the failure of American fi- nanciers to obtain the contract for the construction of the Peking-Hankow line. The American group was working hard to obtain this concession. But in 1907 the Belgian Societe d' Etude de Chemins de fer en Chine appeared on the scene at the right moment and with the material and moral backing of France and Russia obtained the concession in May of the same year.^- American financiers then formed the American-China Development Company under Mr. Calvin Brice, with the purpose of building the Hankow-Canton Railway. A contract was signed between this company and Dr. \Yu Ting-Fang acting as representative of Mr. Sheng Hsuan-Huai in April, 1898.^'^ The company was to provide L4, 000,000. In 1899 Mr. Parsons surveyed 11 See Millard, op. cit, page 375. 12 See U. S. Monthly Consular Reports of 1898, Vol. LVIII, No. 218. 13 See British Blue Books, " China," No. i. 1899, Vol. CIX, pages 336-339- UNITED STATES 205 the line. To go into the details of the contract is un- necessary since it is a dead letter to-day. For very soon a French-Belgian combination began to undermine the scheme which with the death of Mr. Brice had lost its main supporter. That the Belgians themselves ultimately suffered defeat must be ascribed in the main, accord- ing to Mr. Kent, to the course taken by the Russo- Japanese War.^'* The American element became para- mount again by the influence of J. P. Morgan. Finally, however, the Huanese party, supported by the Progres- sives of Kuangtung, pressed for the annulment of the concession, which was arranged in September, 1905, the American Government being glad to rid itself of any fur- ther connection with a business that had been discredit- able from the outset. The road was given over to the provincial authorities. The third large scale American railroad project that remained without success was Mr. Harriman's Man- churian railroad scheme which served as forerunner to ]\Ir. Knox's Manchurian " neutralization " scheme. A detailed account of these negotiations is given in J. O. P. Bland's l)ook on " Recent Events and Present Policies in China," of which account we shall give a brief sum- mary. ^'^ In September, 1905, shordy after the signature of the 1* See Kent, op. cit., pages no ff. 15 See Bland, op. cit.. Chapter XI. 2o6 FOREIGN FINANCIAL CONTROL IN CHINA Portsmouth Treaty, Mr. E. H. Harriman proposed to Japan a joint American-Japanese ownership and work- ing of the South Manchurian Railway. The proceed- ings on the side of China and Japan were, in Mr. Bland's words, " so instinct with duplicity and diplomatic sharp practice that it is impossible to form an opinion on the real merits of this peculiar question." The negotiations did not bear any fruit and nothing was heard of Mr. Harriman's scheme until 1909. In the meanwhile the Chinese Government, represented by Tang Shao-yi, had, in 1907, arranged with Mr. W. D. Straight, United States Consul-General at Mukden, for the creation of a Manchurian Bank. This institute, fi- nanced by American capital, was to be the financial agent of the Manchurian Government, and was to undertake, together with British financiers, the construction of a line from Hsinmintung to Aigun and other important enterprises for the development of the commerce and industry of Manchuria. For the establishment of the institute a loan of $20,000,000 was intended and Messrs. Kuhn, Loeb and Co. of New York signified to the State Department at Washington their readiness to undertake to finance the Manchurian Bank. But owing to a change in China's policy following the death of the Emperor Kuang Hsu and due to Japanese obstruction the scheme fell through late in 1908. In December of the same year negotiations were UNITED STATES 207 opened at New York in regard to the Chinese Eastern Railway which the Russian Government was wilhng to sell to American financiers provided Japan would agree to sell the South Manchurian line. Both schemes seemed to promise success. But in 1909 Mr. Harriman died and his plans died with him. Nevertheless, Mr. Harriman's schemes had borne fruit in so far as they served as the foundation to Mr. Knox's scheme for the neutralization of the Manchurian railways which was to meet with such spectacular fail- ure. Mr. Knox in 1909 submitted his scheme simul- taneously to the British, German, Russian, Japanese and Chinese Governments without having previously received Russia's and Japan's acquiescence. The whole proposi- tion may be best illustrated by quoting Mr. Bland : ^^ " The purport of Mr. Knox's scheme amounted to a proposal that the Powers addressed should authorize the orgaijization of an international syndicate to buy out the Russian and Japanese railway interests in Manchuria. In failing to consult Russia and Japan separately, the Secretary- of State apparently assumed that the results of the negotiations which had taken place between the governments of these powers and Mr. Harriman war- ranted him in taking their consent for granted. Politi- cally speaking, everything in the situation of the moment pointed to the necessity of securing, at least, the specific '* Sec Bland, op. cit., pages 317 ff. 2o8 FOREIGN FINANCIAL CONTROL IN CHINA approval of the Russian Government on behalf of Mr. Harriman's schemes before launching the international scheme as a definite proposal. . . . The scheme as pre- sented was a political gaffe, and the blunder was aggra- vated by the suggestion that, if the powers were unwill- ing to join in the general neutralization scheme, they should at least unite in the financing and construction of the Chinchow-Aigun Railway. In other words, if Russia and Japan were unwilling to abandon their ' special interests ' in this region, they and the other powers were invited to create new interests to compete with those of the existing railways. . . . Their suspi- cions thus aroused, the neutralization scheme was doomed, and the Russo-Japanese entente to divide Man- churia and Mongolia began from this moment to assume definite form and substance. Russia and Japan politely but firmly rejected Mr. Knox's proposals. . . . The immediate result of the American neutralization scheme was the Russo-Japanese agreement of the 4th of July, 1910." Russia and Japan having rejected Mr. Knox's pro- posals, there is no wonder then that the Chinchow-Aigun Railway scheme was likewise doomed. " It was de- nounced as a deep-laid plan for attacking Russian terri- tories in Eastern Siberia and Russia's special interests in Mongolia and Manchuria," says Bland. In recent times the southern half of it, or practically the southern UNITED STATES 209 half of it, has been granted to Japan by China, and now Russia has obtained the right to cover the northern sec- tion, which, however, does not exactly correspond with the route as planned originally.^' Russia's railway is to run from Blagoveshchensk, on the left of the Amur River, to Aigun, Mergen and Harbin, with a connection between Mergen and Tsitsihar. The line gives Russia the final political dominance over her North-Manchurian sphere. The American Government's policy was irreproachable and just. ]\Ir. Bland calls it " a policy of righteous- ness, tempered by enlightened self-interest — but it required the delicate handling of a Aletternich to make it effective and to dominate the equally enlightened self- interest of other powers." ^^ The interests of the powers concerned happened to run in an opposite direc- tion ; their " control " in China would have been greatly diminished had the American proposal been realized. Consequently the American policy found much opposi- tion and criticism, "M. Leroy Beaulieu, the eminent French scholar, for instance, criticizes as follows : ^^ " Les diverses puissances europeennes ayant indique, sous une forme ou sous une autre, que leur attitude vis- 1" See "Far Eastern Review." Vol. 11, page 151. ^® See Bland, op. cit., page 319. 13 See P. Leroy Beaulieu, " Les fitats-Unis, Lc Japon et la Rus- sie dans le Nord Du Celeste-Empire. L'Economiste Eran(;aise," March 19, 1910, page 405. 2IO FOREIGN FINANCIAL CONTROL IN CHINA a-vis de la proposition americaine etait, en definitive, subordonnee a celle des deux principaux interesses, la cession des chemins de fer existant en Mandchourie est, aujourd'hui, une question resolue par la negative et abandonnee. Mais la ne se bornait pas I'initiative americaine. ... La diplomatie americaine est encore un peu jeune et fruste, elle I'a montre en cette occasion, ou elle a use d'habiletes quelque peu pueriles. Rendre publiques des propositions aussi graves que le rachat et la neutralisation des chemins de fer russes et japonais de Mandchourie et la construction d'une nouvelle grande ligne dans cette province, sans avoir preablement negocie avec Tokio et Saint-Petersbourg, c'etait commettre un acte assurement peu aimable sinon discourtois, et c'etait aggraver encore, par un manquement de forme, des dispositions qui devaient necessairement etre peu favor- ables au fond." In spite of this diplomatic faux pas the world gave, nevertheless, to America credit for appreciating the dangerous situation in Manchuria and for the courage to face it. At the same time a vigorous initiative on the part of American finance helped much towards strengthening American prestige in the Orient. The Manchurian bank question marked the beginning of negotiations which led to the organization of an Ameri- can group, the conclusion of the currency loan and the formation of an international syndicate. The United UNITED STATES 211 States Government had recognized that it could not be of any real service to China except through its coopera- tion with other powers. When, therefore, in May, 1909, the British, French and German financial groups were about to conclude an agreement for the construction of the Hukuang Railways, the United States demanded admission, last not least in view of the fact that the Hukuang loan reopened the question of customs, revision in which the American Government was keenly inter- ested.2« To this Willard Straight remarks:-' "In order, therefore, that the United States might be entitled to a practical, and not merely to a theoretical, voice in this matter, as well as to assure to American manufac- turers a share in the profits of Chinese railway construc- tion and the business arising therefrom, it was essential that representative American capitalists should partici- pate in the Hukuang loan. The Department of State offered this opportunity to the bankers already interested in the loan proposed by Mr. Tang Shao Yi and the American Group was organized, creating an instrument which it was hoped might enable the Administration not only to further the interests of American trade, but effectively to assist China in obtaining the consent of the powers to the customs revision she so greatly desired." 