China and World Finance History

60 Blackwell Publishing Ltd.
Oxford, UK and Malden, USAEHRThe Economic History Review0013-0117Economic History Society 20072007 2267312ORIGINAL ARTICLESCHINA AND THE WORLD FINANCIAL MARKETSGOETZMANN, UKHOV, AND ZHU
Economic History Review, 60, 2 (2007), pp. 267312
China and the world nancial markets 18701939: Modern lessons from historical globalization1
By WILLIAM N. GOETZMANN, ANDREY D. UKHOV, and NING ZHU
In this article we review the development of Chinese capital markets over a crucial period in the history of markets worldwide, and place that development in context. Despite fundamental differences between China today and China 100 years ago, it is still important to consider the effects of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversication between foreign and domestic investors. In addition, our analysis suggests that protecting of domestic corporate investor rights is at least as important as protecting foreign investor rights.
INTRODUCTION
n the rst half of the twentieth Century, China attracted considerable investment from abroad. One estimate of the foreign capital invested in China in 1938 put it at US$2.5 billion, third behind India and Argentina as a target of developing market investment, and not dramatically less than the US$7 billion of foreign investment in the United States at the time. Active foreign investment in China, of course, has a much longer history. It began in the mid-Qing era, with direct investment by Britain and other European countries, and developed by the late-Qing into a quasi-colonial relationship with effective foreign control of Chinas largest commercial port cities. The history of foreign investment in China is a vast topic. However, this article focuses more narrowly on the process of securitization of the assets of Chinese rms and government debt that began in the late nineteenth century, both inside and outside China. Over the period 18701930, the Chinese nancial system underwent extraordinary change. Chinese enterprise in major port cities developed from family-based, private equity
1 We thank Zhiwu Chen, Otto Lam, Sir Anthony Neoh, Hidetoshi Mine, Geert Rouwenhorst, and Sayuri Shirai for helpful comments. We thank the Tokyo participants in the ADBI/Wharton Seminar on Regulatory Difference-Banking Sector Regulation and Securities Market Regulation.
Economic History Society 2007. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
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ventures and quasi-public rms, to publicly held corporations that could tap domestic and foreign savings through international and domestic stock and bond markets. Chinese government borrowing began in the late nineteenth century as an informal process of nancial demands levied upon wealthy citizen in times of need. By 1930, despite having defaulted on, and restructured signicant parts of her debt, China was able to issue bonds for major infrastructure projects on the leading exchanges of the world. In addition, an active domestic bond market provided funding for the nearly ceaseless internal and external military struggles that lasted from the fall of the Qing in 1911 to the revolution that created the current government in 1949.2 What makes Chinese nance during this transition era particularly interesting is not the speed and progress of development so much as the problems encountered along the way.3 Despite the eventual success of capital markets in Shanghai and other coastal cities by the mid-twentieth century, Chinese nance lagged behind developments in Europe and Japan during this transition period. In this article, we argue that temporary imbalances in capital market development between China and the rest of the world before the fall of the Qing created political problems for Chinas leaders, and left Chinese investors at a competitive disadvantage with respect to foreign capital. While Chinese ofcials in the late Qing tried to remedy this imbalance through regulatory reform, these remedies were largely ineffectual. Despite experimentation in the late nineteenth and early twentieth centuries with domestic joint-stock companies, China relied primarily on foreign investment and private enterprise through the end of the Qing dynasty. The legacy of this reliance is still visible. Foreign investment over the period 18701930 nanced remarkable growth in the Chinese economy. However, it came at a pricethe most visible being preferential rgime concessions to foreign investors, and partial foreign control over government nances. From the foreign perspective, these concessions were simply investor protections. From the Chinese perspective, however, these terms were viewed as an affront to sovereignty and an impediment to the development of a domestic corporate sector. In particular, the imbalance between the protection afforded to foreign investors and the absence of it for domestic investors caused China to rely increasingly on foreign investors, at the cost of sovereignty and domestic economic growth.
2 For an analysis of the historical economic growth in China, see Perkins, Growth and structural change; and Rawski, Economic growth. 3 The Chinese experience may be compared to nancial development in other Asian countries. The exports by Southeast Asian (Burma, Thailand, Malaya, Indonesia, Indochina, and the Philippines) countries in the nineteenth century grew with little nancial development or foreign borrowing. Huff, Monetization, argues that this was because they depended almost entirely on small-scale producers bringing more land under cultivation and exploiting easily accessible mineral deposits. The scale of Chinese enterprise may thus have been an important differentiating factor.
Economic History Society 2007 Economic History Review, 60, 2 (2007)
CHINA AND THE WORLD FINANCIAL MARKETS
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As a consequence, the terms of Chinese external investments contributed to a backlash against foreign ownership of Chinese capital and foreign encroachment on Chinese sovereignty. Although a vigorous capitalist system emerged in cities such as Shanghai after the treaty of Shimonoseki in 1895, the seeds of resentment towards foreign capital ultimately served as a catalyst for the Revolution in 1949, an event that shifted China away from widespread economic and nancial relationships with large sectors of the developed world. Only in the last two decades has China returned to the global nancial community, and only in the last decade has China begun to rebuild her own domestic capital market. China today confronts some of the same problems she faced a century ago with respect to the tension between domestic and foreign capital markets. Chinese investors today have access to a large domestic market, but they are still largely prohibited from investing overseas. We show that this constraint can have a signicant impact on the cost of capital for development, and on the risks confronted by savers. Despite great progress recently in the modernization of Chinese capital markets, Chinese investors do not yet enjoy the same kinds of protections as investors in other countries. One lesson from Chinese nancial history is that a lack of investor protection may have impeded progress towards a strong domestic capital market, and superior protections negotiated for foreign investors created severe political problems for the government. One cannot consider the Chinese experience independent of the contemporaneous context of nancial and economic development around the world. The nancial history of China clearly has parallels to the experience of Latin America, North Africa, and Southeast Asia in the late nineteenth century. As Bordo, Taylor, and Williamson4 and Clemens and Williamson5 point out, the global context for the joint evolution of nancial institutions and economic growth make it clear that, while globalization brings in capital, technology and institutions, it also imposes external constraints on local development, because it forces nascent local systems to compete against the foreign systems. Our analysis in this article focuses on precisely this experience in China at a critical juncture in that nations history. Although the evolution in China was clearly part of the broad economic globalization of a century ago, the specic Chinese experience is instructive. Economic forces may be global, but the events and conicts that channel or frustrate them can be local. The failure of globalization in Chinese markets can help understand the challenges to nancial market development when international capital encounters domestic interests and alternative market structures. The article is organized as follows. In the next section, we place the development of Chinas equity markets in the context of the global nancial
Bordo, Taylor, and Williamson, Globalization. Clemens and Williamson, Closed jaguar, open dragon: comparing tariffs in Latin America and Asia before World War II, working paper, NBER (2002).
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system of the day. In section III we do the same for Chinas government bond market. Section IV focuses specically on the case of Chinese railroad nance. Section V develops a model of segmented foreign investment and examines the impact of diversication opportunities on investors. Section VI concludes.
II
EQUITY MARKET DEVELOPMENT
In contrast to Europe, the United States, and Japan, the development of Chinas capital market in the late nineteenth century was modest. The domestic investors opportunity set was relatively small, geographically limited, and suffered from early turbulence, all problems that might have dissuaded more widespread investment. Nevertheless, the path of the development of the equity and debt markets in China suggests some reasons for the discrepancy, and also makes clear that proposals and potential for development existed relatively early. Chinese Enterprise and Early Corporate Forms The original impetus for tapping Chinese investor capital for development came in part from a Chinese scholar who studied overseas. Yung Wing ( ), famous reformer and a graduate of Yale College in 1854, proposed the joint-stock nancing of a Chinese steamship transportation company to the governor of Kiansu province in 1867. His plan was approved, but it was not until 1872 that Shanghai entrepreneur Sheng Hsun-Huai ( ) founded the China Merchants Steamship Navigation Company as a jointstock company to compete with foreign-operated maritime transportation lines.6 The company was essentially quasi-private. Local merchants were induced by the provincial government to own shares and to manage the rm, and the government provided a loan that was eventually forgiven. The company was operated with the joint goal of generating prots for shareholders and providing a domestic rival to foreign-owned shipping rms. Other Chinese joint-stock companies were formed in the 1870s by Sheng and by other entrepreneurs in the 1870s and 1880s under the auspices of the guandu shangban ( ) systemOfcial Supervision and Merchant Management. The shares of these ventures, including the Imperial Telegraph Administration, the Hua-sheng Textile Mill in Shanghai, and the Imperial Bank of China, were sold primarily to wealthy merchants and were subject to virtually no ofcial securities laws. Shares in guandu shangban ventures were occasionally traded, and prices for most of the 1880s were printed in Chinese language newspapers in Shanghai. However, there was no ofcial exchange for Chinese securities. In the 1880s, the government moderated its role in such enterprises by introducing another organizational form called guanshang heban (implying joint government-merchant
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Feuerwerker, Chinas early industrialization, p. 97.

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management).7 It was not until the promulgation of the Company Law in 1904 that direct ofcial involvement, and implicit government sponsorship of business enterprise in China was replaced by a western-style set of indirect regulations and institutions for shareholder protection. Recently, scholars have employed in-depth studies of Chinese rms in the late Qing and early Republican period to explore how these evolving ownership and governance structures affected the capacity of Chinese rms to compete economically. For example, Pomeranz analyses the experience of one company, the Yutang Company of Jining ( ).8 The rm, founded in 1779, evolved over its lifetime from an entrepreneurial venture to a mercantile partnership to a family-owned enterprise and nally to a state-owned business. Pomeranz points out that Yutang was able to effectively compete with domestic and foreign rivals in the food business without having to adopt a western-style corporate form. Indeed, in 1905, a year after the Company Act, all external shareholders were bought out by a single family. In contrast, Klls study of the Dasheng Cotton Mill ( ) in Nantong analyses the experience of another Chinese regional enterprise that began as a guandu shangban rm founded by an ofcial in the region of Nantong in 1895. 9 Unlike the Yutang company, The Dasheng Spinning Mill No. 1 registered as a public company in 1905 and continued as a joint-stock enterprise until nationalization. Kll points out that, while nominally a shareholder corporation, Dasheng was under the effective control of its founder. These parallel experiences suggest that various forms of rm ownership and nancing coexisted in the period. While some rms, such as Dasheng, offered external investors the opportunity to share in their protsif not entirely in their governanceothers, such as Yutang remained private. Public Securities Market Development Chinas rst domestic stock price boom occurred in the 1880s when the list of publicly traded rms nearly tripled from 10 to 29, and stock prices exceeded par value by 1882, apparently feeding investor speculative demand.10 Unfortunately, the Shanghai market crashed in the mid-1880s, reducing the traded list to 12 and dropping share prices to roughly half their book value. This early bubble may have had a long-term inuence on investor appetite for shares. Meanwhile, gure 1 shows that the stock prices of foreign-registered companies trading in Shanghai stayed relatively stable, indicating that domestic and foreign equity markets were functionally disjointed during this period.11 An interesting hypothesis is that this lack of
7 See Goetzmann and Kll, History of corporate ownership, for details about the evolution of corporate ownership structures in the late Qing. 8 Pomeranz, Traditional Chinese business forms. 9 Klls study of the Dasheng Cotton Mill, Cotton mill to business empire. 10 Zhu, Three market crashes. 11 Adapted from data in Zhu, Three market crashes.
