The corporation argued that the claim of forfeiture of the original contract on account of failure to deposit $2,500,000 immediately upon the execution thereof is not well founded, because the forfeiture clause was vitiated by the Governor's acting, until the beginning of October-more than five months after the signing of the original contract-on the assumption that the contract was still in force.

I stated to his excellency our position on this point; namely, that if forfeiture might be said to have occurred, it was waived by subsequent negotiations. Dr. Chen stated that this was also his view. He stated that all the officials of the Central Government were in favor of immediately concluding this contract, and that a number of the Shantung members of the National Parliament, as well as the Private Secretary of President Li, a Shantung man, had been induced to proceed to Tsinanfu, in order to argue with the members of the local Assembly.

Considering the fact that the making of this contract was originally requested by the Shantung Government and that no shadow of opposition had hitherto been seen, the sudden appearance of a well organized local obstruction has led to the surmise that influences unfavorable to American enterprise in China, particularly in Shantung, have been active in organizing this local opposition. From confidential reports which have reached me it would however appear that the trouble is due to a certain amount of distrust of the Central Government on the part of the local Assembly. It would seem that a tale is current to the effect that the engineering work would require only $1,000,000, and that the rest of the money is to be spent by the Central Government, while the burden is to be imposed on the province. This is of course a misunderstanding which I hope can be cleared up without delay.

The Governor, Tsai Ju-kai, who originally negotiated the agreement, was greatly in favor of the project. His successor, SunFa-hsü, Civil Governor during the negotiations reported above, was unpopular in the province and was apparently fearful of making any opposition to the Assembly; he has been transferred to another province, and Chang Huai-chih will act as Military and Civil Governor. The latter's attitude has not yet been determined, although he is believed to be favorable to the Canal enterprise.

I also have the honor to report that on September 25 last, the Japanese Legation handed to the Chinese Foreign Office a memorandum concerning the Grand Canal enterprise in Shantung, a copy of which is enclosed herewith. *

* *

I have the honor to enclose a copy of a memorandum by the Minister, and one by the Secretary of Legation, in which the attitude taken by the Legation is stated. In oral conversation with the Acting Minister for Foreign Affairs the position thus indicated has been taken by me, and the Minister appears to share the views of the Legation in this matter.

With respect to the Kiangsu section of the Canal, the demand of the American International Corporation that the Provincial Government should guarantee the loan, referred to in your telegram of

*Not printed.

June 15 and in my telegrams of June 19 and June 26, has delayed negotiations. The political situation in Kiangsu is somewhat uncertain, and the Central Government has only now sent Mr. Pan Fu to that province, in order to prepare the way for cooperation of the local authorities with the Central Government in the matter of the loan. I believe that it will be possible to get a formal expression of such cooperation.

From the above report, it will appear that the method of negotiation followed in this important matter is radically wrong, and will inevitably and at all times lead to endless trouble and the expenditure of fruitless efforts in China. If the original contract had been unconditionally accepted by the American International Corporation, it would have been just as easy subsequently to get the necessary administrative modifications and interpretations; but the whole enterprise is endangered when, after a general agreement has been arrived at, the contract is allowed to remain pending while minor modifications are being discussed. This method secures for such minor modifications an importance far beyond their real consequence. It is highly to be desired and absolutely essential that in the future American concerns attempting to do business in China should definitely make up their minds as to what they want and what they can grant before the main contract is finally signed. Nothing is more irritating to the Chinese than to have long and painful negotiations come to an end, supposedly definitive, and then to find that the negotiators on the other side continue to discover things which they would like to have put into the contract.

I have [etc.]

PAUL S. REINSCH

[Inclosure 1-Translation]

The Shantung Provincial Government to the American International Corpora tion

[No date; received in May, 1916.] The Shantung Provincial Government formerly telegraphed to the Central Government the facts concerning the signing of the 7 per cent loan for the improvement of the Shantung section of the Grand Canal, and the Shantung Provincial Government subsequently received a telegraphic reply from the Administrative Council saying that a presidential mandate has been issued permitting the carrying into execution of the already signed Shantung loan for work on the Grand Canal and ordering that the same be notified to the Ministries of Finance and of Agriculture and Commerce, and to the National Conservancy Bureau.

Subsequently the final complete contract was sent to the Central Government, and on the 27th of April a mandate was issued ordering the same to be transmitted to the Ministries of the Interior, of Finance, and of Agriculture and Commerce, as well as to the National Conservancy Bureau, to be placed on record. The contract is ordered to become operative.