20 See " Foreign Relations," 1909, page 160. 21 See Straight, op. cit., page 127. 212 FOREIGN FINANCIAL CONTROL IN CHINA The Administration's point of view and interest in the matter finds an excellent illustration in the telegram which President Taft sent to the Prince Regent of China on July 15th, 1909. President Taft writes: "I am disturbed at the reports that there is certain prejudiced opposition to your Government's arranging for equal participation by American capital in the present railway loan. To your wise judgment it will of course be clear that the wishes of the United States are based, not only upon China's promises of 1903 and 1904, confirmed last month, but also upon broad national and impersonal principles of equity and good policy in which a regard for the best interests of your country has a prominent part. ... I have an intense personal interest in making the use of American capital in the development of China an instrument for the promotion of the welfare of China, and an increase in her material prosperity without en- tanglements or creating embarrassments affecting the growth of her independent political power and the preser- vation of her territorial integrity." The admission of the American group to the Hukuang loan and the various international loan negotiations will be subject matter of the following chapter. The reason for the ultimate withdrawal of the American group from the international combine, however, is a matter of strictly American policy, which therefore requires our immediate attention. The American Banking group UNITED STATES 213 withdrew, due to President Wilson's refusal to continue the moral support of the Government. In support of his refusal. President Wilson gave in part this state- ment to the press : -- " The conditions of the loan seem to us to touch very nearly the administrative independ- ence of China itself ; and this administration does not feel that it ought, even by implication, to be a party to those conditions. The responsibility on its part which would be implied in requesting the bankers to undertake the loan might conceivably go the length in some un- happy contingence of forcible interference in the finan- cial, and even the political affairs of that great Oriental State, just now awakening to a consciousness of its power and of its obligations to its people. The condi- tions include not only the pledging of particular taxes, some of them antiquated and burdensome, to secure the loan, but also the administration of these taxes by foreign agents. The responsibility on the part of our government implied in the encouragement of a loan thus secured and administered is plain enough and is obnox- ious to the principles upon which the government of our people rests. . . . Our interests are those of the open door — a door of friendship and mutual advantage. This is the only door we care to enter." President Wilson's objections were exclusively directed against certain " control " provisions, which will be 22 See Straight, op. cit.. page 159. 214 FOREIGN FINANCIAL CONTROL IN CHINA analyzed in the following chapter. His motives were based upon the desire to be of a genuine friendship and of an ultimate benefit to China as well as to America. They expressed a high regard for the sovereign rights of China. Yet the President's action has found criticism coming from American quarters closest in contact with the Chinese situation. Mr. Rockhill, a short time before his death, in 1914, made the following comment : -^ " Before retiring from the scene of activity in China our Government, in 1909, made one more attempt to maintain the policy of the ' open door ' and justify the expectations of the discoverers of the panacea called ' dollar diplomacy,' by securing American financial participation in several important loans which the Government of China was seeking to negotiate with various foreign banks. I will not dwell on the stirring incidents which marked the fleeting appearance of America in the field of finance and politics in China, but I cannot pass it by without mention of the permanent moral benefits it brought us, the practical assistance it rendered China while it lasted, in defending her rights and interests, and the profound regret of China and her friends when, moved by idealist views and imperfect information, the present administra- tion at Washington saw fit, in the spring of last year, to withdraw its support from the American banks. 25 See "Far Eastern Review," Vol. 11, page 229. UNITED STATES 215 While declaring that ' our interests are those of the open door, a door of friendship and mutual advantage, this is the only door we care to enter,' it declined to take a step to show the one or to secure the other. I only- know of one blow equally heavy which has been dealt our interests, our prestige, and our influence in China: it was the cancellation, in 1905, of the concession of the American-China Development Company. ... In con- clusion it seems clear to me that so long as we shut our eyes to the undoubted fact that, in the East at least, from Stamboul to Tokyo, politics, finance, and trade go hand in hand, and that neither the profits of trade can be fully reaped nor our influence and prestige be ade- quately upheld without incurring the responsibilities incident to political and financial activity, we must be content to play a modest, effaced role in the Far East, unworthy, in my opinion, of our great country and its vast interests in the Pacific." " Dollar diplomacy," mentioned by Mr. Rockhill, has been defined by Mr. Willard D. Straight as the " logical manifestation of our national growth, and the rightful assumption by the United States of a more important place at the council table of nations. The new policy aims not only to protect those Americans already en- gaged in foreign trade but to promote fresh endeavor and by diplomatic action pave the way for those who have not yet been, but who will later be, obliged to sell 2i6 FOREIGN FINANCIAL CONTROL IN CHINA either capital or goods abroad." ^* Mr. Straight, repre- sentative of the American group, was a most energetic promoter of the international syndicate. He wrote in 1913:-^ "It is to China's interest that this combina- tion should be maintained, and it is to the interest of China as well as of the United States, that we should retain our present position therein. China's great prob- lem to-day is that of finance. It is to her advantage that we are entitled to a practical voice in its solution, and it is to the advantage of American trade that the United States continue to be an active party in Chinese loan negotiations." A similar stand has been taken by the American Asso- ciation.^*' " The policy of the United States Govern- ment in discouraging the investment of American capi- tal in Chinese railways and in loans to the Republic has been detrimental to our merchants, but as the adminis- tration gains a clearer view of the situation in China and begins to recognize the things that must be done if the United States is to share in this vast trade area, there are possibilities of some modifications of this policy which is believed to have been put forth without suffi- cient investigation and, at that, on sentimental grounds. This Association should use every means in its power to awaken the Government in Washington through -* See Straight, op. cit., page 121. 25 See Straight op. cit., page 157. 26 See "Far Eastern Review," Vol. 11, page 360. UNITED STATES 217 whatever means it can find, to the necessity for a more vigorous poHcy in China to secure for us and to hold open when secured as liberal advantages for the extension of our trade as are now enjoyed by other nationalities." Meanwhile American finance, under the leadership of the American International Corporation, has attempted to undertake developments in China independently and without government support. In doing so the Corpora- tion wanted to avoid transactions clothed with any political character, adhering strictly to business lines. In their recent contracts for railways in Central China the American financiers propose to proceed on a new basis. ^^ The Chinese Government was to remain owner of the lines constructed and would issue the bonds. Since the Chinese have not as yet a sufficient number of engineers and technical railway men to construct and operate the lines arrangements were to be made whereby the Chinese Government will secure the services of American experts to assist them in the management of the new roads. For services in financing and in directing operation the Cor- poration would receive a certain percentage of the profits in operation. The latest developments indicate a return of the United States Government to the policy of approving loans by American bankers to China.