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The Chinese defence.In defence of the failure to repay their loans, the Chinese pointed out that these were not normal financial transactions. They claimed that the loans were made largely by the South Manchuria Railway in order to monopolise railway construction in South Manchuria; that the object was primarily strategic and political; and that, in any case, the new lines had been so heavily over-capitalised that they were, at least for the time being, financially unable to earn the necessary money to repay the construction expenses and loans. They contended that in each instance of alleged failure to fulfil obligations, an impartial examination would show adequate justification for their conduct. As for the Kirin-Kwainei Railway, they denied the moral, and even the legal, validity of the alleged agreements.
The South Manchuria Railway desired a system of branch lines.There were certain conditions which existed in connection with those railway agreements which made it natural for the loan controversy to arise. The South Manchuria Railway had practically no branches and wished to develop a system of feeder lines in order to increase its freight and passenger traffic. The Company was therefore willing to advance money for the building of such new lines, even though there was little likelihood that the loans would be repaid in the near future; it was also willing to continue to make further advances when earlier loans were still outstanding.
In these circumstances, and so long as the newly constructed Chinese lines functioned as feeders to the South Manchuria system and were operated in some measure under its influence, the South Manchuria Railway Company appeared to make no special effort to force payment of the loans, and the Chinese lines operated with ever-increasing debt obligations. But when certain of these lines were connected with a new Chinese railway system, and in 1930-31 started a serious competition with the South Manchuria Railway, the non-payment of the loans at once became a subject of complaint.
The Nishihara loans.Another complicating factor, in the case of certain of these loan agreements, was their political character. It was as a result of the "Twenty-one Demands" that the Kirin-Changchun Railway was placed under the direction of the South Manchuria Railway Company, and the outstanding indebtedness of the line converted into a long-term loan, maturing in 1947. The advance of 20,000,000 yen made in 1918 in consequence of the so-called "Four Manchuria-Mongolia Railways Agreement" was one of the so-called "Nishihara loans", made to the military Government of the "Anfu clique", without any restriction as to the purpose for which it might be used. Similarly, it was from a Nishihara loan that an advance was made of 10,000,000 yen to this clique in connection with the preliminary loan contract agreement of 1918 for the construction of the Kirin-Kwainei Railway. Chinese national sentiment has been greatly aroused over the subject of the "Nishihara loans" ever since their negotiation; but, in spite of this, the Chinese Government has never repudiated them. In these circumstances, the Chinese felt little moral obligation to fulfil the conditions of the loan contracts.
The Kirin-Kwainei Railway project.Especially important in Sino-Japanese relations were the issues over the Kirin-Kwainei Railway project. The first act of issues related to the section of the line from Kirin to Tunhua, the construction of which was completed in 1928. From that time on, the Japanese complained because the Chinese would not convert the Japanese advances for construction purposes into a formal loan secured by the earnings of the railway, and maintained that the Chinese were violating the contract by their refusal to appoint a Japanese accountant for the line.
The Chinese in turn claimed that the construction costs submitted were not only much higher than the estimates of the Japanese engineers, but were greatly in excess of the amount for which vouchers were presented. They refused to take over the line formally until the construction costs should be settled; and contended that, until they should do so, they were under no obligation to appoint a Japanese accountant.
