Sir Claude MacDonald was, of course, unable to admit the argument, and though M. Pavloff again returned to the subject with the Yamen in the following March, Count Lamsdorff subsequently notified Sir Nicholas O'Connor, the British Ambassador at St. Petersburg, that Russia had retired from the position she had taken up; the incident was therefore closed.

By this time the Imperial Chinese Railway administration had determined to continue the extra-mural extension, and had decided to raise a loan sufficient for the construction of the line to Hsinminting with a branch to Yingkow,1 and to pay off various loans which had been borrowed from time to time in connection with the line within the Great Wall. These liabilities stood at Taels 2,540,000, -Taels 1,240,000 representing advances by the Hongkong Bank to which reference has already been made, and the balance loans of Taels 600,000 from the Russo-Chinese Bank, and Taels 700,000 from the Deutsche-Asiatische Bank.

In these circumstances Hu Yen Mei, the Director General, turned for assistance to the Hongkong and Shanghai Bank. Negotiations were opened up in April 1898, and on the 7th of June a preliminary agreement was arrived at, but not actually signed, between Hu Ta-jen and Mr. E. G. Hillier, the Peking agent of the Bank, acting on behalf of the British and Chinese Corporation Limited. This syndicate had been formed by the Bank and the house of Jardine, Matheson & Company, earlier in the year, for dealing with Chinese concessions, loans, and Chinese affairs generally, the Bank and Messrs. Jardine, Matheson & Company being its joint agents in China.

The agreement 2 provided for a sterling loan of 16,000,000 Taels approximately, "for the construction of a railway line from Chunghouso and Hsinminting, and a branch line to Yingkow, and for the redemption of existing loans to the Tientsin-Shanhaikwan and Tientsin-Lukouchiao lines."

The second clause defined the security.

"The security for the loan shall be the permanent way, rolling-stock, and entire property, together with the freight and earnings of the existing lines between Peking, Tientsin, Tangku, and Chunghouso, and also of the proposed new lines when constructed, in addition to the rights of mining

1 On the west bank of the Liao River, opposite the Treaty Port of Newchwang. 2 Appendix A, No. 1.

coal and iron, which will be hereafter determined. In event of default or arrears in payment of interest or repayments of principal, the said railway lines and mines shall be handed over to representatives deputed by the syndicate, to manage them on their behalf, until principal and interest of the loan are redeemed in full, when the management will revert to the Railway Administration."

On the day on which these terms were embodied in an agreement for signature by the parties (7th June), M. Pavloff, the Russian Chargé d'affaires in Peking, entered a strong protest against the arrangement. He pointed out that the security for the loan, in accordance with the clause above set forth, was a mortgage on the line already constructed and on those to be constructed. That, in the event of default by the mortgagors, the line would come into the possession and control of the mortgagees. In other words, a British controlled line in the Manchurian provinces, which the Russians had in their own minds already marked for their own, was an eventuality which Russia would have to recognise.

M. Pavloff's objections, however, were not in the main based on that ground. A more tenable position was open to him. It will be remembered that at an earlier stage of this chapter reference was made to certain supplementary articles of agreement settling the southern termini of the Chinese Eastern Railway at Talien-wan and Port Arthur after the grant of the lease of those places. The third of those supplementary articles contained the following provisions :

"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."

Now Hsinminting, as a glance at the map will show, is within a few miles of Mukden, and M. Pavloff's contention was that a mortgage such as was proposed would contravene this agreement, for which he claimed priority over the agreement with the Bank, the former bearing date the 7th of May.

Notwithstanding this protest, however, the agreement was signed on the 15th of June by Hu Yen Mei, to whom the Yamen had referred the Russian objection. His reply had been to refer to the Chinese text of the May agreement, which withdrew in the most precise manner this particular railway from the purview of the Russian Government. He also recalled an explicit promise

given by M. Pavloff in an interview following the lease of Port Arthur, that the extension to Newchwang should be no concern of Russia's, no matter what the nationality of the people employed or where the money to build the line was borrowed.

M. Pavloff's objections continuing, and the conclusion of a definitive contract being, in consequence, considerably delayed, the discussion was transferred from Peking to London and St. Petersburg.

On the 12th of August Mr. Balfour drew M. Lessar's attention to the matter in London, pointing out that the Russian claim was inconsistent with the provisions of the Treaty of Tientsin, which guaranteed equal rights to the people of all nations. The Chargé d'affaires does not appear to have dissented from this view, but met the argument with a proposition of a reciprocal agreement between Great Britain and Russia in regard respectively to Manchuria and the Yangtze Valley region.