^^ The bankers will give 2' See Journal of the American Asiatic Association, Vol. XVI, No. 12, pages 373 ff. 28 See New York Times, July 30, 1918. 2i8 FOREIGN FINANCIAL CONTROL IN CHINA assurance " that they will cooperate with the Govern- ment and follow the policies outlined by the Department of State." While the Government assures " that, if the terms and conditions of the loan are accepted by this Government and by the Government to which the loan is made, in order to encourage and facilitate the free intercourse between American citizens and foreign states which is mutually advantageous, the Government will be willing to aid in every way possible and to make prompt and vigorous representations and to take every possible step to insure the execution of equitable contracts made in good faith by its citizens in foreign lands." It is also " hoped that the American group will be associated with bankers of Great Britain, Japan and France," A very important point is the hoped for financial cooperation between the United States and Japan. The American-Japanese agreement of November 2, 19 17, bids fair to be the foundation for a financial cooperation between the two countries in China.^® It has removed, in the words of Mr. Lansing, '* a feeling of suspicion as to the motives inducing the activities of the other in the Far East, a feeling which, if unchecked, promised to develop a serious situation." The two governments furthermore explicitly " deny that they have any purpose to infringe in any way the -^ See end of Chapter "Japan." UNITED STATES 219 independence or territorial integrity of China, and they declare furthermore that they will always adhere to the principles of the so-called ' open door ' or equal oppor- tunity for commerce and industry in China." In fact, the reaffirmation of the " open door " policy and the introduction of a principle of non-interference with the sovereignty and territorial integrity of China are reassur- ing- factors in the Far Eastern Question for the reason that both Japan and the United States, by this declara- tion, bind themselves to see that China will obtain a fair deal, not only at the hands of other nations, but from themselves as well. CHAPTER VIII INTERNATIONAL CONTROL International financial competition in China, with its struggle for " spheres of interest," and national " con- trol," has during later years gradually given way to inter- national cooperation and international control. An Anglo-German agreement between the Hongkong-Shang- hai Bank and the Deutsch-Asiatische Bank for mutual participation in administrative and railway loans to China had, as we have seen, existed previous to the " battle of concessions." The first financial transactions done in common under this agreement were the two Chino-Japan- ese War indemnity loans of 1896 and 1898, of Li6,ooo,- 000 each, which were paralleled by a Franco-Russian loan of 400,000,000 francs of 1895.^ All three loans were secured by the Maritime Customs Revenue administered by the International Maritime Customs Service.- The Russo-French loan enjoyed an additional guarantee from the Russian Government while the Anglo-German loan of 1898 was charged upon certain additional likin rev- enues which were also collected by the International 1 See " China Year Book," 1913, page 332. ■- See Chapter I. 220 INTERNATIONAL CONTROL 221 Maritime Customs Sen-ice. To this the British Repre- sentative refers under March i8, 1898, as follows:^ " The only point of other than financial or commercial interest is the provision for the placing under the control of the Inspector-General of Maritime Customs the likin revenues pledged as security, for this may have import- ant future results, as in the case of every other measure likely to benefit their country, the Chinese Government has refused to take this step until forced thereto by necessity." Under the part control of the Maritime Customs Serv- ice falls furthermore the Boxer Indemnity-Service, since payments are secured upon the balance of the revenues of the Maritime Customs after payment of preexisting charges, upon the Native Customs Revenues at open ports, and the Salt Gabelle."* The amortization was to commence the first of January, 1902, payable annually, and shall be finished at the end of the year 1940. The Anglo-German loan of 1898 was followed in February, 1905, by the final exchange-adjustment of the Boxer Indemnity, amounting to Li, 000,000 and secured by the Peking octroi and Shansi likin.^ That the collection of the revenues upon which these first three international loans and the Boxer Indemnity were pledged fell under foreign " control " was, as we 3 See British Blue Books, " China," No. CIX, 1899, No. 59. * See " China Year Book," 1913, page 333. 5 Ibidem. 222 FOREIGN FINANCIAL CONTROL IN CHINA have seen due to the fact that the Maritime Customs were at that time under foreign expert supervision. This supervision had become a stable and well founded institution and was generally recognized as a source of great benefit to foreigners as well as to Chinese. Few difficulties were therefore encountered when these loan services thus fell automatically under foreign " control." But the case was entirely different with " control " em- bodied in the various railroad agreements, the first of which was that made by the Chinese Government in 1898, with the British and Chinese Corporation, for a loan to the Imperial Railways of North China. The control stipulations of most of the railroad agreements were exceedingly severe, as we have demonstrated in the preceding chapters. The lenders, besides securing a first mortgage on the railways, were entitled to a share in the profits and the management of the lines. This form of " control " was naturally a great blow to Chinese pride and it therefore found considerable opposition from many quarters. The first international railway loan agreement now altered conditions substantially. This was the Anglo-German Tientsin-Pukow loan agree- ment concluded in 1908 by the same banks which had arranged the indemnity loans of 1896, 1898 and 1902. The signature of the Tientsin-Pukow agreement, says Mr. Straight,*^ " marked the first recognition by the *> See Straight, op. cit., page 132. INTERNATIONAL CONTROL 223 banks of the increasing efficiency of the ' Young China ' party. These men demanded the radical modification of the old loan terms. They considered ' control ' subver- sive of China's sovereign rights and, flattered by the blandishments of rival foreign interests, they were deter- mined to exact from the world a consideration similar to that accorded Japan after years of patriotic self- sacrifice and conscientious endeavor. The avowed pur- pose of these officials to weaken the hold of the foreigner on China was heartily applauded throughout the prov- inces. It served as a patriotic issue on which an appeal could be made to the masses and a cloak under which the provincial gentry could cover their real purpose, which was to restrict the extension of the Peking Gov- ernment's authority by railways built with foreign loans, or otherwise, and their determination that if foreign loans were made, the chances for peculation should not be monopolized by the metropolitan mandarins." The agreement of January 13th, 1908,'^ sanctioned the flotation of a loan of L5,ooo,ooo at five per cent, issued to the Chinese at 93 and to the public at 98^ for a term of 30 years, repayment to commence at the end of 10 years. Of the total loan Li, 850,000 was issued by the Hongkong and Shanghai Bank and L3, 150,000 by the Deutsch-Asiatische Bank. The line was accordingly T See " Far Eastern Review," Supplement, Nov., 1909, for text of the Agreement. 