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Price indices of Chinese Domestic and Foreign Stocks in 1880s
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Separation of Chinese domestic and foreign stocks in the 1880s
correlation was a clientele effectthe dynamics of the Chinese share market reected uctuations in capital supply by investors who were simply not accessing the foreign-registered share market. Whatever the reason for the tumult, following the crash, prices were no longer recorded in local newspapersthe collapse of Chinese shares in the 1880s seems to have dampened investor enthusiasm for local equity investing for nearly two decades. Chinas rst stock exchange, the Shanghai Share Brokers Association, was founded in 1891 in Shanghai by foreign businessmen. Foreigners founded another stock exchange, the Shanghai Stock Exchange, in 1904, which later merged into the Shanghai Share Broker Association. 12 These exchanges initially only traded shares of foreign-registered companies. It is not clear the extent to which these foreigner-founded exchanges served the needs and interests of Chinese investors. Only members could trade in the Shanghai Share Broker Association (SSBA), and out of the 100 members, about 10 were Chinese. Do these proportions reect anything about the client-base of the brokers? We do not know. Like other well-known restrictions by the foreign merchants on Chinese access to institutions, until 1935, Chinese were prohibited from trading through the SSBA. 13 Trading in domestic shares thus took place apart from the leading exchanges, and in
McElderry, Shanghai securities exchanges provides a chronology. Thomas, Western Capitalism in China documents the history of the Shanghai exchange. 13 Shanghai Archive, Shanghai Stock Exchange, p. 399.
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all likelihood remained relatively small around the turn of the century. The number of domestic listings reached a maximum of 37 in the late Qing era, investors were geographically limited to the vicinity of Shanghai, and transactions were infrequent. By 1935, the Shanghai China Merchants Stock Exchange had grown to become one of the biggest exchanges in the far east, with a list of 190 companies and an annual trading volume from 25 trillion Yuan. Interestingly, the Shanghai China Merchants Stock Exchange itself was a public company listed on the Exchange. Shanghai was by then one of the most important capital markets in Asia, with a strong domestic and international banking sector and a vigorous market for domestic and foreign stocks and bonds. This had not been the case three decades earlier, when thoughtful attempts to develop home-grown Chinese capitalism experienced sporadic successes and failures that limited the ability of domestic investors to hold diversied portfolios. The early lack of functional capital markets likewise limited the ability of Chinese commercial enterprises to access signicant capital. These two effects can re-enforce each other.14 While foreignercontrolled exchanges functioned relatively earlier than Chinese-controlled exchanges, even they could not be compared to the scale and scope of European markets, or to contemporaneous capital markets in Japan. Beyond capital constraints on enterprise, the lagging development affected domestic Chinese investors by leaving them relatively undiversied when compared to foreign investors who accessed more fully developed markets. Development and Reform It has been pointed out that embryonic capitalism existed in China from the Late Ming onwards, particularly in the mining and manufacturing industries. However, there is little question that the encounters with the west, particularly in the major trading ports, was a major stimulus to domestic enterprise.15 For all of its negative effects on China, British gunboat diplomacy in the nineteenth century generated considerable opportunity for the development of domestic manufacturing development. The success of European business practices and nancial institutions in trading ports such as Shanghai and Hong Kong elicited a movement in China to develop her own nancial system based upon securitization of nancial claims. In 1904, the Chinese Ministry of Commerce promulgated a number of reforms of the commercial code to facilitate the development of domestic corporations and to limit the ability of foreign shareholders and bondholders to gain control. It further established a bankruptcy code in 1905.
Goetzmann and Kll, History of corporate ownership, point out that when the price of attracting external capital is too high, companies will prefer self-nancing. 15 See, for example, Dixin and Chengming , Chinese capitalism.
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According to one estimate, these efforts attracted 130 million taels (or roughly US$100 million) in Chinese capital to 265 new domestic corporations between 1903 and 1908.16 Ten of these new rms were railway companies, representing about half of the capitalization of all Chinese corporations registered under the company act of 1904. Besides companies organized under the ofcial code, there were a number of other businesses devised to nance railroad development and to compete directly with foreign concessionaires. Table 1 in the paper, taken from Lee (1977) lists 19 rail companies formed from 1903 to 1909, many of which received ofcial provincial subsidies in the form of revenues from surtaxes on rice, opium, opium pipes, tea, salt, lottery tickets, lumber, stamps, rent, ofcials salaries, and land.17 As the table suggests, the promised rate of return on these investments was not highranging from 4 per cent to 7 per cent although it is not clear whether this included the potential for capital gains, since the type of securityequity or debtis not identied. What is clear is that the targets for capital were not met. Even with ofcial subsidies for many of the rms, the actual amount raised rarely reached half of the goal. It is unlikely that this was because of a lack of personal domestic capital. Macroeconomic estimates of domestic wealth from China in the 1930s, as well as accounts of major personal fortunes of her citizens, both suggest that China had considerable capacity to nance defence and infrastructure domestically. One problem was surely the lack of experience with share issuance and bond underwriting processes that European markets had already mastered.18 Another problem was corporate governance. Despite legal reforms and active efforts to charter domestic enterprises, evidence suggests that most of the new businesses after the 1904 reforms did not have the governance structures, managerial expertise, and independence from governmental control to allow them to compete effectively against foreign concerns. Lees study of the Chinese chartered railroad companies in this era attributes their failure to (1) undercapitalization due to higher alternative uses of capital, (2) lack of engineering and technical skill, (3) lack of managerial expertise, and (4) corruption and embezzlement.19 Of course, the rst problem of undercapitalization is a symptom and not a cause. Chinese reluctance to invest may have been because of competition with internationally diversied investors, or to rational investor expectations about governance problems, or both. In connection with this hypothesis, we will detail a particularly important company in our later discussion of railway nance.
Lee, En-Han , Chinas quest for railway autonomy, p. 268. These gures differ slightly from those in Feuerweker, Chinas early industrialization, table 1, presumably because of the addition of railway companies, studied more completely by Lee. 17 Lee, Chinas quest for railway autonomy. 18 For macroeconomic estimates of Chinas savings capacity, see Riskin, Surplus and stagnation. For a discussion of personal fortunes see Huenemann, Chinas foreign debt, p. 126. 19 Lee, En-Han , Chinas quest for railway autonomy, pp. 13241.
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III
GOVERNMENT DEBT: SECURITIES ISSUES AND FINANCIAL INTERMEDIARIES
Debt nancing is the alternative to equity nancing, and is the primary nancing avenue available to governments. While this article focuses on publicly traded securities, it is impossible to ignore the key role played by nancial institutions in China as intermediates of public nance and as sources of loan capital for companies. In this section we examine the development of external and internal markets for sovereign and corporate Chinese debt. Beginnings There is a long history of native Chinese banks serving the need for savings, remittance, and borrowing. Yang describes Pre-Qing pawnshops, moneyshops, and mutual savings associations as local providers of credit services. 20 Interregional banks called piao-hao ( ) appeared in the nineteenth century and facilitated long-distance remittances for private enterprise as well ) as the Chinese government.21 Many of these family-owned piao-hao ( were concentrated in Shanxi, although, as Shanghai rapidly developed into Chinas nancial center through the nineteenth century, native banks ourished there as well.22 With the expansion of interregional Chinese commerce, as well as the needs of the government to move sums of cash around the country for military purposes during the Taiping Rebellion of the 1850s and 1860s and the Moslem rebellion of the 1870s, the need for interregional banking services was clear.23 Stanley cites the role that at least one Shanxi bank played in nancial transfers for military operations during 1870s. 24 Ji notes that the Shanxi banks served as lenders to Shanghai native banks who in turn provided local banking services,25 and McElderry argues that the Shanghai native banks also intermediated between foreign banks and local enterprise.26 Despite the emergence of domestic Chinese banks, their experience with facilitating government money transfers, and their ability to source and supply capital for business loans, Chinese government ofcials turned rst to foreigners for loans. Stanley argues that the Taiping Rebellion (18511864) represented a watershed in Chinese government nance. Not only did it cause China to return to the issuance of paper money, but, for the rst time in dynastic history, it initiated decit nance. In 1861, the provincial governor of Kiangsu, Hseh Huan, was given imperial permission to borrow 300,000
Yang, Money and credit in China, p. 81. Also see Wu, Chinese native banks, pp. 8993. Stanley, Late Ching nance, p. 22. 22 See McElderry, Shanghai old-style banks. 23 Interestingly, one of the rst proposals for a domestic bank was also made by Yung Wing. See Cheng, Banking in modern China, p. 23. 24 Stanley, Late Ching nance. 25 Ji, History of modern Shanghai banking. 26 McElderry, Shanghai old-style banks.
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taels from foreign merchants during the Taiping rebellion. The one-year loan was secured by vouchers for Shanghai customs receipts. Foreign merchants again made provincial loans in 1862, 1864, and 1866 for military purposes. In 1866, the governor of Fukien, Tso Tsung-ttang ( ) was charged with putting down the Islamic rebellion in western China. He used the earlier experience with loans from foreign merchants as a model for military nancing on a larger scale, using the maritime customs receipts in Fukien, Canton, Chekiang Shanghai, and Hankow as collateral.27 The Maritime Customs duties, one of the largest sources of government revenue, were collected directly by foreign government ofcials at Chinese ports, and deposited in the Hong Kong and Shanghai Bank (HSBC), and this nancial arrangement led naturally to the bank acting as a nancial intermediary in future government borrowing.28 In appendix I, we enumerate the Chinese external loans listed in Kuhlmann and Stanley and code each according to the security pledged for the loan.29 The external loans over the late nineteenth and early twentieth centuries essentially securitized an array of specic government revenues, including Chinas maritime customs, salt taxes, internal provincial transfer taxes (likin), mining taxes, alcohol and tobacco taxes, opium revenues, property transfer taxes, and revenues for railways. Of course, verication and collection of these revenues was an important feature of the loan contract. The next recorded Chinese government loan was oated to defend against the Japanese designs on Taiwan in 1874. It was made by HSBC and likewise secured on the Maritime Customs. HSBC arranged the rst public offering of Chinese government bonds in 1877 in the form of a ve million tael loan in silver. With this issue, the Chinese government nally entered the international capital markets. HSBC continued to play a major role in underwriting the issuance of Chinese debt through the nineteenth and early twentieth centuries, although other foreign banks, including Barings and the Deutsche-Asiatische Bank managed some of its foreign issues. Later, larger loans required international banking syndicates to simultaneously oat bond issues in nancial capitals around the world. Maritime Customs again backed the 7 per cent 1.5 million sterling bonds sold in London to nance Chinas defence against France in the 1880s. All of the debt incurred in the 18945 war with Japan and the resulting indemnity was secured by Customs revenues, as were the Boxer Indemnitiesthe debt settled on China by the consortium of powers after
Stanley, Late Ching nance, gives a complete account of these early loans, pp. 48ff. Cf. Stanley, Late Ching nance, ibid., p. 82. The foreign oversight of Chinese maritime customs revenues began as a method for the British and French to collect their war indemnity of 8 million silver taels. Forty per cent of custom revenues were paid directly to Britain and France in equal share from collections in all open ports, until the completion of the obligation in 1866. From that point on, the 40% share was paid directly to the Imperial Government in Peking, which found it convenient to maintain the same structure and oversight of the customs duties. 29 Kuhlmann, Chinas foreign debt; Stanley, Late Ching nance.