Having received this reply this communication is now sent for your [omission] to be placed on record.

THE SHANTUNG PROVINCIAL GOVERNMENT

[Inclosure 2-Translation]

Memorandum from the Japanese Legation to the Chinese Government

We have heard that the Chinese officials have made a contract with American capitalists for a loan of $3,000,000 for the renovation of the Grand Canal in the province of Shantung. Ou the 29th ultimo the Japanese Minister, "Lin"

(i. e., Hioki), had an interview with the Minister for Foreign Affairs, Chen, at which inquiries were made about this matter. The Minister, Chen, stated that this loan had been negotiated between the Conservation Bureau and the American capitalists. Although it had been heard of, neither the Ministry for Foreign Affairs nor the Ministry of Finance knew the details. The Japanese Legation has now obtained definite information to the effect that in April of this year the Conservation Bureau drew up and sealed an agreement with the American International Corporation and that now negotiations are proceeding with regard to the deposit of the funds and the method of carrying on the work.

I wish to observe that in Article 3 of the sealed agreement regarding the lease of Kiaochow, dated March 6, 1898, the following things are specified regarding preferential rights in Shantung Province:

In case of undertaking any work in Shantung Province, if foreign labor, capital, or materials are required, China shall first apply to German capitalists or merchants to know whether or not they are willing to undertake the said work and furnish the materials.

Two years ago Japan engaged in war for a year with Germany and expelled Germany from all influence in the Province of Shantung. The consequence was that all the rights and privileges which Germany had obtained in Shantung by treaty or otherwise reverted to Japan.

Also in Article 1 of the sealed convention between China and Japan of May 25, 1915, relating to Shantung Province, the Chinese Government, in regard to the above-mentioned rights and privileges granted, acknowledges all previously arranged with Germany as appertaining to Japan. From the above it is plain that in the matter of improving the Grand Canal within the Province of Shantung by the Chinese officials, if foreign assistance is to be asked, application must first be made to Japan.

September 15, 5th Year of Taisho [1916].

File No. 893.811/231

The Acting Secretary of State to Minister Reinsch

[Telegram]

DEPARTMENT OF STATE, Washington, November 6, 1916.

Your telegram of September 25. If Foreign Office replied as you anticipated you may support it in that attitude. In any event inform it this Government reserves all American rights. Report any further action by Japan.

File No. 893.811/235

No. 1267

Minister Reinsch to the Secretary of State

POLK

AMERICAN LEGATION, Peking, November 15, 1916. SIR: Referring to my despatch No. 1224 of October 13, last, concerning the Grand Canal improvement work in Shantung Province, Mr. W. F. Carey has reported to me that on the 28th ultimo, Mr. Debuchi, First Secretary of the Japanese Legation, called on him and, among other things, spoke about the Canal enterprise. He assured Mr. Carey that the Japanese entertain the most friendly disposition towards the Siems-Carey Company. He continued:

* that we must not take their inquiries on the Grand Canal, for instance, as meaning anything more than they were anxious that China should recognize the fact that Japan had by might taken over the position of Germany In the Province of Shantung. He said that he realized quite fully that legally

as yet Japan did not have the rights of Germany in Shantung; but that, inasmuch as they had put the Germans out of this province, and inasmuch as by the twenty-one demands made on China in 1915 (wherein one of these demands stipulated that should Germany and Japan come to an agreement whereby Germany relinquished her position in Shantung to Japan, that transaction should be recognized and binding upon the Chinese Government), therefore, while this procedure as yet had not actually taken place, nevertheless it was a procedure that would at the close of the war take place; and that Japan was only anxious that China recognize the fact that Japan was actually now in Germany's position in this province. He stated that Japan did not want and would not do anything to prevent the construction of this waterway; that he realized it was a much needed improvement, and as a matter of fact it was an improvement that Japan herself desired.

Mr. Debuchi assured Mr. Carey that the Japanese would not press their claim to the extent that it might endanger the carrying out at this time of the Canal improvement.