224 FOREIGN FINANCIAL CONTROL IN CHINA subdivided in two sections. The northern portion from Tientsin extended to the Grand Canal, a distance of 385 miles, and was built by German capital. The southern portion extended from the Grand Canal to Pukow, 236^ miles, and was built by British capital. Accord- ing to Article 9 the loan is secured by a first charge upon likin and internal revenues of Chihli, Shantung, and Kiangsu Provinces, amounting to a total of 3,800,000 Haikwan taels a year. Regarding administration or " control " of the line, Article 17 of the agreement provides that: "The con- struction and control of the railway will be entirely in the hands of the Imperial Chinese Government. For the work of the northern and southern sections respec- tively the Chinese Government will select and appoint fully qualified German and British Chief Engineers, acceptable to the syndicate. These two Chief Engineers shall be under the orders of the Managing Director, or his duly authorized representative, and will carry out all the wishes of the Railway Administration with regard to the plan and construction of the line. They must pay all due respect to the Director General and the Managing Director. The terms of their respective agreements will be arranged by the Director General on his sole authority." To ensure Chinese control after completion Article I concludes: " On the completion of the line the Imperial INTERNATIONAL CONTROL 225 Chinese Government will appoint an Engineer-in-Chief, who during the period of the loan shall be a European without reference to the syndicate." By 1 910 the money was exhausted and it became necessary to raise a supplementary loan of L4,8oo,ooo, divided into two equal parts, to complete the work. In the Tientsin-Pukow Agreement of 1908, it was for the first time stipulated, that in case of default on the loan serv'ice, the hypothecated revenues should be administered by the Maritime Customs Service. The principle of joint management was abandoned. No authority was conferred by the Tientsin-Pukow con- tract upon the auditors of the banks to stop the with- drawal of funds in case the Chinese officials were found guilty of peculation. " These terms," says the Far Eastern Review, " were distinctly favorable to China, and the precedent set has been seized upon and will be used to obtain better terms in future agreements. The Board of Posts and Com- munications are convinced that the management of roads should be in the hands of the Government. And in the hands of the Government they should be exceedingly profitable, though everything depends not only upon sagacious management, but upon scrupulous treatment of earnings. The European bankers' sole and only object in endeavoring in the past to obtain supervision over railway management and finance was to see to it that 226 FOREIGN FINANCIAL CONTROL IN CHINA all moneys were honestly dealt with and the interests of bondholders protected. The opponents of what are now described as ' the Tientsin-Pukow terms ' declare that the way has been deliberately left open for ruth- less squandering and peculation in railway funds. It is therefore all the more incumbent upon the railway administration to demonstrate to the world that they are capable of controlling their officials and the funds that are destined to pass through their hands." ^ The Chinese officials, however, did not fulfill the expectations and trust placed in them. Mr. Straight informs us that:^ "from the commencement of the construction of this line there have been numerous scan- dals, the most flagrant instance resulting in the degrada- tion of the director general and a number of his sub- ordinates. The cost of construction has far exceeded even the most liberal estimates, and the loan service will therefore constitute a heavy charge on the revenues of the line." " Owing to the unsatisfactory operation of the so- called ' Tientsin-Pukow ' terms," continues Mr. Straight, " negotiations were conducted in the winter of 1908- 1909 between the British, German and French Groups and their respective Governments with a view to reach- ing an understanding as to the degree of ' control ' to « See " Far Eastern Review," Vol. IX, page 336. ^ See Straight, op. cit., page 133. INTERNATIONAL CONTROL 227 be demanded from China as a condition precedent to future loans." These negotiations were for a loan to construct both the Canton-Hankow and Hankow- Szechuan line or, as they are called collectively, the Hukuang Railways. At first it was intended that there should be Anglo-American cooperation; but America refused to have anything to do with the project in 1904. Later on, in 1905, France and England came to an arrangement with regard to this line. Little, however, was done until, in 1908, the German group insisted upon participation in said enterprise.^*' Diplomatic protest and recriminations followed owing to the willingness of the Germans to agree to " Tientsin-Pukow " terms, while the British insisted upon more effective " con- trol." ^^ The controversies finally resulted in a com- promise under which the British and French associates combined with the German group to negotiate the Hukuang loan jointly. The agreement was initialed on the sixth day of June, 1909, and the " control " pro- visions accepted by the banks were similar to those em- bodied in the Tientsin-Pukow Agreement, as we shall see presently. At this point the United States interfered. The American legation in Peking forwarded a protest to the Grand Councilor, Chang Chih Tung, against the rati- i«See Chapter II (72). 11 See Straight, op. cit., page 133. 228 FOREIGN FINANCIAL CONTROL IN CHINA fication of the preliminary agreement on the ground that American financiers had secured, in 1904, a promise from the Chinese Government that in the event of the floating of foreign loans for the Hupeh section of the Szechuan road China would consult first the United States and Great Britain.^- Inasmuch as the United States had not officially relinquished her right to partici- pation, the American Government now demanded admis- sion of an American group composed of Messrs. J. P. Morgan and Co., Kuhn, Loeb and Co., the First National Bank, and The National City Bank, all of New York. The group was represented by Mr. Willard D. Straight. Mr. Knox supported his demand by pointing to the " menace to foreign trade likely to ensue from the lack of proper sympathy between the powers most vitally interested in the preservation of the principle of equality of commercial opportunity," adding that " the Govern- ment of the United States regards full and frank cooperation as best calculated to maintain the open door and the integrity of China and . . . that the formation of a powerful American, British, French and German financial group would further that end." ^^ It was last not least due to the personal interference of President Taft,^'* that the Chinese agreed to provide for equal participation of America in the railway loan, 12 See "Foreign Relations," igog (Vol. 5704), pages 144 ff. 13 See "Foreign Relations," 1909 (Vol. 5704), page 152. ^* See preceding chapter. INTERNATIONAL CONTROL 229 and that " Tripartite Banks " consequently invited the American group, in May, 19 10, to join them in the com- bination which they had effected the year before. This invitation was accepted and an intergroup agreement was signed in November, 1910.^^ The final agreement for the Hukuang loan was signed with China by represen- tatives of the four nation syndicate on May 20th, 191 1, on which day the preliminary agreement of June, 1909, was sanctioned with the addition of a few provisions referring to American participation, and an increase of the amount to L6,ooo,ooo.^® The Imperial Chinese Government Five Per Cent. Hukuang Railway's Sinking Fund Gold Loan of L6,ooo,C)00 was to the amount of L5oo,ooo for the re- demption at a premium of 23^ per cent, of certain un- redeemed Gold Bonds of the total par value of $2,222,000, issued by the American China Development Company on behalf of the Chinese Government, and the balance for the construction of a government railway in the Provinces of Hunan, Hupeh, and Szechuan, com- prising two sections: i. The Hupeh-Hunan section of the Canton-Hankow Railway, being a line from Wuchang south through Yochow and Changsha to a point on the 15 See " Far Eastern Review," Vol. XIII, page 83. 1^ For the text see " Far Eastern Review," Supplement, Aug., 191 1. See also U. S. Daily Consular Reports, Oct. 20, 191,3, No. 245. For the preliminary agreement of 1909 see " Foreign Relations," 1909, pages 152 and 200. 230 FOREIGN FINANCIAL CONTROL IN CHINA southern boundary of Hunan, there connecting with the Kwangtung section. This section of a total length of 900 kilometers is under a British engineer in chief. 2. The Hupeh section of the Hankow-Szechuan line, from Kwangshui, on the Peking-Hankow line, through Siangyang and Chingmen to Ichang, 600 kilometers under a German engineer in chief, and from Ichang to Kweichowfu in Szechuan, 300 kilometers under an American engineer in chief. The question of control is regulated in Article XVH : " The construction and con- trol of the railway lines shall be entirely and exclusively vested in the Imperial Chinese Government. For the work of construction the Imperial Chinese Government will select for appointment a fully qualified British Engineer-in-Chief for the Hupeh-Hunan section of the Canton-Hankow railway line to Yichangshien, and a fully qualified German Engineer-in-Chiet for the Kwangshui-Ichang section of the Szechuan-Hankow railway line, with a fully qualified American Engineer- in-Chief for the section of that line from Ichang to Kweichowfu, at the same time informing the Banks of the selection made." At Kweichow the system was to connect with the future Kweichow-Chungking-Chengtu section of over 500 miles which had been reserved for French capital, as no share of the construction of the system provided for by the Hukuang agreement was INTERNATIONAL CONTROL 231 allotted to the French group." Article XVIII concedes to the British and Chinese Corporation and the Deutsch- Asiatische Bank the exclusive purchasing rights for the entire system, including the American section, on which thev are allowed a purchasing commission of five pei cent. There is, however, a gentleman's compact between the four groups of May 23rd, 19 10, that fair play will be observed and that the purchasing agents will *' make all proper provision for the receipt on an absolute basis of equality of tenders from British, German, French, and American manufacturers," ^^ The loan of six million pound sterling was according to Article IX secured in respect to both principal and interest, as a first charge upon Hupeh and Hunan provin- cial salt and likin revenues and Hupeh rice tax amount- ing to a total of 5,200,000 Haikwan taels a year. These revenues are declared free from all other loans, charges or mortgages. It is furthermore stipulated that " so long as principal and interest of this Loan are regularly paid, there shall be no interference with these Provincial revenues; but if principal or interest of the Loan be in default at due date, then, after a reasonable period of grace, likin and other suitable internal revenues of the Provinces of Hupeh and Hunan sufficient to provide the 17 See Chapter IV ; see also " Far Eastern Review," Vol. 9, page 305. 