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the Boxer Rebellion. The Boxer Indemnity of 67.5 million was divided among 14 powers with roughly 75 per cent going to Russia, Germany, France, and Great Britain. It effectively absorbed the previously remaining unpledged portion of Chinas customs revenues and placed her import taxes entirely under foreign control. With her customs revenues largely pledged after 1900, China had to promise alternative sources of revenue as collateral on major loans. Some of the last obligations of the Chinese Imperial Government, such as the 1910 Kiagnan loan issued in France and Belgium, were secured by salt taxes. The Qing dynasty fell in 1911 and recognition of the Chinese Republic by the great powers was conditional upon honouring the debts of the previous government. Thus, the rst major loan of the new Republic in 1912 (the 5 per cent Crisp Gold Loan), oated in London, negotiated and approved by the new political leaders, Sun Yat-sen ( ) and Yuan Shi-kai ( ), was backed explicitly by salt revenues. Loans secured by salt taxes followed in 1917, 1918, 1922, and 1937 under a variety of Chinese governments. Internal transit taxes, called likin ( ), existed after the TaiPing Rebellion. These were pledged as security on Chinese external loans in 1898, 1909, 1911, and in 1912. Why are all of these revenues and taxes important? Because they represented security to foreign investors. China faced constant external and internal military challenges throughout the period of our study, and by the end of the nineteenth century, the weakness of the Imperial Government was well known. Thus, without such backing, Imperial promises to repay were not worth much, even if repayment were deemed to be expedient. Perhaps the most remarkable feature of Chinese bonds over the period is the stability of their yields until 1918. Figure 2 shows the time-series of yields on Chinese, Indian, Japanese, and Russian bonds over the period. This was a time of political tumult for China; a period that included two external wars, the Boxer Rebellion, indemnity payments, a revolution that toppled the Qing Dynasty, and participation in a world war. Despite these events, the yields on Chinese bonds never moved outside of a narrow trading band between 5 1/2 and 6 per cent from 1899 to 1913, and from 6 per cent to 7 per cent from 1913 to 1918.30 This stability of the Chinese yields is particularly striking in light of evidence that European and American securities reacted strongly to wartime events. European bond markets reected the wartime fortunes of
30 The data in this chart are from Global Financial Database, which collected the data from the series of yields on Chinese Government bonds quoted on the London market and published in the Investors Monthly Manual, a monthly publication of The Economist. The bonds used are the 8% Taiwan War Loan of 1874, the 6% Sterling Loan issued in London by Baring Brothers in 1885, and the 5% Reorganization Loan of 1912/13 issued in London, Paris, Frankfurt, and St. Petersburg. The rst two bonds were backed by maritime customs receipts. The third bond was a direct obligation of the Chinese government, backed by a salt tax and surplus maritime customs. Semi-annual data for all securities listed in the London Exchange are currently available on the website of the International Center for Finance at the Yale School of Management [http://www.icf.yale.edu].
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Yields of foreign public debts of China, Russia, Japan, and India
Sources: The data are from Global Financial Database, which collected it from the series of yields on Chinese government bonds quoted on the London market and published in the Investors Monthly Manual, a monthly publication of The Economist. The bonds used are the 8% Taiwan War Loan of 1874, the 6% Sterling Loan issued in London by Baring Brothers in 1885, and the 5% Reorganization Loan of 1912/13 issued in London, Paris, Frankfurt, and St. Petersburg. The rst two bonds were backed by maritime customs receipts. The third bond was a direct obligation of the Chinese government, backed by a salt tax and surplus maritime customs. Semi-annual data for all securities listed in the London Exchange are currently available on the website of the International Center for Finance at the Yale School of Management [http://www.icf.yale.edu].
combatants during the First World War, and European equity markets reected the relative advantages of combatants during the Second World War.31 Studies of the United States debt during its civil war indicate that the nancial markets reacted to, and in some cases anticipated, outcomes of major battles.32 The rationale for market reactions to news from major political events is based on the presumption that the likelihood of payment on the security uctuates with the political and military events affecting the issuing authority. Conversely, if the foreign shareholder protection were riskless, one would expect to see no price reaction to political events. In China, the rst political event we examine for a bond price reaction is the 18945 war with Japan and treaty negotiations on indemnity
31 For yield uctuations in Europe during the World Wars, see Ferguson, Cash nexus. For equity uctuations during the Second World War, see Jorion and Goetzmann, Global stock markets. 32 See Roll, Interest rates and price expectations during the Civil War; and Willard, K. L., Guinnane, T. W., Harvey, and Rosen, S., Turning points in the civil war: views from the greenback market, NBER, working paper no. W5381 (1996), and Rosen, Turning points in the Civil War.
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payments. Speculation about the treaty and proposed indemnity payments might have been seen in prices in early 1895, and the terms of the 200 million tael indemnity would have become public after 17 April 1895.33 If anything, the 8 per cent treasury bond prices decreased during the war years, despite the fact that the loans to defease the indemnity, issued in 1895 at 6 per cent, were also largely secured on the Maritime Customs revenues. The second date we look to for yields to reect an increasing risk of Chinese default is the funding of the Boxer Indemnities in 1901, which were not publicly issued as bonds, but which captured most if not all of the remaining Customs Revenues until the end of the First World War, at which time some of the indemnity was postponed or cancelled by various nations. The Boxer Indemnities had a junior claim on the Maritime Revenues, with priority following previous charges.34 However, despite their lower priority, they must have represented a severe economic burden to the government, and they were owed directly to nation states with armies, as opposed to bondholders who would have to seek legal protection in the event of default. Despite these issues, there were no price reactions in the London market. The third and perhaps most important event with the potential to cause default on Chinese sovereign debt was the Chinese Revolution of October 1911. It is only reasonable to assume that an investor holding a promise by the Chinese Imperial Government would be concerned by the news that the government had been violently overthrown and replaced by a military strongman with an unclear popular mandate to rule. Again, no movement in the bond prices in London hint at elevated uncertainty about whether the new government would honour its external obligationsdespite an obvious, immediate need to consolidate internal popular support. Recognition of the new government by world powers was conditional upon honouring international debts, and the rst step towards this was the 1913 Reorganization Loan, a 25 million loan negotiated by Chinas new ruler Yuan Shi-kai ( ) with Great Britain, Germany, France, Russia, Belgium, and Japan. The US did not participate, on the grounds that the loan interfered in Chinese sovereignty. The terms effectively prevented China from using the loan proceeds to defend herself against Russian and Japanese designs on Manchuria.35 Indeed, political power was directly tied to nancial power in the Reorganization Loan negotiations, and American inuence in the course of the complex negotiations over the Reorganization Loan was hampered by the lack of a liquid market in the US for foreign government securities. Not until the end of the First World War did the US
33 34
For details of the treaty negotiations see Beasley, Japanese imperialism, p. 64. Kuhlmann, Chinas foreign debt, p. 34. 35 Scholes and Scholes, Foreign policies of the Taft administration, pp. 237 and ff.
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assume prominence as a global capital market, in effect, stepping into the vacuum created by wartime nancial crises in Great Britain and the continent.36 By the time the Reorganization Loan was nally negotiated and proceeds issued in 1913, the Chinese government was in dire nancial straits and needed the cash to meet imperial and provincial loans coming due, back pay for the army, and administrative expenses of the new government. Certainly some of the loan proceeds went to pay the army in Beijing loyal to Yuan Shih-kai ( ), but contemporary observers suspected much of it ended up in the pockets of high ofcials.37 The Reorganization Loan marks the beginning of the nances of the new Republic, and a period of higher rates and higher volatility for Chinese bonds. Loan rates averaged over 6 per cent in the period up to 1919, which by historical accounts marks the beginning of High Warlordism by which time the Republic had fractured into a number of battling regional powers with shifting alliances and uncertain nances. It is really the rst evidence in the time-series of yields on Chinese bonds suggesting that political events in China had any bearing at all on the likelihood of bondholder repayment. Until that time, apparently the bondholders in London and elsewhere in Europe felt condence that regardless of Chinas internal turmoil, the mechanisms were in place to insure against governmental expropriation. On 19 October 1921, the Chinese government declared bankruptcy, and with few exceptions, China began to default on her foreign loans in the 1920s. Only bonds backed directly by the Maritime Customs Revenues, including the 1898 AngloGerman Loan and the 1913 Reorganization Loan continued to pay. It is interesting to note that appendix I indicates clear trends in the sourcing of Chinese debt. After the First World War, Japan became a more important lender to China, apparently taking up the slack left by the weakened European capital markets. By 1939, virtually all Chinese external loans were in default. 38 The erosion of Chinas ability to pay her debts is generally attributed to the breakdown of the mechanism for directing revenues to claimantsprovincial seizure of revenues during her civil war were apparently common as regional warlords needed to nance military operations. Finally, the Great Depression, the devaluation of silver and natural disasters nished off Chinas ability to borrow externally. Although the Imperial government relied almost exclusively on foreign debt, the government of the Chinese Republic started to issue domestic debt immediately after the revolution. We report the domestic public debt issuance in table 1. In 1914, the government of the Chinese Republic established a new agency, the Internal Debts Bureau, to oversee the issuance of bonds. Most of the high-ranking ofcers of this bureau were foreigners. The biggest problem with Chinese domestic bonds during that time is that
36 37
Atkin, British overseas investment, pp. 23 and ff. Kuhlmann, Chinas foreign debt, p. 87. 38 Kuhlmann, Ibid., p. 5.
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Table 1.