A long discussion followed in St. Petersburg between Sir Charles Scott, the British Ambassador, and Count Muravieff on these lines. Meanwhile the Bank showed signs of willingness to undertake the business on the security of a mortgage of the PekingShanhaikwan section, and a charge on the profits of the extramural section, subject to an assurance being given by the Chinese Government that no part of the lines mentioned in the agreement should be alienated to a foreign power, such assurance to be recognised as an arrangement to be upheld by the British Foreign Office.

At this stage the Russo-Chinese Bank entered the field as a competitor, and, it was alleged, offered terms impossible for any Bank not in receipt of Government support. But on representations being made by Sir Charles Scott to Count Muravieff, M. de Witte, the Minister of Finance, made communications to the Bank, causing them to withdraw from the field.

In October a definitive contract 1 was prepared, and executed by Hu Ta-jen and Mr. Hillier, on behalf of the Corporation, the official seals of the former being affixed on the 11th; on the 27th of November following it received the Imperial sanction.

The terms of the contract as regards the security were in principle those outlined immediately above. Russia had thus gained her point: there was to be no foreign held mortgage on the Shanhaikwan-Newchwang Railway.

1 Appendix A, No. 2.

Early in February the prospectus of the loan was issued in London. In it was set forth a copy of the agreement, then published for the first time. Immediate objection was taken by the Russians to the sixth clause providing for the appointment of a British engineer and accountant. It was argued that such a provision constituted "foreign control of the line " in the sense of the previous objection.

About the middle of March this objection was withdrawn, but a few days later a fresh difficulty was raised. Count Muravieff suddenly made the alarming discovery that the projected extension ran to Hsinminting. He averred that until this moment he had never heard the name of the place or of the proposal to carry the line there; he had always understood that Yingkow was the only objective, and professed a colossal ignorance of geographical conditions which some have found it difficult to believe of him.

This point, however, was also in due course ceded in return for the formal recognition of the Russian Government's right to support applications by Russian subjects for railway concessions in the south-west parts of Manchuria, and on the understanding that the line to Hsinminting should be built by China herself, subject to the condition of her allowing European-not necessarily British engineers-to inspect the work periodically, to see that it was being properly executed.

Meanwhile Count Muravieff and Sir Charles Scott had come to an understanding in regard to the Yangtze Valley region and Manchuria, and on 28th April 1899 identic notes were exchanged between them setting forth the arrangement; at the same time the understanding in regard to the Shanhaikwan-HsinmintingYingkow extension was made the subject of a supplemental note.1

The terms of the latter understanding have been dwelt upon. The arrangement in regard to the Yangtze Valley region and Manchuria took the form of an engagement by Russia not to seek for herself or on behalf of Russian subjects or others railway concessions in the Yangtze Basin, and not to place obstacles either directly or indirectly in the way of railroad enterprises in that region supported by the British Government; a similar engagement, mutatis mutandis, was entered into by Great Britain with regard to railway concessions north of the Great Wall.

1 Appendix A, No. 5.

On its conclusion the Marquess of Salisbury telegraphed to Sir Charles Scott congratulating him "heartily on the successful issue of these protracted negotiations."

Had the congratulations been addressed to Count Muravieff one could, perhaps, have understood them better, or had the agreement been concluded a year or two earlier, the reason of Lord Salisbury's apparent satisfaction would have been more obvious. As it is, it is a little difficult to appreciate his point of view in face of certain contemporaneous facts which may be marshalled with some advantage at this point in order to show the precise bearing of the new agreement.

Firstly, In August 1898, almost at the moment that M. Lessar was making the first suggestion of the idea to Mr. Balfour in London, a concession to a Franco-Belgian syndicate for a trunk line to Hankow was receiving Imperial sanction in Peking. The scheme had the powerful support of M. Pavloff, the Russian Chargé d'affaires in Peking, despite the protests of Great Britain.

Secondly, The concession for lines emanating from Shanghai -the beginnings of the Yangtze Valley system—had been secured by the British and Chinese Corporation before the conclusion of the agreement.

Thirdly, Two days after the conclusion of the agreement the Russo-Chinese Bank applied for a concession for a railway from a point on the Manchurian Railway north of Mukden to Peking, while Fourthly, Of the powers interested in China, with the exception of Japan, Great Britain was the only considerable power whose activities were not clearly localised. France was engrossed in the south and Germany in Shantung. America had her hands full with Manila, and at that time, at anyrate, was not likely to take any very strong line in China.

Fifthly and lastly, but by no means least important, the arrangement had an unfortunate effect on the Chinese, by whom it was regarded as tending only to the advancement of Russian aims, and ill-according with the boasted friendship of Great Britain.

It does not require particularly close reasoning to deduce from these facts the conclusion that the arrangement came too late to be of much service to us in the Yangtze Valley, and it would therefore appear that we agreed to tie our hands in Manchuria without receiving adequate consideration in the shape of compensating