18 See " Foreign Relations," 1910, page 283. ^Z2 FOREIGN FINANCIAL CONTROL IN CHINA amounts above stated shall forthwith be transferred to, and administered by, the Imperial Maritime Customs in the interests of the bondholders." The bankers had acquiesced in these lenient control provisions, " feeling that the punishment inflicted after the Tientsin-Pukow frauds and the surveillance of the National Assembly over the expenditure of loan funds, as well as the difficulties by which the central govern- ment was confronted, justified them in confirming the " control " provisions of the original agreement." ^^ That the Chinese, on the other hand, were able to secure " Tientsin-Pukow " terms in the original Hukuang agreement — despite the fact that more stringent con- trol was needed — was due to the rivalry between the British and German groups. The international syndi- cate was furthermore confronted by an ever increasing " anti-loan " agitation in the provinces through which the Hukuang lines were to be constructed, which obliged Chang Chih Tung — especially in the face of the opposi- tion by the National Assembly — to adhere as strictly as possible to the terms of the original contract. But notwithstanding the multitude of good reasons for a lenient " control " the bankers should soon be forced to have the security revised, the arrangements for the bank- ing of funds reconsidered and a change instituted with regard to the auditors. It was the Chinese revolution 1^ See Straight, op. cit., page 135. INTERNATIONAL CONTROL 233 which necessitated the reconsideration of several points in the agreement. Says the Far Eastern Rcview,^^ " At the time the agreement was being negotiated an effort was made to have the railway lines to be built pledged as collateral security, but the authorities resisted overtures in this regard chiefly owing to the popular opposition to placing what are described as ' sovereign rights ' in the hands of the foreigners. The revolution produced such changes in the value of the security already pledged, however, that reconsideration was necessary. One of the first steps to be taken by the revolutionists was to declare the abolition of likin, and though that was event- ually revised likin collections fell off almost entirely as a result of the dislocation of the machinery of tax col- lection. Other revenues pledged also suffered. . . . The Government protested that the taxes were unaffected, but after much argument it was agreed that the property and materials of the hues should be specially given as a provisional guarantee that the likin was unimpaired." In Article 14 it was stipulated that certain funds should be placed with certain Chinese banks. The credit of all native banks being seriously affected through the revolution the Chinese Government and the representa- tives of the " Quadruple Banks " arranged in 191 3 that the loan funds should be deposited in the Hongkong and Shanghai Bank, Deutsch-Asiatische Bank, Banque 20 "Far Eastern Review," Vol. IX, page 454. 234 FOREIGN FINANCIAL CONTROL IN CHINA de rindo-Chine, and the International Banking Cor- poration, instead of with the native banks. -^ Finally China undertook of her own accord to engage experi- enced foreign accountants for the various railway sec- tions. The construction of the Hukuang railways had made but little progress owing to the political and financial state of China during and following the revolution, which was unfavorable to railway construction. The revolu- tion has also set a halt to the issue of the socalled Cur- rency Loan. On April 15th, 191 1, an agreement had been signed between the President of the Ministry of Finance on behalf of China, with the " Four-Power " syndicate, authorizing the issue by the foreign bankers of a Five Per Cent. Sinking Fund Gold Loan for an aggregate amount of L 10,000,000. The issue price of this loan was to be 95, and of the L9, 500,000 which was actually to be handed over to the Chinese Government, Li, 000,000 was earmarked for the industrial develop- ment of Manchuria, while L8, 500,000 were to be devoted to the reform of a chaotic currency that had always been at the root of China's financial troubles. ^^ The loan was to be secured on certain revenues appertaining to the three Manchurian provinces, and on a recently im- posed surtax upon salt. 21 See " China Year Book," 1914, page 234. 22 See " China Year Book," 1912, page 288. INTERNATIONAL CONTROL 235 The question of " control " should prove again the greatest stumbHng block in the path of negotiations. To quote Mr. Straight : ^^ " Practically the only loans previously falling " within this category (" government " or " administrative " loans) had been required to pay indemnities abroad and there was no necessity therefore that the lenders should exercise " control " over their expenditure. The currency loan, however, was to carry out a definite program and not for general administrative purposes. The four banking groups now acting in har- mony believed some form of supervision to be necessary, and it was thought that the " control " machinery devised for railway loans, could, with certain modifications be utilized for assuring the proper applications of the bor- rowed funds under the currency reform program. " The Chinese had reluctantly agreed to various con- trol provisions in railway loan agreements, but they feared that to admit the principle of supervision over admin- istrative expenditures would be to pave the way for foreign control over China's general finances. An arrangement was finally made, however, whereby China submitted to the groups her program of currency reform for their acceptance, and agreed to expend the loan funds only in accordance therewith, to publish quarterly reports of disbursements made, and to engage a foreign expert to assist the Bureau of Currency Reform. 23 See Straight, op. cit., page 135. 236 FOREIGN FINANCIAL CONTROL IN CFIINA " The Loan has not been issued but it is open to ques- tion whether this * control,' in practice, would have pre- vented peculation, and insured the proper expenditure of loan funds, and the effective operation of the cur- rency reform program." So much for the international loans preceding the revolution. At the outbreak of the revolution in Octo- ber, 191 1, the Empire faced an annual deficit variously estimated from twenty to seventy million taels.^^ The imperial authorities at Peking soon realized that the scarcity of funds made ofifensive military operations im- possible. Their general inability to cope with the situa- tion, together with their loss of revenue from the revolted provinces, capture of Government funds, and the whole- sale embezzlement of moneys by officials, brought them face to face with bankruptcy. Various foreign sources were therefore approached regarding loans to the im- perial Government : a Baron Cottu for francs 150,000,0x30, certain American financiers for L 1,000,000, on the security of the Peking-Kalgan Railway, a British- Belgian-French Syndicate under Russian influence for taels 90,000,000, Germany for $20,000,000, and last not least the " Four-Power " Syndicate for various sums. The Provincial Assemblies and Republicans in the South 2* The financial history of the Revolution is given in the Chinese Year Books of 1913 and 1914 and has also been recorded by George Bronson Rea in the " Far Eastern Review," Vols. VIII and IX, passim. INTERNATIONAL CONTROL 237 immediately raised an outcry against any possible loans, threatening a boycott against the nations furnishing the funds. This caused the bankers to hesitate and consult with their Governments through their respective lega- tions. The foreign legations in Peking were at that time in favor of the North. In view of the fact that the British interests predominated in China, the Powers deferred to the wishes of Great Britain in saying whether the Manchus and Yuan Shih Kai should receive finan- cial support or not. And it was " generally understood that up to this juncture, the British Minister at Peking, Sir John Jordan, fully agreed with his colleagues in that Yuan, as the only man to save the situation, should re- ceive foreign financial aid." -^ But " to the repeated recommendations of the legations in support of Yuan, the Chancellors answered that as the South was entirely under Republican rule, any support to the North would result in retaliatory trade boycotts, destruction of property, and possible anti-foreign uprisings, with con- sequent massacre of all foreigners in the interior. In view of this, the Governments could not sanction any financial assistance to the other side, and China would have to solve its internal problem unaided." -*^ The neutrality proclamation of the powers following shortly afterwards sealed the doom of the Manchu Government, 25 See " Far Eastern Review," Vol. 8, page 345. 