Amount (converted into US$) 8,476,900 7,692,300 7,407,400 1,146,800 4,848,600 89,407,800 16,077,400 15,194,100 1,647,000 11,428,500 43,636,300 52,941,100 80,000,000 2,880,000 13,064,500 1,301,100 58,483,800 14,623,600 40,278,500 10,000,000 7,142,800 3,731,300 746,300 3,134,300 11,111,000 5,882,300 6,060,600 2,255,600 1,515,200 1,818,200 12,878,700 4,033,100 8,867,550 19,736,800 26,315,800 10,126,600 6,250,000 5,660,400 18,750,000 28,481,000 6,666,700 31,847,100 15,894,000 2,649,000 26,143,800 45,751,600 12,500,000 937,500 1,373,600 11,111,100 5,681,800
Chinese domestic debt issues
Year 1894 1898 1910 1911 1912 1912 1913 1914 1914 1915 1917 1918 1919 1919 1920 1920 1920 1920 1921 1921 1921 1922 1923 1923 1924 1924 1925 1925 1925 1925 1925 1926 1926 1926 1926 1926 1927 1927 1927 1927 1927 1927 1927 1928 1928 1928 1928 1928 1928 1929 1929 1929 1929 1929
Yield 8.4 6 7.2 6 8 6 6 6 6 6 6 7 6 7 6 7 6 7 8 18 7 8 8 8 8 8 8 8 8 8 4 8 6 7 9.6 8 8 8 9.6 8 8 2.5 8 8 9.6 9.6 8.4 8.4 2 6 8 8 8
Converted yield 6.46 4.62 5.33 4.20 5.26 3.95 3.87 3.53 3.53 3.43 5.45 8.24 8.00 9.33 6.45 7.53 6.45 7.53 5.71 12.86 5.00 5.97 5.97 5.97 5.93 5.88 6.06 6.02 6.06 6.06 2.72 5.30 3.97 4.61 6.32 5.06 5.00 5.00 6.04 5.00 5.00 1.58 5.33 5.10 6.36 6.36 5.49 5.49 1.25 3.75 4.40 4.44 4.55 Rent tax
Securities Taels Taels Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan
Currency
Department income National income National transactional tax Railway income Unsecured custom Bond fund Tobacco tax Special fund Commodity tax Unsecured custom Commodity tax Tobacco tax and special fund Tobacco tax and special fund Special fund Special fund Salt tax Stopped indemnity Stopped indemnity Stopped indemnity Stopped indemnity Stopped indemnity Railway income Special fund Special fund Stopped indemnity Stopped indemnity National income Hupei export tax Hupei export tax National income River custom River custom Tobacco tax Yin hua tax Gasoline tax Tianjin custom tax National income and transportation income Stopped indemnity Remaining customs Custom increment Custom increment Tobacco tax Tianjin custom tax Custom increment Custom increment Railway income Eletronic plant income Eletronic plant income Custom increment Telecomm. income
282
Table 1. Continued
Amount (converted into US$) 13,714,300 45,454,500 28,409,100 23,904,400 3,174,600 31,746,000 31,746,000 31,746,000 31,746,000 31,746,000 6,006,000 1,801,800 1,201,200 30,030,000 25,000,000 3,000,000 3,000,000 34,482,800 41,379,300 41,379,300 34,482,800 241,379,300 10,344,800 3,448,300 6,896,500 561,538,500 130,769,200 10,384,600 30,769,200 5,769,200 46,153,800 5,384,600 189,230,800 6,538,500 148,656,700 29,850,700 7,440,500 1,153,846,100 1,153,846,100 126,161,600 77,419,300 77,419,300 5,291,000 32,222,200 168,539,300 9,831,400 280,898,800 204,778 Converted yield 4.57 4.55 5.45 3.35 3.17 3.81 3.81 3.81 3.81 3.17 1.80 1.80 1.80 1.80 1.50 1.50 1.50 2.07 2.48 2.48 2.07 2.07 2.07 2.07 2.07 2.31 2.31 2.31 2.31 2.31 1.54 2.31 1.54 1.54 1.79 1.49 1.19 1.15 1.15 0.61 0.39 0.39 0.33 0.32 0.32 0.34 0.34 0.00 0.00 0.00 0.00
Year 1929 1929 1929 1930 1930 1930 1930 1930 1930 1930 1932 1932 1932 1932 1933 1933 1933 1934 1934 1934 1934 1934 1934 1934 1934 1935 1935 1935 1935 1935 1935 1936 1936 1936 1937 1937 1937 1938 1938 1939 1940 1940 1940 1941 1941 1942 1942 1942 1945 1945 1946 1947 1947 1948
Yield 8 8 9.6 8.4 8 9.6 9.6 9.6 9.6 8 6 6 6 6 6 6 6 6 7.2 7.2 6 6 6 6 6 6 6 6 6 6 4 6 4 4 6 5 4 6 6 6 6 6 5 6 6 6 6 6 6 15 5 5
Securities Tobacco tax Custom increment Custom increment Tobacco tax Export income Custom increment Tobacco and our tax Salt tax National tax Stopped indemnity Tobacco tax and special fund Eletronic plant income Salt tax and special fund Custom increment Custom increment Railway income Salt tax Stopped indemnity Stopped indemnity Custom increment Salt tax Szechuan local tax Telecomm. income Custom increment Stopped indemnity and special bond Railway income Railway income Szechuan local tax Canton local tax Railway income National Income Guangxi salt tax Income tax Salt tax National income National income General tax and tobacco tax National income National income National income Filed rent Britain loan Special fund National income National income Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan
Currency
Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Yuan Corn: 6,730,000 Dan; Wheat: 590,000 Dan
Grain: 10,000,000 Dan Foreign exchange fund National income National income Jin Yuan Dollar Gold: 2,000,000 Liang
283
they were seldom sufciently securedforeign bondholders held debt senior to domestic bondholders. Many domestic debts were secured with the remainder of the customs revenues, which were controlled by foreigners and largely pledged to previous foreign debts. In the1920s, the government of the Chinese Republic had to reorganize its obligations and as a result effectively defaulted on domestic debt as well as foreign loans. After the successor Nanjing Government took control of most of the country in the 1920s, it also resorted to domestic public debt issuance and likewise had to restructure its debt, reducing the yield on the face value of its domestic loans from 7 and 8 per cent down to 6 per cent, an outcome equivalent to partial default. The reorganization plan also extended the maturity of the debts to twice as long as originally designed. Shortly after the reorganization, the government issued bonds, and not surprisingly, the ever-increasing size of public debts put the government into default again in 1935. The government issued 2,082 million yuan worth of bonds in 1936 in connection with another reorganization, which represented the largest issuance in a single year up to that point. After the Sino-Japanese war broke out in 1937, the government issued various domestic bonds during the eight years of the war. During this period, the government no longer targeted individual investors. Instead, it turned towards banks. Paradoxically, with the weakening of the central government, the banks in ShanghaiChinas money centrebecame relatively strong. While the government defaulted frequently, Chinese banks in this era had a sterling reputation.39 To attract investment from Chinese living overseas, some debts were issued in foreign currencies outside China. In addition to regular debts, the government also issued debt denominated in commodities such as wheat and rice. Because the regular taxes and custom revenues decreased dramatically during the Sino-Japanese War, the public debts issued during that period were at even greater risk of default. Eventually, ination solved the governments problems at the expense of domestic bondholders. The ination of the 1940s decreased the real value of investments by 90 per cent. Finally, the Currency Reform of 1948 issued a new currency at a rate of 3 million to 1 to original currencies, wiping out most existing domestic debt. In sum, Chinese government obligations over roughly 60 years around the turn of the nineteenth century can be divided into a period of nancial stability followed by a period of volatility. Paradoxically the period of stability in her loan payments was a very volatile period politically. China met obligations despite the sizable Japanese Indemnities and Boxer Indemnities for more than a decade. This was not entirely due to choicethe stability in Chinese bond prices in the rst decade of the twentieth century is almost certainly attributable to the foreign control of Chinese government revenues. It may be argued that the foreign control of revenues was good for
39 See, for example, Fortune magazines June 1932 feature, Celestial modernism in the banks of China.
284
25
20
15
Yield
10
19 10
19 17
19 37
18 90
19 20
19 22
19 25
19 27
19 30
19 32
18 92
18 95
18 97
19 00
19 06
19
18
18
18
-5 Year China Russia Japan India
Figure 3. Yields (relative to British gilt) of foreign public debt of China, Russia, Japan, and India
foreign bondholdersat least in the short termbut perhaps bad for the new Chinese Republic, which suffered from a lack of military funding, despite the rst Reorganization Loan. It is particularly interesting that the very transparency and accountability of the Maritime Customs Revenues that guaranteed bondholder security also restricted the ability of the central state to access cash when needed. The cost of capital was low, but it may not have been such a bargain. The comparison to the loan uctuations in other Asian countries is instructive. Figures 2 and 3 indicate that China was unusual in the period before 1912 in the stability of her bond yields. For example, Russian debt yields uctuated dramatically, with lows in the 1890s and highs following their defeat in the Russo-Japanese War. Japanese debt yields began higher than Chinas, but dropped dramatically after her settlement with China in the 1890s. They rose again before the Russo-Japanese War and then dropped with its successful conclusion. Even Indiaa full-edged colony of Britainhad more volatile bond yields than China in this period. 40 The
40 Several factors contribute to volatility of Indian securities. Examination of the reports in the leading nancial monthly of the day, The Investors Monthly Manual reveals that the political situation in Europefor example war concerns in 1877 and the Afghan campaign in 1878and its implications for British nances had an impact on the value of colonial securities. Local conditions, such as famine in 1877, and issuance of new loans affected the value of Indian debt (The Investors Monthly Manual, December 1877 and December 1878 issues).
18
19
19 35
19 40
12
80
82
85
87
15
285
conclusion we draw from these comparative dynamics is that the distinctive characteristics of the Chinese loansin particular their enhanced security featuresmay have played a role in insulating investors from risk. In the next section, we focus on one of the most important types of Chinese loans during the periodrailway loansand examine their role in Chinese political change.
IV
RAILWAY LOANS
Like his contemporary Yung Wing, Ma Jianzhong ( ) was another Chinese scholar responsible for proposing that railway development be nanced through the securities market. Like Wing, his proposals were eventually adopted by the Chinese government. Ma obtained a baccalaureate in 1879 from cole Libre des Sciences Politiques in Paris. In that year, after a careful study of European economies, he wrote a compelling analysis of Chinas need to use bonds to nance railway development in the same manner as European nations. Noting that, despite their relative small geographical size,
It seems that these countries can draw on a source as vast and copious as a wellspring or river. By what means do they bring about such a situation? They ensure rstly that they gain the peoples trust, secondly that they have a clear method of borrowing, and thirdly that they repay the loans within a xed time period.41
Much has been written about global railway nance around the turn of the century. By most accounts the competition among the great powers to secure railway concessions during this period through a combination of political diplomacy and the nancial might of their capital markets is, in some ways, the high point of the age of Imperialism. At least it was characterized as such by contemporary commentators such as Lenin, who used the division of China into spheres of inuence by foreign capitalists as the example of Capitalist Imperialism par excellence.42 Although being under the nominal control of the Chinese Railway Commission, virtually all of Chinas railways constructed after 1895 were nanced by foreign debt issues underwritten by European-led investment banking syndicates, which obtained right of way, property concessions, and promises of repayment from the Chinese Imperial government. Under the control of the bankers who nanced the loans, Chinese railways were constructed, owned, and operated by managers designated by the nancial consortium. Certainly the most contentious feature of these loans was their provision for extra-territorial rights, which in essence means the substitution of the court procedure of a creditor country for the business practices of the debtor country.43
41 42
Ma, On the use of loans to build railroads. Lenin, Imperialism. 43 Adams, H. C. 1920, International supervision over foreign investments.
