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 (a branch of the Peiping-Mukden system) lines; and they owned the Peiping-Mukden Railway and the following Japanese-financed lines: the Kirin-Changchun, the Kirin-Tunhua, Ssupingkai-Taonan and Taonan-Angangchi lines. During the two years preceding the outbreak of the present conflict, the Chinese attempted to operate these various lines as a great Chinese railway system and made efforts to route all freight, if possible, exclusively over the Chinese-operated lines, with a seaboard exit at the Chinese port of Yingkow (Kewchwang)- potentially at Hulutao. As a result, the Chinese made through-traffic arrangements for all ports of their railway system and refused in important sections to make similar traffic agreements between their lines and the South Manchuria system. The Japanese claimed that this discrimination deprived the South Manchuria Railway of much freight from North Manchuria which would normally pass over at least a part of its line and would find an outlet at Dairen.

Associated with these through-traffic controversies, a bitter rate war sprang up between the Japanese and Chinese lines, which began in 1929–30, when the Chinese reduced their rates after the opening of the Tahushan-Tungliao and the Kirin-Hailung lines. The Chinese lines appeared to have a natural advantage at that time due to the fall in the value of the Chinese silver currency, which made the silver rates on these lines cheaper than the gold-yen rates on the South Manchuria Railway. The Japanese claimed that the Chinese rates were so low that they constituted unfair competition, but the Chinese replied that their aim was not primarily to make profits, as was the case with the South Manchuria, but to develop the country and to enable the rural population to reach the markets as cheaply as possible.

Incidental to this rivalry in rate-cutting, allegations were made by each side that the other indulged in rate discrimination or secret rebates in favour of its own nationals. The Japanese complained that the Chinese made railway classifications which enabled Chinese products to be carried over Chinese lines more cheaply than foreign goods, and that they gave lower rates than normal for native goods and for freight shipped over Chinese lines to a Chinese-controlled seaport. The Chinese, on their side, charged the South Manchuria Railway with granting secret rebates, pointing out particularly that a Japanese forwarding agency was quoting rates for freight consigned through them which were lower than the regular scheduled rates of the South Manchuria line.

These issues were highly technical and involved, and it was difficult to determine the justice of the charges which each side was making against the other. It is obvious that such questions as these should normally be settled by a Railroad Commission or by regular judicial determination.

The railway policies of the Chinese authorities in Manchuria were focussed upon the new port development at Hulutao. Yingkow was to be the secondary port and, pending the completion of Hulutao, the principal one. Many new railways were projected which would serve practically all parts of Manchuria. The Japanese claimed that the through-traffic arrangements and the low rates put into effect by the Chinese deprived the port of Dairen of much cargo that would normally have moved to it and that this situation was particularly evident in 1930. They stated that the export freight carried to Dairen by the South Manchuria Railway fell off over a million metric tons in 1930, while the port of Yingkow actually showed an increase over the previous year. The Chinese, however, pointed out that the falling-off in freight at Dairen was due principally to the general depression and to the especially severe slump in soya beans, which constituted a large part of the freight normally carried over the South Manchuria line. They claimed also that the increase at Yingkow was the result of traffic from regions:recently opened by the new Chinese railway lines.