26 See " Far Eastern Review," Vol. 8, page 345. 238 FOREIGN FINANCIAL CONTROL IN CHINA the collapse of their loan negotiations convincing them of the hopelessness of their cause. But the powers, in pursuance of their policy of main- taining strict neutrality, would not countenance loans to the Revolutionary Government. The latter was therefore compelled to close a deal with Japan, v.'hich Power was ready to widen her interests in China, and accordingly prepared to sign the agreement for the hypothecation of the properties of the China Merchants' Steam Navigation Company. But, " When the great British shipping and commercial companies realized that their interests were in danger and the Republicans were playing into the hands of their formidable Japanese rivals, who by securing a lien on the China Merchants' properties would be masters of the river and coastwise shipping trade, then the law of self-preservation over- shadowed all other considerations, and the demand was made on the British financial group to break the dead- lock and advance the funds to Sun Yat-sen, to prevent the China Merchants' Steam Navigation Company pass- ing into the control of the Japanese. And the British group with the support of its Government acted," ^^ At that time the Chinese situation had been cleared up considerably. The Manchus abdicated on Feb. 12th and the Chinese Government was consolidated under the leadership of Yuan Shih Kai with the active support 27 See " Far Eastern Review," Vol. 8, page 374. INTERNATIONAL CONTROL 239 from Sun Yat-sen and the South. Immediately there- after the proposition was made to the Quadruple Syn- dicate that the embargo on foreign loans be raised and permission given to advance funds to the new^ govern- ment. To this the syndicate agreed and on Feb. 28, 1912, the Hongkong and Shanghai Banking Corporation, acting on behalf of the quartette, made an advance of taels 2,000,000 to the Chinese Government at Nanking — last not least stirred to action by the British shipping interests, as suggested above. The deadlock had been raised on the previous day, i.e., on Feb. 27th, when the representatives of the syndicate at the invitation of Mr. Tang Shao Yi, representing the republican government, discussed with him the question of a general Reorganization Loan. According to Mr. Straight " Mr. Tang stated the immediate requirements of the Chinese Government, and requested the repre- sentatives to ask their groups to finance the same. In addition he discussed the Chinese revenues available as security for a large loan to reorganize the Chinese Administration, and to initiate a scheme of commercial and industrial development. He asked the representa- tives how much China could borrow on this security, and finally, himself suggested the figure of L6o,ooo,ooo which he wished the banks to loan in five annual install- ments of Li 2,000,000 each." ^^ As security for the 2» See Straight, op. cit., page 157. 240 FOREIGN FINANCIAL CONTROL IN CHINA proposed advances he offered to issue sterling treasury bills, to be secured as a secondary charge upon the Salt Gabelle. The advance of taels 2,000,000 of the follov^r- ing day was made at Mr. Tang's request to meet the urgent requirements of the Nanking authorities. Negotiations for further advances were proceeding when the Peking mutiny, followed by similar outbreaks in other parts of the North, threatened to involve the whole of the North in anarchy. It was not until March 2nd that the situation in Peking was once more in hand, and on that day the syndicate was requested to make further advances. To this request the bankers agreed, making an advance of taels 1,100,000 on March 7th. On March 9th the syndicate received a letter from the President which is of particular importance in the light of subsequent events. According to this letter, it was understood and agreed -^ " That the banks hold a firm option for the provision of the further monthly requirements of the Chinese Government for the months of March, April, May, June and possibly July and August, which the Four Groups have already been requested to finance, against the delivery of additional sterling Treasury Bills on terms to be arranged. " That in consideration of the assistance rendered by the groups to China in the present emergency, and 2^ See " China Year Book," 1913, page 350. INTERNATIONAL CONTROL 241 of their services in supporting her credit on the foreign markets, the Chinese Government assures to the groups (provided their terms are equally advantageous with those otherwise obtainable) the firm option of under- taking the comprehensive loan for general reorganiza- tion purposes, already proposed to them, to be floated as soon as possible, and to be applied in the first instance to the redemption of the sterling Treasury Bills afore- said." Every arrangement had been made by the groups to continue the payment of the advances agreed upon, when on March 14th they received definite information that the Premier Tang Shao-Yi was negotiating with a nominally Belgian Syndicate for an independent loan. And despite the protests of the Groups, Premier Tang signed the loan on March 14th, subject to the confirmation of the National Assembly at Nanking. The European Syndicate which undertook the loan consisted of the Eastern Bank Ltd. and Messrs. J. Henry Schroder and Co., both of London, Messrs. A. Spitzer and Co., Paris, The Russo-Asiatic Bank and a Belgian Group com- posed of La Societe Generale de Belgique, La Banque Sino-Belge, and La Societe Beige de Chemins de Fer en Chine. The agreement provided for a loan of Li, 000,000 at five per cent., issued at 97 (ninety-seven) and redeemable in 12 months, to be followed subse- quently by a larger loan, amounting in all to L 10,000,000. 242 FOREIGN FINANCIAL CONTROL IN CHINA It was according- to Article LV secured upon the general revenues and specifically upon the property and revenue of the Peking-Kalgan Railway.^*^ " The Chinese Gov- ernment shall deposit with the Bank, Government Treas- ury Bills for one million pounds sterling in amounts of ten thousand pounds each. The Bills shall be secured by the general revenue of the State, and the payment of the principal and interest is further secured by a first mortgage on the net income and property of the Peking- Kalgan railway." The article of greatest significance is No. 15: "In consideration of the financial assistance given by the Bank (Banque Sino-Belge) to the Govern- ment under this agreement, the Government engages to give a preference to the Bank for such loan or loans (future loans) until an aggregate amount of ten million pounds sterling shall have been floated through the Bank provided the terms offered are equally advantageous to those offered by other parties." A comparison of these terms, signed on March 14th with the terms of the agreement signed by President Yuan on March 9th, reveals a concession of preferential rights to both parties, or in other words a breach of the earlier contract. According to the Far Eastern Review this would indicate : " that the new rulers of China adhered to the traditional tactics of playing one group against the other in the hope that by such com- 30 See " China Year Book," 1913, page 351. INTERNATIONAL CONTROL 243 petition China would free herself from any foreign monopoly or control of her finances." ^^ The premier himself gave for an explanation that he was forced to arrange the Belgian loan because of an — alleged — refusal of the Quadruple Syndicate to make the advances he required.^- But the only true justification for China's action is to be found in the fact that the price paid by the bankers for the Belgian loan was lower than that which the four groups were ready to give. In addition to the breach of faith the pledging of the revenues and property of the Peking-Kalgan Railway was regarded by the four governments concerned as a violation of the Anglo-French Peking-Hankow Railway Redemption Loan of 1908 and of the engagement entered into by Great Britain and China in 1902 that the Peking- Kalgan Railway should not be mortgaged for a foreign loan.^^ It must be remarked, in this connection, that there is every reason to believe that the loan, although termed a Belgian one, was in fact a Russian affair, for the syndicate is identical with that formed by Russia for participation in the " Six-Power Syndicate." The pos- sible political character of this loan is, according to the Far Eastern Review, made clear when it is remembered that Russia had for years endeavored to gain control 31 See " Far Eastern Review," Vol. 8, page 378. 2^ See " China Year Book," 1913, page 353- 38 See " China Year Book," 1913, page 353. 244 FOREIGN FINANCIAL CONTROL IN CHINA of a railway across Mongolia and through the Kalgan Pass to the capital.