286
The Chinese Eastern Railway was a prime example of extra-territoriality. The Russo-Chinese bank issued a ve million tael loan in Russia in 1896 to nance the construction of a railway across Manchuria, linking the TransSiberian Railway to Vladivostok. The railway and its right of way were entirely administered and policed by Russian ofcials, who controlled the receipts and disbursements. The line was, in effect, a little bit of Russian territory within Chinas borders, and it issued its own currency. 44 Japan followed the same model with the loan for the 1917 South Manchurian Railway, which was secured upon the railways properties. The railway became Japans rst territorial stake in China. A Belgian loan issue of 1897 nanced the construction of the Lung-Tsing-U-Hai Railway and was secured by the railway itself, with the property and rights of way owned by the company. Externally nanced, owned, operated, and policed railways represented an obvious threat to Chinese sovereignty, an issue widely debated by contemporary observers. For example, economist A. P. Winston, writing in the Quarterly Journal of Economics in 1916, was sharply critical of the foreign companies monopolizing the nancing, construction, and control of Chinese railways.45 In contrast to Britain, France, Russia, Belgium, and Japan, the United Statesfor the most partpursued an Open-Door policy with respect to China, based on the principle of equal access by all nations to Chinese markets and resources, and the preservation of Chinese national sovereignty as opposed to its fragmentation and colonization by world powers.46 As a consequence, America generally opposed contracts that suggested preferential access to rail concessions. One exception to this policy, and perhaps the most important and spectacular example of Chinese railways concessions, is the Hukuang Loan. The Hukuang Loan is important in Chinese history for many reasons. The story of the loan illustrates the struggle between provincial and national powers in the late Qing period. It also illustrates how Chinese capitalists sought to fund development internally. Finally, it reveals the political consequences of foreign concessionsthe Hukuang Loan has been interpreted by some historians as the spark that led to the 1911 revolution and the end of 3,000 years of dynastic rule. Hukuang is a region in south-central China, which includes the provinces of Hunan, Hubei, and part of Szechuan. In 1905, a consortium of Hukuang gentry, ofcials, and businessmen, with the blessing and participation of the provincial governor, Chang Chih-Tung ( ), obtained a concession to develop a domestically nanced railway line through Hukuang. It came after the successful provincial lobbying for compensated cancellation of the development rights of J. P. Morgans American China Development Company,
Dreyer, China at war, p. 29. Winston, Chinese nance under the Republic. 46 Scholes and Scholes, Foreign policies of the Taft administration a, contains a detailed description of the USChina policy.
45 44
287
which actually fronted for a Belgian rail-development rm seeking to construct a line from Canton to Hankow. The line was a key route through Hukuang, linking a commercial port to the cross-roads of Chinese rail lines in the interior, and the cancellation of the foreign concession opened the door for domestic development. After the cancellation of the American concession, the Hukuang gentry took an active role in gaining concessions. For example, the Canton Hankow line was divided between two domestic concessionaires, one in Kwangtung (Guangdong) and the other in Hunan. The experience of the Kwangtung company illustrates some of the problems of corporate governance experienced in the emerging Chinese legal framework. The rm was among the most successful of Chinese companies at capital subscription. All 44 million taels of the required capital were raised, much of this from wealthy overseas Chinese investors. However, the domestic source of investment was important as well. An initial price of one tael per share attracted widespread popular domestic interest. An account in the North China Herald is particularly graphic in its description of investor enthusiasm for buying railway shares:
Not only are the monied classes rushing to buy shares, but the poorest of the poor and even those who are supposed of have no cash to spare and hardly enough to keep body and soul together are buying up one or more shares.47
Many of the shares were sold to the public through provincial charitable institutions, which often failed to register them in the name of the subscribers and instead retained the voting rights for themselves. With the help of these same organizations, and over the violent protests of the shareholders, the president of the Canton Chamber of Commerce took control of the company and precipitated further proxy contests and the ultimate intervention by provincial authorities. An audit of the company books in 1909 revealed massive embezzlement. The management had falsied the books by inating expenses, and had been purchasing equipment at high prices through suspicious transactions.48 The movement after the turn of the century towards domestic nancing is often interpreted as a grassroots nationalistic response to the threat of external nancing and control of Chinese infrastructure by foreign concerns. However, this characterization may be too simplistic. The gentry in China at this time was an educated social elite who served a political role as local intermediaries between the imperial government and the populace, and exerted considerable local control and inuence over commercial affairs. Sun observed that early in the history of Chinese railway development:
Chinese railways often suffered from forces in the environment that tended to obstruct their normal operations. These obstructions came from different
47 48
Quoted in Lee, En-han , Chinas quest for railway autonomy, p. 104. Account taken from Lee, Ibid., p. 104.
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quarters. It was sometimes the local gentry in the early years of railway history: over 3,000 taels were paid in 1906 to a number of local inuential personages along the route of the Ping hsiang-Hsiangtan line, for example, as salary for protecting the road, in permission to lay the track through their districts.49
In his study of the Changsha Rice Riot of 1910, Rosenbaum nds that the gentry played a key role in using xenophobic sentiment about foreign railroad development to turn the populace against the Manchu government. Indeed, Chang Chih-tung ( ) had turned down a proposal by a local merchant guild to fund a proposed rail line in Hunan in favour of a gentrydominated, quasi-governmental rm. According to Rosenbaum it suffered a similar fate to the Kwangdong company:
The operations in 19071908 were an unmitigated disaster. Virtually no power was assigned to shareholders, a number of whom apparently were merchants. In late 1907 large numbers of private shares were withdrawn. Those excluded from a voice in management continued to protest, although it is not clear whether their main target was the incompetent gentry management or the governments refusal to reorganize the company into a purely private venture.50
In sum, the experience of the domestic rail companies that obtained the concessions in place of the American China Development Company was unfortunate. The formation of domestic companies for rail development had the potential as a catalyst for personal investing in domestic ventures. The active participation of overseas Chinese in these ventures suggests that the domestic rms might even have had the potential for attracting international capital of a sort. It was all the more unfortunate that, despite the laudable goals of self-nanced railway development, and the willingness of Chinese speculators great and small to invest their savings in such ventures, the fundamental structure of corporate governance was not yet in place in China. A combination of poor corporate governance and an entrenched gentry that operated under a system of prestige and inuence made it difcult to compete with foreign companies incorporated abroad under governance systems clearly understood by well-diversied investors. Ultimately, despite nationalistic sentiments and powerful local interest groups, Chang brokered sole British nancing for the railwaya move that threatened to tip the delicate balance of foreign inuence in the Yangtze region.51 To combat British advantage, Germany, France, and nally the US, demanded participation in the loan, the construction, and the control of the railway. The nal result was a 6 million sterling loan shared by the four powers, with the rights to develop separate sections of track carefully negotiated among the participants. In a move that doubtless infuriated the gentry, Chang then closed the deal by persuading the Qing government to nationalize all domestic railway development on the grounds that delays
49 50
Sun, Pattern of railway development. Rosenbaum, Gentry power. 51 Scholes and Scholes, Foreign policies of the Taft Administration, p. 127.
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caused by the undercapitalization of domestic developers were impeding progress. The expropriation of domestic shareholder rights was thus complete. The 5 per cent, 50-year Hukuang Railway Sinking Fund Gold Loan was signed in 1911 with the Imperial seal of the Minister of Posts and Communications. The bond also bears the details of the security for the loan. Besides the net revenues of the railroad, the loan pledged as security: (1) the Hubei general likin of $2 million taels per year; (2) the Hubei additional salt tax for river defence of 400,000 taels per year; (3) a new, additional salt tax established in 1908 (during the period of loan negotiation) of 300 taels per year; (4) the Hubei collection of Hukuang inter-provincial taxes on imported rice of 250 taels per year; (5) Hunan general likin revenues of 2 million taels per year; and (6) the Hunan salt commissioners treasury allotment of regular salt likin of 250,000 taels per year. Presumably, this collateral was vital to pay bondholders during the railroad construction period. While the people of Hukuang were getting a modern railroad, they were paying for it with the original salt taxes, new salt taxes, rice taxes, and taxes on inter-provincial transfers, which presumably would increase with the extension of the rail system. In addition, the development rights were effectively expropriated from local business interests and handed to foreigners by the provincial governor, acting in concert with the Imperial government. Kuhlmann found a particularly interesting account of the consequences of the Hukuang loan. Quoting Chang Kia Ngaus Chinas struggle for railroad development, he said:
When the new policy of nationalization was made known the people raised a storm of opposition. Popular indignation was once more aroused to an extraordinary extent. It was especially intense in Szechuan, where strikes took place in the markets and schools. The provincial legislature was thrown into turmoil by the arrest of its speaker and deputy speaker. The people of the provincial capital Chengdu marched en masse to the ofcial residence of the viceroy, and sentries red into the crowd, killing scores of people. This enraged the people still more, and they refused to pay any more taxes and levies. By the middle of July many thousands of persons surrounded and attacked the city of Chengdu, being supported by the neighboring townships and villages. The coincidence of the outbreak of the revolution in Wuchang, opposite Hankow on the Yangtse River [in Hubei Province]greatly heartened the people of Szechuan. To suppress the movement, the Imperial Government sent its well-equipped soldiers under the command of General Tun-Fang ( ) to Szechuan, but the general was assassinated on his way, and the Viceroy of Szechuan met with the same fate. On September 10, 1911, the people of Szechuan declared themselves independent of the old regime and in sympathy with the revolutionary cause. On October 16, Prince Regent Chun proclaimed on behalf of the boy emperor his abdication from the throne.52
52
Quoted in Kuhlmann, Chinas foreign debt, p. 73.
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While this account conates a number of riots and unrest in the period just before the revolution, a careful study of one of the most important riots over Chinese railroad rights during this periodthe Changsha Rice Riot of 1910clearly implicates the local gentry as fomenters of resistance against the Qing government.53 With the Qing government siding with foreign investors in nancing Chinese development, the rights recovery movement turned against the Manchu rulers as well as foreign commercial interests. The Hukuang Railway Loan was the last external debt of the Chinese Imperial government, and it defaulted in the 1920s. China as a nation continued to borrow for railway development until late into the 1930srail loans appear in 1934, 1935, 1936, and 1937. The only signicant gaps in railroad bond issuance in the database are 1926 and 1927 (coinciding with the northern military campaign of Chiang Kai-shek ( ) to unify China), and the rst four years of the Great Depression. With these exceptions, Chinese railway nancing and development by foreign investors continued in the face of civil war and eventually foreign occupation.
DIVERSIFICATION
The International Context Tabers 1911 survey of the worlds stock markets provides a useful overview of the world of international investing before the First World War. He describes bourses in more than 30 countries around the world available to the German investor.54 Lowenfeld, an English author, in his 1909 book, Investment: an exact science, lists 40 countries with stock markets open to British investors.55 In fact, for British investors of this era, many of these markets were available by trading on the London Stock Exchange itself either by purchasing stocks and shares in foreign rms listed in London, or by purchasing the securities of British rms with concessions to operate overseas.56 Lowenfelds analysis is particularly interesting, because it proposes an international diversication strategy based on The Geographical Distribution of Capital. With numerous graphs showing the uncorrelated movement of securities from various countries, he argues that superior investment performance is obtained by spreading capital in equal
Rosembaum, Gentry power. These include Germany, Austria, Switzerland, the Netherlands, Norway, Sweden, Denmark, Russia, Serbia, Greece, Romania, Turkey, Italy, Spain, Portugal, Belgium, France, Great Britain, Ireland, New York, Haiti, Dominican Republic, Ecuador, Brazil, Peru, Argentina, Uruguay, Chile, Columbia, Venezuela, Japan, South Africa, Natal, Egypt, and Australia. Taber, Die Brsen der Welt. 55 Great Britain, India, Canada, Australia, Tasmania, New Zealand, Singapore (Straits Settlements), Belgium, Denmark, Germany, Holland, Norway, Russia, Sweden, Switzerland, Austria, Bulgaria, France, Greece, Italy, Hungary, Portugal, Romania, Spain, Serbia, Turkey, Japan (Tokyo and Yokohama), China (Shanghai and Hong Kong), Cape Colony, Natal, Transvaal, Egypt, New York, Mexico, Argentine, Brazil, Chile, Peru, and Uruguay. Lowenfeld, Investment. 56 A detailed description of the development of the investment opportunity set of British investors in the rst half of the nineteenth century is contained in Platt, British portfolio investment.