I am not in a position to report the complete solution of the tangle which was explained in the Legation's No. 1224 of October 13, as the situation is very complicated, it has seemed well to the American representatives here to leave the solution of the matter in the hands of Mr. Roy S. Anderson and Mr. Pan Fu, the official who is most interested in the realization of the Canal improvement plans. Mr. Pan has, during the last three weeks, been working on the Kiangsu situation and has reported that the local officials and gentry have now been brought in line so as to support the Central Government in this matter. Mr. Pan has now proceeded to Tsinanfu; the new Governor of Shantung, Mr. Chang Huai-chih, with whom Mr. Pan is on good terms, is favorable to the enterprise and it is believed that the local opposition can now be overcome within a very short time.

I have [etc.]

PAUL S. REINSCH

FINANCIAL AFFAIRS-LOAN AGREEMENTS WITH LEE, HIGGINSON AND COMPANY AND WITH THE CONTINENTAL AND COMMERCIAL TRUST AND SAVINGS BANK OF CHICAGO. OPPOSITION OF THE CONSORTIUM GROUPS; ATTITUDE OF THE UNITED STATES

File No. 893.51/1741

Loan agreement between the Chinese Government and Lee, Higginson and Company

[Left at the Department by the Counselor of the Chinese Legation]

This agreement, made this 7th day of April, 1916, between the Government of the Republic of China, represented by His Excellency Doctor V. K. Wellington Koo, Chinese Minister to the United States, acting in the name and on behalf of the Minister of Finance of the Republic of China by special authorization, and Lee, Higginson and Company, of Boston, Massachusetts, New York City, New York, and Chicago, Illinois.

Whereas the Chinese Government has heretofore appointed Messrs. Lee, Higginson and Company its fiscal agents in the United States of America; and

Whereas the Chinese Government now desires its said fiscal agents, Messrs. Lee, Higginson and Company, to offer for sale five million

dollars ($5,000,000) principal amount of six per cent three-year Treasury gold notes, dated April 1, 1916, payable April 1, 1919, bearing interest at the rate of six per cent (6%) per annum payable semi-annually on October 1st and April 1st in each year;

Now, therefore, the parties hereto do agree as follows:

1. The Chinese Government authorizes Lee, Higginson and Company to act as its fiscal agents for the purpose of offering for sale five million dollars ($5,000,000) principal amount six per cent threeyear Treasury gold notes of the Republic of China. Said notes are to be direct and binding obligations of the Republic of China, are to be signed in the name of the Chinese Government by His Excellency Doctor V. K. Wellington Koo, Minister of the Republic of China to the United States of America, at Washington, D. C., and shall also bear the official seal of the Chinese Legation at Washington, D. C., and are to be countersigned by Lee, Higginson and Company, its fiscal agents. The notes are to be dated April 1, 1916, and are to be payable April 1, 1919; they are to be in coupon form registrable as to principal only in the denomination of one thousand dollars ($1,000) each and to bear interest at the rate of six per cent (6%) per annum payable semi-annually on October 1st and April 1st in each year, and are to be paid principal and interest in gold coin of the United States of America of the present standard of weight and fineness at the office of Lee, Higginson and Company, New York City. Upon the request of Lee, Higginson and Company, the Chinese Government will issue coupon notes in denominations of one hundred dollars ($100), or of five hundred dollars ($500), or of five thousand dollars ($5,000), or will issue registered notes without coupons in denominations of one thousand dollars ($1,000) or any multiple thereof. If coupon notes of denominations other than one thousand dollars ($1,000) or registered notes without coupons shall be issued, they shall be issued and may be interchangeable with any other notes of such issue under such scheme or plan as may be necessary or desirable to conform to the rules of any stock exchange.

The notes of this issue are to be subject to redemption at par and accrued interest upon October 1, 1917, and upon any interest day thereafter before maturity by operation of a sinking fund on thirty (30) days' published notice. On the first day of August, 1917, and on the first day of February, 1918, and on the first day of August, 1918, the Chinese Government will deposit with Lee, Higginson and Company the sum of one million two hundred and fifty thousand dollars ($1,250,000) or such lesser sum as shall equal one-quarter of the principal amount of the notes which have at any time been issued, for the purchase or redemption of said notes. Each such sinking fund instalment if reasonably practicable shall be applied by Lee, Higginson and Company within twenty (20) days after the receipt thereof to the purchase of notes at a price not exceeding par and accrued interest. In case the cost of any such notes so purchased shall, because of the inclusion in such cost of accrued interest, exceed the par value of the notes so purchased, Lee, Higginson and Company will pay the difference between par and the cost of said notes out of any monies on deposit with Lee, Higginson and Company, other than