^ ^ Furthermore, the signature of the Belgian loan, as Mr. Straight remarks, " affected the security for the large loan which the groups had been asked to under- take — and it carried no guarantee whatsoever that the funds furnished or to be furnished would be properly expended, it increased China's liabilities without insuring any increase in the effectiveness of her administration and instead of rehabilitating, it was calculated to prej- udice her credit." ^^ For all these reasons the Four-Power Syndicate immediately suspended further payments, and refused to comply with their side of the agreement unless the so- called " Belgian " loan was canceled. In their protest against this loan and their demand for its cancellation the bankers found the active support of their respective governments under the leadership of Great Britain. The London Foreign Office had put itself on record as opposed to any loan coming from sources other than the Quad- ruple Syndicate, when it refused its support to the British Banks which had taken an interest in the Belgian loan. On March 14, the Foreign Office assured the Hongkong and Shanghai Bank of its exclusive support during the loan negotiations, when requested to do so by said 34 See " Far Eastern Review," Vol. 8, page 379. 35 See Straight, op. cit., page 140. INTERNATIONAL CONTROL 245 Bank.^^ The justification of the Foreign Office for this support was that any other loan " might interfere with the temporary arrangements made for financing the Chinese Provisional Government, or . . . might con- flict with the terms or weaken the security of the large loan for reorganization purposes, which your bank and the allied French, German, and American groups are negotiating, with the full knowledge of their Govern- ments." The Foreign Office likewise recognizes " that they are under obligation not only to the Hongkong and Shanghai Bank, but also to the governments and groups concerned in these advances, not to give their support to any other group in negotiating with the Chinese Gov- ernment any loan as described above until the large loan out of which these advances and the expenses of re- organization are to be covered has been successfully negotiated, and, above all, until the security on which it is to be issued has been definitely settled." The standpoint of the English Foreign Office is also expressed in the following dispatch : " His Majesty's Government and the other governments concerned have, from the experience of past years, come to the unanimous conclusion that, both in the interests of their own finan- ciers and investing public, and also as a safeguard of China's credit, it is incumbent on them to prevent, as far 36 See British Blue Books, "China," No. 2, 1912, Vol. CXXI, No. I, ff. 246 FOREIGN FINANCIAL CONTROL IN CHINA as lies in their power, 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 guaran- tees, and rendered it impossible for the governments in- terested to exercise the necessary control over the terms of any loans. There can be no doubt that the inter- nationalization of future loans would go far to secure this desirable end." ^'^ To enforce the broadest possible internationalization of Chinese loans, the syndicate decided at this time to strengthen its position by inviting the cooperation of Russian and Japanese financiers. By this step it was hoped to secure the absolute unanimity among the six Powers possessing the most substantial interests in China, to prevent the entrance of unscrupulous financiers and the dissipation, by reckless and unchecked borrowing,, of the nation's tangible securities. Japan at once accepted the invitation and designated the Yokohama Specie Bank as the official institution through which her share of the loans would be negotiated. After a long hesitation, Russia also signified her willingness to enter the combination, " although it has been quite apparent that she desired to play a lone hand and push her advan- tage through the medium of the Belgo-Russian financial 87 See " China," No. 2, 1912, Vol. CXXI, No. 7- INTERNATIONAL CONTROL 247 syndicate." ^® Russian interests were to be represented by the Russo-Asiatic Bank in cooperation with the same syndicate as had undertaken the " Belgian " loan. The " Belgian " loan had meanwhile been canceled upon the strong representations by the foreign ministers, and the negotiations between the bankers and Mr. Tang were resumed on May 3rd. The question of control arose immediately. To appreciate the difficulties the bankers were obliged to take into consideration, we shall avail ourselves of a summary of the situation existing at this time, as given by Mr. Straight.^^ " They (the six groups) had been requested by China to furnish roughly 10,000,000 taels or Li, 300,000 a month for six months and to provide other sums, mak- ing the aggregate amount to be advanced 80,000,000 taels or about L 10,000,000. " It would have been impossible to issue a Chinese loan at this time except at a figure so low as to prejudice the quotations for Chinese bonds already on the market, in the hands of the public not of the groups. To fur- nish the sums immediately required therefore the banks would have been obliged to discount treasury bills, which they would have either had to hold themselves, or dis- pose of to a very limited clientele. 88 See " Far Eastern Review," Vol. VIII, page 381. 3» Straight, op. cit., pages 142 fF. 248 FOREIGN FINANCIAL CONTROL IN CHINA " These advances were required to pay the army, to finance the disbandment of superfluous troops, and to meet the current expenses of the government. The large loan was to be expended to redeem the treasury bills, to clear off arrears in China's indemnity and loan services, and to meet certain pressing outstanding obli- gations. Mr. Tang proposed to use the balance to make up the loss of likin, which he desired immediately to abolish, pending the consent of the powers to an increase in the customs tariff. In addition he had certain vague schemes for railway construction, afforestation, and the establishment of mills of various sorts. " For the advances and large loan requested the Chinese Government proposed to pledge the Salt Gabelle as security. The service of the Boxer Indemnity is :i first charge on this revenue. It was estimated, how- ever, that it now yields taels 47,000,000 per annum and could be increased to at least half as much again if honestly collected. " The Chinese Government at this time was power- less to collect the taxes which it offered as security and was unable to meet its indemnity and loan payments, to pay troops or to finance its current administrative ex- penses and its permanence was by no means assured. " During the course of the negotiations, from Feb- ruary to June, the Chinese officials had shown little appreciation of the magnitude of their financial task and INTERNATIONAL CONTJ^OL 249 had evinced little ability in dealing effectively therewith. "The groups nevertheless had advanced 12,100,000 taels in order to enable the administration to meet its most urgent needs and to prevent the disorders and mutinies which it was feared would occur unless funds, which the Government could not secure from its own people, were obtained. " These advances had been made subject to certain conditions to insure their proper application to the pur- poses for which they were borrowed, yet the Chinese officials charged with their expenditure had placed every obstacle in the way of a proper and efficient audit, to which they had agreed. " Patriotic Chinese, proud of their Republic and hopeful and confident of its future, may regret the neces- sity of including such facts in this statement. These men, however, if they be fair minded, must admit that the banking groups, no matter how friendly they might be to China, would not have been warranted in disregard- ing them. " Because of these facts the groups were unwilling to undertake the business without the joint support of their respective governments. Because of these facts, more- over, they deemed it possible to proceed with advances and to undertake the reorganization loan only on cer- tain conditions, which were briefly as follows : " I. That the groups should have the right to satisfy 250 FOREIGN FINANCIAL CONTROL IN CHINA themselves as to purposes for which funds were re- quired. " 2. That China should herself create a system of audit in which foreigners should be employed with powers not merely advisory, but also executive so as to ensure the effective expenditure of loan funds borrowed for the purposes specified. " 3. That the salt taxes to be hypothecated for the service of this loan should be administered either by the existing Maritime Customs organization or by a separate Chinese service like the customs, however, under foreign direction, thus safeguarding the proper administration of the security despite the possible continuation or re- currence of unsettled conditions in China. " 4. That the groups should take the first series of the loan of L6o,ooo,ooo, at a fixed price, and be assured an option on the subsequent series at a price to be based on the market quotation of the first issue, thus giv- ing China the benefit of any improvement in her credit. "5. That to protect the quotation of bonds issued and to assure a successful marketing of subsequent series China should not borrow through other groups until the entire loan of L6o,ooo,ooo had been issued. " 6. That for a period of five years China should ap- point the groups financial agents to assist the adminis- tration in its work of reorganization. INTERNATIONAL CONTROL 251 " These conditions were submitted to the Chinese Gov- ernment and in reply the group representatives in Peking were informed that it would be impossible to China to accept a loan on such terms. Negotiations, however, though interrupted, were not formally broken off, and from the end of June discussions were continued between the Chinese officials and the group representatives, but without result. " The difficulty was not a question of the price at which the bankers should take the bonds. It was the question of ' control.' The Chinese particularly ob- jected to placing the Salt Gabelle under the Maritime Customs, or any foreign directed service, and to the crea- tion of a proper audit department to appointing the groups financial agents." The strongest opposition came from the Chinese Gov- ernment itself. The premier declined to entertain any proposal for effective supervision, and hinted that in the event of the bankers pressing their proposals, he would suspend negotiations and endeavor to raise money by means of a poll-tax, or some similar method. At secret sessions of the National Council it appeared that the council was also strongly opposed to any form of foreign control, and this feeling was reflected in the provinces, where a popular clamor was voiced against any semblance of foreign control. Dr. Sun Yat-sen and General Huan Hsing both declared against foreign supervision. 