54 53
291
proportion across a number of geographical sectors and carefully rebalancing back to these proportions on a regular basis:
It is signicant to see how entirely all the rest of the Geographically Distributed stocks differ in their price movements from the British stock. It is this individuality of movement on the part of each security, included in a well-distributed Investment List, which ensures the rst great essential of successful investment, namely, Capital Stability.57
This geographical diversication strategy was apparently a popular one with British and other European investors around the turn of the century. Europe was the worlds major exporter of capital to the world until the end of the First World War I, when the lending role of the United States and Japan grew in prominence.58 Edelstein ranked Great Britain, France, and Germany as the leading creditor nations in terms of capital outows for most ve-year periods from 1881 to 1913, with Russia, Norway, Australia, South Africa, and the United States also occasionally being net capital exporters in this period. 59 Applying the capital asset pricing model (CAPM) to indices of pre-First World War foreign and domestic investment returns experienced by UK investors, Edelstein demonstrates that the realized return to foreign investments was commensurate with the systematic risks to which they were exposed. 60 Edelsteins results suggest that investors in Great Britain were effectively pricing both domestic and overseas assets as if they held geographically diversied portfolios. Two recent studies have extended Edelsteins research and taken up the question of whether the aggregate portfolio weights of domestic versus international securities listed on the London Exchange in the late nineteenth and early twentieth centuries were in any sense optimal for investors. Chabot and Kurtz61 and Goetzmann and Ukhov62 use a modern portfolio approach to study the capital weights implied by pre-First World War British investors seeking to construct portfolios with the highest expected return for a given risk level. The implied weights from application of quantitative models match fairly well the relative magnitude of foreign versus domestic listings on the exchange. In each of these studies, asset prices and quantities reect an equilibrium consistent with the ability and desire to reduce risk through international investing. On the other hand, they are silent on the implications of one set of investors being diversied and another set of investors being undiversied.
Lowenfeld, Investment, p. 49. Lewis study of international capital ows, Foreign investment problems, suggests that by 1938, the US, UK, Holland, Belgium, Sweden, Italy, and Japan were the only capital exporting countries. 59 Edelstein, Overseas investment, p. 271. 60 Lewis, Foreign investment problems. 61 Chabot and Kurz, Thats where the money was. 62 Goetzmann and Ukhov, British investment overseas.
58
57
292
In appendix II we argue that, when one group of investors is diversied and another is not, it will imply a difference in required rates of return on capital. In particular, a country with an underdeveloped capital market that does not afford sufcient investor diversication, and limits external investment, is likely to have high required rates of return on capital. We nd that, in this setting, diversied investors entering this market have a comparative advantagetheir required rate of return on the same investment project is potentially much lower than that of a domestic competitor. Put simply, in a head-to-head competition between foreign and Chinese capitalists for commercial projects, foreigners could pay more. This point is not self-evident from current asset pricing models such as CAPM, nor is it true for all ranges of foreign and domestic capital and risk preferences. It requires the specication of an economic model that contains the unconstrained, borderless CAPM as a special case. We develop this model formally in appendix II. Our analysis indicates that when one set of investors is able to diversify their portfolios through international investments and another set is constrained to hold assets in only one country, the cost of capital is potentially affected. The degree to which the cost of capital is lower for the foreign investors is dependent upon the degree to which returns to domestic investments are correlated to non-domestic investments, as well as the relative volatility of the domestic versus the international index.63 In the China case, under the assumption that domestic investors have no means to international diversication, the degree to which the domestic cost of capital is higher than the international cost of capital for the same project depends crucially on whether the returns to the project are highly correlated to other China-related projects. This would predict, for example, that returns to investment in railroads in China are more correlated to returns to investment in other Chinese enterprises, as opposed to rail investments in other countries. This in fact is an empirical question to address. There is some historical evidence that the required rates of return on foreign-nanced capital projects during this era were less than the rates of return to externally nanced infrastructure projects. Pomeranz cites evidence that the prime rate charged to the government and leading merchants by Tianjin banks and pawnshops in the late eighteenth century was between 10 and 12 per cent.64 Broader surveys of Chinese interest rates in the early twentieth-century document annualized median interest rates on agricultural loans of 30 per cent, and for business ventures, required loan rates of 78 per cent plus a share in equity prots.65 Lee notes that capital opportunities outside of the traditional investment in real estate and
63 Related papers on the effects of liberalization on the domestic cost of capital include Stulz, Globalization of equity markets and the cost of capital, and Trzcinka and Ukhov, Financial globalization and risk sharing. 64 Pomeranz, Great divergence, p. 178. 65 Huenemann, Dragon and the iron horse, pp. 1289.
293
pawn shops also yielded higher returnsChinese capitalists were actively investing in export-oriented industries such as textile and food processing. Lending to the government and buying railroad bonds and shares were comparatively unattractive places for capital.66 Unfortunately, there is no systematic survey of rates of return on investments in China at this time, because there was no large-scale public capital market. What is clear is that it was hard to attract domestic investment. The Chinese were not major investors in government loans or domestic development projects in the late nineteenth and early twentieth centuriesa simple economic explanation for this is that there were superior risk-adjusted alternative uses of capital. The dramatic export of capital from Europe, and the active practice of international portfolio diversication must surely have had a signicant effect on the markets into which Europes capital owed. Stulz argues that the modern trend towards globalization has reduced the global cost of capital through the diversication effect. Motivated by similar interests, 67 Bekaert68 and Beckaert and Lundblad69 carefully examine the shifts in cost of capital and market risks in emerging markets as they integrate into the world capital market. The general conclusions reached by these and other researchers studying world capital market liberalizations is that the cost of capital drops as outside investors are given access to local investment projects. There are obviously positive features of this drop in the cost of capitalcapital projects previously unattractive because of low rates of return become attractive. Lower interest rates can be an extraordinary boom to the economy. Hou and Huenemann both document the dramatic expansion of the Chinese economy resulting from foreign investment in the late nineteenth century.70 However, the other side of the coin is that, in the competition for control of domestic assets, the undiversied local investor is at a relative disadvantage. Competition between domestic and international investors is the theme of Rajan and Zingales.71 They point out that, despite the obvious efciencies of international nancing, domestic investors may strongly resist competition. The motive for such resistance is, presumably, the additional benets of inuence attached to rights of control enjoyed by local management. When these rights are challenged without compensation, and the powers of local interests are not governed by strict rule of law, the consequences are potentially explosive. Our model suggests that differential domestic and foreign discount rates for projects, because of the differences in portfolio
Lee, Chinas quest for railway autonomy, p. 133. Stulz, Globalization of equity markets. 68 Bekaert, Time varying world market integration. 69 Bekaert, G. and Lundblad, C., Does nancial liberalization spur growth, NBER working paper, 2000. 70 Hou, Foreign investment; Huenemann, Dragon and the iron horse. 71 Rajan, R. and Zingales, L., The great reversals: the politics of nancial development in the 20 th century, NBER, working paper 8178 (2001).
67 66
294
diversication between international and domestic investors, may well have exacerbated these conicts, and contributed, in part, to strains that led to the political change in China in the twentieth century. Corporate Governance and Investor Protection The second factor in the trajectory of Chinese nancial history is the relative ineffectiveness of legal protection and governance structures for enterprise in China, compared to the extraordinary protections negotiated by foreign investors. By the late nineteenth century, many European nations had developed laws and norms for the denition and governance of business enterprise, as well as legal protection of the rights of security holdersboth holders of corporate obligations and holders of sovereign debt. In Asia, Japan moved quickly to adopt nancial markets and structures patterned after European models, but major steps in this direction were not taken in China until the early twentieth century. Even then, stake-holders of various kindsfrom local gentry to provincial government ofcialswielded considerable power and inuence over commercial enterprise. Virtually all the major rail and mining rms operating in China before the twentieth century were incorporated in Europe, not China. These foreign concessionaires extracted guarantees from the Chinese Imperial Government, such as direct control over collection of revenues, the right of property seizure in case of default, the right to source their own materials, and exclusivity against domestic or foreign competition. In some cases, concessions included nearcomplete autonomy from Chinese law and taxation, and freedom from local competitioneven the right in some cases to issue a separate currency. While such deals may have lowered the risk to foreign investors, their effect was to elevate the protection enjoyed by foreign rms above Chinese rms. China was not the only country that relied on foreign capital for industrial development during this era. There are obvious parallels to nancing in North Africa, South America, and even the United States before the First World War by European investors, and in many of these circumstances, foreign investors obtained signicant concessions. An interesting example right in Europe itselfis the case of Spain. Simpson points out that Spain turned to foreign investment in the second half of the nineteenth century for nancing of large sectors of the economy.72 Spain itself had an active domestic capital market for shares by 1850, but it increasingly relied on foreign markets through the late nineteenth and early twentieth centuries for infrastructure development as well as for the development of nancial institutions, mining operations, and colonial development. Some specic examples of external company nancing are instructive. The Spanish-incorporated Compaia Anonima de los Ferro-Carrile Ponferrada del Noroeste de Espaa oated ve-year bonds on the Madrid
72
Simpson, Economic development in Spain.

295
and Paris markets in 1862. The Compaia Anonima de los Ferro-Carriles Sevilla-Jerz-Cadiz was nanced by a simultaneous share issue in 1867 in Madrid and Paris. The 1869 Parisian loan issue by the Companie Privilgie des Ports, Debarcadre Maritime et Terrains de Cadix bore certain similarities to later Chinese railway loans in that the French company secured an exclusive concession from the Spanish government for the municipal jetty, sea wall, and 7,000 metres of shore property for development. The loan was retired through the periodic sale of land from the concession and the retirement of bonds drawn by lottery. The bonds were explicitly secured by the Spanish territorial concession. The effectiveness of these and related concessions is debatable.73 Despite land and development rights concessions, there is little evidence that the crown extended the same kind of legal rights of extra-territoriality to foreign investors that the Chinese Imperial government did in the late nineteenth century. In their detailed study of foreign investment in Spain, Harvey and Taylor conclude that mining in Spain was a risky business in which most rms failed and only one in ve ventures was protable.74 Investors in Spanish mining had to bear the risk of their ventures without a pledge of additional security or a claim on tax revenues as was, for example, the case of Hukuang Railways bond in China. The protections for foreign investors in Chinese government bonds were even more extraordinary than protections extended to shareholders in private enterprises. Beginning in the mid-nineteenth century, the Chinese maritime customs revenues were collected and controlled by the British. Payments on foreign debt could thus be taken directly from customs revenues before going to the treasuryeffectively giving foreign bondholders senior claim to Chinas primary source of revenue. While this undoubtedly lowered the Chinese Governments cost of capital by reducing the probability of default, it also limited the scal options of the Chinese state, and put her purse-strings in the hands of a foreign power. Protection granted to foreign investor interests emerged from the economic pressure and aspiration to lower the cost of capital. The protection was also constantly reinforced through diplomatic channels.75 Foreign control of the Chinese maritime customs, and the commercial concessions extended to foreigners may have served at rst to control foreign investor risks, but they had obvious political repercussions. Indeed, they were regarded then, as now, as dangerous, intermediate steps towards the foreign colonialization of China.76 Foreign control of Chinas transportation system and trade revenues put the Imperial government at the mercy of political attempts to press territorial advantage. The great powers: Britain,
Simpson, Ibid., p. 352. See also Harrison, Economic history of Spain, p. 83. Harvey and Taylor, Mineral wealth and economic development, p. 199. 75 A detailed study of actions of the British Foreign Ofce on behalf of British commercial and nancial interests in China is contained in McLean, Commerce, nance, and British diplomatic support in China. For a comparative perspective and a discussion of Turkey and the Persian Empire, see McLean, Finance and informal empire . 76 See, for example, Winston, Chinese nance under the Republic.
74 73
296
France, Germany, Russia, and Japan all had imperialistic designs on Chinese territory. While investor benets may have been the original motivation for commercial and governmental concessions, following the Sino-Japanese War in 1895, the great powers vied with each other to nance Chinese rail developmentregardless of whether there was demand by investors for the loans. China was chronically in debt in the early twentieth century as a result of indemnities settled on her by these same powersa condition that gave foreign nations more leverage in negotiations to expand their spheres of territorial inuence. The pressure of foreign powers on the Chinese government together with the institutional imbalances between Chinese nancial markets and those of the developed world was an explosive combination. They nally led to the foreign ownership of productive capital, to foreign capitalists playing in China by their own rules, and to the pretext for weakening of the states control over her own territory. In a series of cross-sectional studies of the worlds capital markets, LaPorta, Lpez-deSilanes, Shleifer, and Vishny (1997, 1999, 2000) show that protection of investor rights is a necessary condition for attracting capital. They argue that the legal environment is one of the most important determinants of the success of corporate capitalism in a country.77 Empirical evidence by these authors and others who have built upon their work shows that legal origin is an important determinant of the protection of shareholder rights, which in turn helps determine the size and functioning of the capital market, which ultimately determines the efciency of the allocation of capital to enterprise.78 What, then, determines the origin of the countrys legal system? Colonialism is obviously a major factor. Colonialism, for all of its known faults, can be thought of as an export mechanism for the legal framework from one country to the other. LaPorta et al. show that even when the government itself is no longer a colonial one, the legal framework may continue to provide differential benets to private enterprise within the country. 79 Pushing this evidence a bit further, one can interpret a colonial world as one form of political-economic equilibrium in which investor-friendly legal systems across the world allow for increased efciency in capital allocation and the emergence of private enterprise. Of course, there is another side to this coin when the issue of national sovereignty supercedes economic motives.
VI
CONCLUSION
Sometimes, nance plays a central role in the political development of nation states, both as an agent for the states formation and as an agent for the states destruction. The story of Chinas rst major encounter with the
77 LaPorta et al., Lpez-de-Silanes, Shleifer, and Vishnay, Legal determinants, Corporate ownership, and Investor protection. 78 Wurgler, Financial markets. 79 LaPorta et al., Legal determinants, Corporate ownership, and Investor protection.
297
worlds nancial markets is inseparable from global politics. The worlds nancial markets of a century ago were anything but laissez-faireat least as far as China was concerned. Loan negotiations, which began as investor protections, ultimately became the means for colonial designs on China. Railways played a key role in the extension of foreign control and even foreign legal environments into China. None of this could have occurred, however, without the fundamental drivers of nance. In this article, we have identied two key nancial motivations which in some sense are stateless. First, we argued that the high level of development, and the demand for international diversication by sophisticated investors in the global money centres of Britain and continental Europe gave a relative advantage to foreigners. Chinese sovereign debt found a ready market in London, and experienced relative stability in yields as a result of investor protections negotiated with the Chinese government. Investors also nanced potentially highly protable infrastructure projects in Chinaparticularly railroads. We argued that the existence of a liquid capital market, and the power of international diversication put foreign investors in a relatively better position to bid for Chinese projects. The active markets in Europe and Japan were able to mobilize the capital of small investors. We extended the analysis of modern portfolio theory in this article to argue that the diversication enjoyed by these investors through global investing allowed them to accept lower rates of return than Chinas domestic investors. The second major factor we have focused on is investor protection and corporate governance. While the extraterritorial terms provided to foreign investors were anathema to the Chinese people, the historical evidence suggests that they may have been a necessary condition to allow development and operation without the interference of local interest groups. The gentry-led movement to regain railway development rights from foreigners in the early 1900s had been viewed as a nationalistic movement to regain Chinese rights. The experience of the shareholders in these companies suggests that the potential for a genuine capital market in China was hobbled by the inability to protect the minority rights of domestic investors. The role of nance in Chinese politics of a century ago is of more than historical interest. With the re-emergence of global investing in emerging markets, China is poised to attract considerable nancial capital. China is in a much stronger position today politically and militarily, and thus the issues of extra-territoriality and sovereignty are less threatening than 100 years ago. It is worth noting, however, that in part as a result of nancial history, China is understandably still sensitive to violations of her territorial sovereignty. The key factors of diversication and governance remain relevant. As commercial opportunities arise in China today, will her own investors be able to compete against foreign investors to nance projects? One way to ensure this possibility is to offer domestic investors the possibility of investing outside of China, either directly, by liberalizing currency exchange, or internally by listing international shares on Chinese exchanges and by
298
launching international mutual funds that are accessible to Chinese savers. Although this means that some Chinese capital will be exported, it also means that the domestic investor opportunity set will be equal to that of foreign savers, and as a consequence, Chinese investors will demand the same rates of return as foreigners, and the marginal investors in Chinese ventures will not necessarily be foreign. The enthusiasm for share capitalism in China in the late nineteenth and early twentieth centuries was tempered by the failures of corporate governance. These failures were nothing special to China. Governance is a particularly challenging problem for many countries in the world now as it was historically. One interpretation of the unequal rights and concessions associated with foreign nance is that they were a means to control the risks associated with emerging market investing. But the experience of China a century ago suggests that investors needed protection against expropriation just as much as foreigners needed it. Chinese capital markets today are developing rapidly as Chinese nancial regulators are modernizing the legal framework for investment. One approach that might prevent the unequal treatment of foreign and domestic interests is to concentrate efforts to protect minority shareholder rights for domestic shares, and to test the institutional structures for such things as contests for corporate control, public accounting, and disclosure and insider trading laws in the context of the domestic share market. There are also important lessons for the international investment community interested in supporting Chinas capital market development. Although much of the early political abuse of the international nancial system has been corrected with the development of international lending institutions such as the World Bank, there is still the potential, in these dynamic times, for asymmetric competition between domestic and international nancing. While it may be tempting to suggest that the most efcient, low cost means of nancing Chinese economic development is through foreign rather than domestic markets, the international community should realize the serious problems that arise from domestic stakeholders who are excluded from participation in the prots of such nancing. Currently, the dual-listing structure of the Chinese equity market is an effective means to mobilize and in some sense to nurture domestic commitment to Chinese capital markets. The international community should do what it can to support future efforts to protect this re-emergence of Chinese investing. This may mean accepting a gradual process of experimentation with market regulation and share dissemination, as well as a gradual reduction in the differences between foreign and domestic shares. It has become fashionable for both the left and the right to criticize the current global nancial systemeither because it distorts risk-taking incentives by governments expecting a bail-out, or because it nances projects that environmental and political groups nd objectionable. These critics should consider the alternative. One hundred years ago, Chinas rst
299
encounter with globalization created political conditions that led ultimately to a rejection of the international nancial system. As the world now approaches the degree of global market integration that it enjoyed at the end of the nineteenth century, the disparity in international capital market development creates potential problems similar to those faced in the past. International nancial architects should be wary of suggestions that a new equilibrium can be quickly and easily achieved without consideration of the human and political consequences. Besides the immediate interpretations of Chinese nancial history, we draw one additional implication from our current study. Chinese capital markets ultimately disappeared because of internal rather than external forces. A simplistic view of this is that, in China, the Leninist interpretation of capitalistic imperialism eventually won out. Although current empirical research shows that legal protection of external shareholder rights particularly in the face of strong stakeholder inuencesmay ultimately be best for economic development, there are large gaps in the empirical record. China and Russia both withdrew from the world capital markets as a result of Marxist revolutions. Thus, a longer historical view reveals these gaps to be endogenous. The repudiation and elimination of both internal and external nancial claims may have resulted at least as much from the success of legal imperialism as from its failure. That is, the expansion and articulation of property rights of external owners that is so important to the success of corporate enterprise also sometimes alienates local stakeholders from the productive sector. China has enjoyed impressive economic growth in the past two decades and is now contributing to a large proportion of global economic growth. Having successfully introduced foreign direct investment, established its own domestic stock market, and become a member of the World Trade Organization, it would seem to be well on its way to integration into the global marketplace for goods and capital. Nevertheless, the two issues addressed in this article, the equal protection of property rights between domestic and foreign investors, and the under-diversication of domestic investors, still echo the Chinese situation of a century ago. Given the potential for further integration versus the threat of reversal of recent gains, the lessons of history at this crucial juncture may be doubly important. Yale University Indiana University University of California, Davis
Date submitted Revised version submitted Accepted 26 February 2004 1 April 2005 24 February 2006
DOI: 10.1111/j.1468-0289.2007.00376.x
300
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Perkins, D., Growth and structural change of Chinas twentieth century economy, in D. Perkins and K. Chao, eds., Chinas modern economy in historical perspective (1975). Platt, D. C., British portfolio investment overseas before 1870: some doubts, Economic History Review, 2nd ser., 33 (1980), pp. 116. Pomeranz, K., The great divergence: China, Europe and the making of the modern world economy (Princeton, 2000). Rajan, R. and Zingales, L., The great reversals: the politics of nancial development in the 20 th century, NBER Working Paper 8178 (2001). Rawski, T., Economic growth in pre-war China (Berkeley, 1989). Riskin, C., Surplus and stagnation in modern China, in D. H. Perkins, ed., Chinas modern economy in historical perspective (Stanford, 1975). Roll, R., Interest rates and price expectations during the civil war, Journal of Economic History, 32 (2) (1972), pp. 47698. Scholes, W. V. and Scholes, M. V., The foreign policies of the Taft administration (Columbia, 1970). Shanghai Archive, , Shanghais Stock Exchange before the liberation (Shanghai, 1992). Simpson, J., Economic development in Spain, 18501936, Economic History Review, 50 (1997), pp. 34859. Stanley, J. C., Late Ching nance: Hu Kuang-Yung as an innovator (Cambridge, 1970). Stulz, R., Globalization of equity markets and the cost of capital, Working Paper, Dice Center, The Ohio State University (1999). Sun, E-T. Z. , The pattern of railway development in China, Far Eastern Quarterly, 14 (2) (1955), pp. 17999. Taber, R., Die Brsen der Welt (1911). Thomas, W. A., Western capitalism in China: a history of the Shanghai Stock Exchange (Aldershot, 2001). Trzcinka, C. and Ukhov, A., Financial globalization and risk sharing: welfare effects and the optimality of open markets (January 27, 2005). Available at http://ssrn.com/abstract=682821. Willard, K. L., Guinnane, T. W. Harvey and Rosen, S., Turning points in the civil war: views from the greenback market, NBER Working Paper No. W5381 (1996). Winston, A. P., Chinese nance under the Republic, Quarterly Journal of Economics, 30 (4) (1916), pp. 73879. Wu, L. T. K. , The crucial role of the Chinese native banks, Far Eastern Survey, 4 (12) (1935), pp. 8993. Wurgler, J., Financial markets and the allocation of capital, Journal of Financial Economics, 58 (1) (2000), pp. 187214. Yang, L-s. , Money and credit in China (Cambridge, Mass., 1952). Zhu, Yingue , Three market crashes and Shanghai securities market in late 1800s and early 1900s, China Economy History Research, 3 (1998), pp. 5870.