252 FOREIGN FINANCIAL CONTROL IN CHINA On June i8, the Shanghai Chinese Chamber of Com- merce took the novel step of requesting the British Minister of Foreign Affairs to persuade the syndicate to modify the more stringent terms of the proposed loan. Sir Edward Grey's reply, communicated through His Majesty's Minister at Peking, was as follows : *^ " Sir Edward Grey has authorized me to inform the Chamber of Commerce in reply that so far the action of the groups has met with the entire approval of His Majesty's Gov- ernment, who, however, cannot urge the Banks to make any loan which does not, in their opinion, offer adequate guarantees for the proper and useful expenditure of the proceeds and satisfactory security for the payment of principal and interest; and further, that in regard to all questions connected with this loan His Majesty's Government is acting, and will continue to act, in full accord with the other governments concerned." The protraction of the loan negotiations had the result that several provinces, being in desperate financial straits, negotiated independent loans with certain foreign commercial houses, as for instance, the firms of Skoda, Diederichsen, and Krupp, in return for large contracts for arms and ammunition. Various other expedients were adopted by the Central Government, all of which while relieving a temporary necessity merely increased the difficulties of an already almost hopeless *" See " China Year Book," 1913, page 357. INTERNATIONAL CONTROL 253 financial problem. Finally the Chinese Minister of Finance decided to negotiate with the representatives of an independent British Syndicate, which appeared at that time on the Chinese financial market, for a larger loan of Lio,ooo,ooo. On July 12th a preliminary agree- ment and on August 30th the final contract for what became known as the Crisp loan was signed in London. The contract contained among others the following pro- visions : '*^ " Article IV. The payments of interest and the re- payments of the principal of the loan and all other amounts required for or incident to the service of the loan shall be and hereby are constituted a first charge on the surplus revenues of the Salt Gabelle, the total annual revenue of which amounts to Forty-seven Million Five Hundred and Ten Thousand Kuping Taels, of which Twenty-four Million Taels per annum are already hypothecated. The remaining Salt Revenue is hereby declared to be free from all loans, liens, charges, or mortgages. " Article VII. The price of the bonds to the Chinese Government shall be eighty-nine per cent, of their nominal value. " Article IX. The rate of interest for the loan shall be five per cent, gold per annum on the nominal prin- cipal. . . . The term of this loan and of the bonds evi- 41 See " China Year Book," 1913, page 360. 254 FOREIGN FIXAXXIAL CONTROL IN CHINA dencing the same shall be forty years from the date issue of the loan to the public. " Article XIV. The Chinese Government engages not to issue nor to authorize the issue of any other external loan until the whole of this loan has been issued to the public . . . but if the Chinese Government should desire to obtain further foreign capital before this loan is realized, and the terms offered by the Financial Group are as favorable as those offered by others, preference shall be given to the Financial Group." This latter article and the hypothecation of the surplus revenues of the Salt Gabelle as well as the absence of any effective control provisions were considered highly detrimental to the interests not only of the Sextuple Syndicate but also of the Chinese Government. There- fore, as soon as the conclusion of this agreement became known the Sextuple Group refused to comply with the request of the minister of finance for further advances, while the British minister at once informed the Chinese Government that his government did not approve of the new loan and warned China that her policy was liable to alienate the powers principally interested in her finances. The British Foreign Ofiice had previously been approached by Mr. Crisp with the view of solicit- ing the British Government's support in his proposed loan. The Foreign Office's refusal and attitude is ex- plained in a telegram from Sir Edward Grey to Sir J. INTERNATIONAL CONTROL 255 Jordan of August 23rd :*^ "It was explained to Mr. Crisp that, as a matter of general principle, His Majesty's Government would never support a loan concluded without adequate guarantees for the control of the expenditure of the proceeds and without proper security. The fact that the Six Power Consortium, with the full support of the respective governments, had so far been unable to obtain satisfactory terms in these respects from the Chinese Government, rendered it very improbable that a syndicate without the same experience and un- supported by any foreign government could meet with a greater success." After the refusal of the international syndicate to make the advances requested the Chinese Government decided to avail itself of at least half of the sum offered by Mr. Crisp and L5, 000,000 were issued in London shortly afterward. But the Chinese minister of finance made it at the same time understood " that China desired to deal with the six groups as the only combination capable of furnishing within the next few years the enormous sums which China would need to reorganize her administration and finance the industrial develop- ment upon which the Peking Government wished to em- bark." *^ For this reason, the Chinese Government finally induced Mr. Crisp to agree to the cancellation *2 See " China," No. 2, 1912, Vol. CXXI, No. 22. <3 See Straight, op. cit., page I47- 256 FOREIGN FINANCIAL CONTROL IN CHINA of Article XIV, as demanded by the Group, and of the flotation of the second half of his loan in return for Li 50,000 compensation.^'* The international loan negotiations were continued and an early signature of the Reorganization Loan agree- ment was expected on all sides, when, early in 19 13 new obstacles arose, which again threatened to wreck the negotiations. The source of the difficulty was this time certain Foreign Powers who, actuated by selfish motives, and in a highly discreditable manner began to scramble about the appointment of Foreign Adviser. It had been understood that China intended to nominate a Dane to the position of Chief Inspector of the Salt Administra- tion and that a German would be nominated Director of the National Loans Department. The only appoint- ment about which there was any uncertainty was that of the Adviser to the Accounts and Audit Department.*^ But when the list of names was submitted to the Foreign Legations, the French and Russian legations formally objected to a scheme which included advisers of neutral nationality as well as a German. A suggestion then was made that two advisers of Russian and French nation- ality respectively be appointed for the Audit Bureau, the American and Japanese ministers disclaiming any ambitions for advisorship. ** See " China Year Book," 1914, page 379. *■' See " China Year Book," 1914, page 381. INTERNATIONAL CONTROL 257 The decision to make nationality the chief qualifica- tion for the adviserships was open to many objections from the Chinese point of view, particular exception being taken to the appointment of a Russian at a time when diplomatic relations were so seriously strained by the Mongolian situation. Matters were therefore again brought to a complete deadlock. It was during this deadlock that President Wilson, in a reply to a communication from the American group, announced that the administration had refused the re- quest of the group to sanction American participation in the loan. The eventual resumption of serious nego- tiations with what had then become the Quintuple Syn- dicate was probably due in no small measure to the fact that it was brought to the attention of the Chinese Gov- ernment that under an old loan contract the Russian Gov- ernment could claim the appointment of an adviser as a treaty right.*** China ultimately agreed to appoint the foreign advisers as proposed by the "foreign minister, while the banks on their part agreed to rearrange the price of the loan and to reduce the rate of interest from 5/^ to 5 per cent. The Reorganization Loan Agreement was finally signed at Peking on the twenty-sixth day of April, 19 13, between the government of the Republic of China of the one part, and the Hongkong and Shanghai Banking