APPENDIX I: Chinese foreign debt issues
302
External debt of Chinese government as compiled from Kuhlmann, Chinas foreign debt and Stanley, Late Chiing nance. Each is coded by date of issue, type of debt, and face value of issue, converted into US$ at exchange rates prevailing at the time. Loan yields are as specied on the bond at issue, not market yields based upon issue price, thus they are typically a lower bound on the actual bond yield. Currency indicates the currency or form of payment promised on the loan. The purpose of loans is briey identied, and the type of security or collateral is listed. Place of issue indicates the location the debt was issued. Multiple locations indicate multiple bond issues.
Date Shanghai custom voucher 11 6.5 none maritime-customs/provincial revenues tael tael armory none none tael tael tael tael war war
Type
US$ amount (millions) if known Yield Currency Purpose Security or collateral if known
Place of issue
1861 1862 1862 1864 1865 1866 1866
loan loan loan loan loan loan loan
200,000 336,587 169,370 100,000
1,333,000
800,000 1,413,000 3,260,000 3,333,000 2,333,300 1,667,000 7.25 8 8 10 5.5 7 8 8 8 7 6 6
maritime customs
Hong Kong Hong Kong London Berlin Hong Kong
2,667,700 667,700 667,700 667,000 667,000
1867 1868 1874 1877 1878 1878 1879 1881 1883 1883 1884 1884 1884 1885 1885 1885 1885 1886
loan loan loan bond loan bond bond loan loan loan loan loan loan loan bond loan bond loan
2,667,700 6,543,000 6,522,000 3,409,000 2,000,000
tael tael sterling tael tael tael tael tael tael tael tael tael sterling tael sterling sterling sterling tael
war war war war war none none war war war war war armory war war rail none war
maritime customs maritime customs maritime customs
Hong Kong London London Hong Kong London
Date 7 5.5 7 Chihli customs maritime customs maritime maritime maritime maritime maritime customs customs customs customs customs 7 6 6 6 6 4 5 6 4 5 4.5 5 5 sterling franc rail rail franc gold rail indemnity gold tael sterling indemnity rail rail sterling sterling sterling sterling gold indemnity indemnity indemnity indemnity none Shanghai Frankfort Berlin
Type
US$ amount (millions) if known Yield Currency Purpose Security or collateral if known Place of issue
1886 1887 1888 1893 1894
bond loan loan loan bond
76,000
726,000
tael DM tael tael tael
none none Yellow River none war
1895 1895 1895 1895 1895
bond bond bond bond bond
4,347,000 13,043,470 4,347,000 4,347,000 68,782,000
1896 1896 1897
bond bond bond
69,565,000 3,333,000 19,565,217
Shanghai Hong Kong Amsterdam Hamburg London London Frankfort Berlin Hamburg London Paris St. Petersburg Geneva Brussels Amsterdam Frankfort London Berlin Shanghai London Brussels Paris London Berlin
1898 1898
bond bond
8,000,000 69,565,000
1899 1899
bond bond
10,000,000 22,500,000
maritime customs Chinese Eastern Railway Lung-Tsing-U-Hai Railway and land Cheng-Tai Railway maritime customs, salt/likin revenues, customs bonds Chinese Northern Railway Peking-Hankow rail revenues government guarantee
1900 1900 1901 1901 1903 5
bond bond loan bond bond
3,000,000 1,121,739
London Paris Geneva Brussels Amsterdam New York London Shanghai Paris London
300,000,000 8,000,000
5 5 5 4 5
dollar sterling sterling sterling franc
rail cable cable indemnity rail
1904 1904 1904 1904 1905 1905 5 sterling 5 franc rail rail
loan certicates bond bond bond loan
14,772,700 20,454,500
maritime custom railway and direct obligation of government existing and future railway
4,444,000
sterling sterling sterling dollar yen sterling
rail rail rail war war indemnity
London Berlin London
1905
4,888,800
303
1905
loan
8,200,000
maritime customs and provincial revenues opium revenues and internal revenue bonds railway
APPENDIX I: Continued
Yield 5 4 5 4.5 5 5 5 rail rail war rail repay debts sterling rail existing railway and its revenue London Currency Purpose Security or collateral if known Place of issue
304
Date
Type
US$ amount (millions) if known
1905 1906 1906 1907 1907 1907 London
loan bond loan loan bond
400,000 6,521,700 4,782,600
sterling dollar sterling yen sterling sterling
rail war rail rail rail rail
1908
bond
6,521,000
1908 1908 1909 5(4.5) 5(7)
bond cert.
1,075,000 23,585,000
railway Canton-Hankow railway and its revenues direct obligation of government, railway Kirin-Changchun-railway railway
Tokyo London Berlin
1909 1909
loan loan
22,727,270
yen sterling Chinese gold dollar sterling sterling
160,000
1909 1910 1910 1910 1910 1911 1911 7 7 5 5 8 sterling yen sterling tael local armory rail rail tael local
loan loan loan loan loan loan loan
12,766,000 2,888,510 5,000,000 5,000,000
5 7 7 5 5 5 5
yen tael tael sterling sterling yen yen
rail local local rail rail none rail
provincial likin revenues, direct obligation of government Hsin-Feng Railway guarantee of the central government Kiangnan salt revenues railway and provincial revenue
Tokyo London Berlin
1911
loan
Shanghai London Paris Berlin New York
1911
loan
1911
loan
2,885,000
1911
loan
39,216,000
1912
loan
1,500,000
Peking-Hankow railway revenue railway and revenue of Kiangsu Province third charge on the ichang salt revenues rst charge on likin revenues of Kwang-Tung salt taxes, direct obligation of government revenue on general revenue form Hunan and Hupeh Province revenues and stock of Kiangsi railway
Tokyo
Date 8 6 7 8 8 silk and likin revenues central government guarantee taxes of agricultural products and supplementary customs revenues Shanghai London Paris Brussels Brussels 6 5 5 5 5 5(6) 5.5 6 5 6 6 6 5 5 6 sterling repay debts sterling sterling sterling sterling franc sterling sterling sterling sterling rail rail rail repay debts DM sterling sterling armory rail none surplus of salt gabelle and other government sources government guarantee Lung-Tsing-U-Hai Railway tax on transfer of property and title deeds tael sterling Treasury repay debts repay debts rail local local Treasury yen sterling sterling DM DM tael
Type
1912 1912 1912 1912 1912 1912
loan loan loan loan bond bond
1,000,000 10,714,000 1,607,100
1912 1912
bond loan
35,087,700
1912 1913 1913
loan loan loan
15,686,000 1,765,000
1913 1913 1913 1913
loan loan loan loan
17,655,000 19,608,000 3,019,600 98,039,200
1913 1913 1914 1914
loan loan loan loan
4,706,000 7,843,100 1,960,784 28,864,000
London Paris St. Petersburg Brussels Tokyo London London Paris London Shanghai London
1914
loan
41,667,000
repay debts none none government expenses/railway rail
1914
loan
1,562,000
industrial enterprises it was issued for, municipal taxes secured upon a second mortgage on the Chiaokia-Tayuan-fu railway surplus prots of the PekingMukden railway
1914 1914 1914 1915
loan bond bond loan
19,230
3,745,455 2,488,000
5 8 5 6
franc m sterling yen
rail Treasury rail none
1915 1915 1915 1916 1916
bond bond loan bond bond
2,488,000
mining concessions in Hunan and Anhwei rst charge on railway
1,150,000 5,500,000
yen yen 7(8,10) franc 8 dollar 8 dollar
rail war repay debts rail Treasury
305
306
Yield 8 8 Currency Purpose Security or collateral if known Place of issue
Date
Type
1916 1916 1916 1916 1916 1917 1917 1917 1917 6.5 7.5 yen yen 7 7 6 6 7 7.5 6(5) Bank of Bhina notes peking octroi peking octroi surplus salt revenues Treasury bonds properties of railway and government guarantee repay debts local industry industry industry local repay debts local/industry bank shares and treasury bonds factory and local government guarantee provincial salt taxes Tokyo Tokyo Tokyo Tokyo Tokyo Tokyo Tokyo
loan loan loan loan loan loan bond certicates(?) loan
5,871,400 301,600 1,010,000 301,600 505,000 1,010,000 2,564,000 667,000
tael sterling yen yen yen yen yen yen yen
769,000 1,179,000
1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 1917 franc taels sterling sterling yen yen yen yen none none repay debts local none rail
loan loan loan bond bond loan loan loan loan loan
2,122,640 52,173 272,700 1,090,900
local rail repay debts Treasury
Tokyo
769,230 10,256,000 3,333,000
41,025 128,200 25,600 25,600 66,200
1917 1917 1917 1917 1918 1918 1918 1918 1918 1918 1918 1918 9 10 8 8 8 8 7
loan loan loan loan loan loan loan bond loan loan loan loan
1,052,000 755,500 2,667,600 444,400 526,000 5,261,000
yen yen yen yen sterling taels yen sterling sterling sterling yen yen
local/industry local local/industry industry education none purchase telecommunication army equipment telecommunication military repay debts
none direct obligation of the government government treasury Kailan mining Adm. surplus salt revenues
London Tokyo Tokyo
Date 7 yen local rights to cooperate in local iron-mining surplus salt revenues sundry taxes of Fukien revenues of the railway all telegraph properties not previous pledged Tokyo Tokyo collieries in Fengtien owned by prov. Gov. exclusive rights to communicate with systems outside China Kirin and Heilongkiang gold mines and government forests treasury bonds Tokyo
Type
1918
loan
1,052,000
1918 1918 1918 1918 1918 1918 1918 1918 7 7 7.59 5 yen yen yen local rail rail
loan loan loan loan loan loan loan loan
526,000 526,000 526,000 7,368,000 1,052,000 52,600 1,578,900 10,521,000
yen yen yen yen yen yen yen yen
government local industry government rail rail telecommunication telecommunication
Tokyo Tokyo Tokyo Tokyo Tokyo Tokyo Tokyo Tokyo
1918 1918 1918
loan loan loan
526,000 10,521,000 1,578,900
1918 1918 1918 8 7.5 7.5 8 8 7 7 8 industry rail telecommunication 10 7 8 6 8 10 9 9 none none none none none sterling yen sterling taels franc franc rail rail yen yen rail local
loan loan loan
1,578,900 5,261,000 2,382,200
yen yen sterling
industry repay debts telecommunication
1918 1918
loan loan
5,261,000 15,789,000
1918 1918 1918 1918 1918
loan loan loan loan bond
10,521,000 10,521,000 5,261,000 5,261,000
1918 1918 1918
loan loan loan
1,206,000 1,538,000 5,128,300
yen yen yen yen Chinese dollar yen yen yen
1919 1919 1919 1919 1919 1919
loan loan loan loan loan loan
901,000 258,500 891,900 572,000 752,000 76,000
Peking-Suiyuan railway present and future gov. tel. Adm. Rev. title deeds taxes
307
308
Yield London Currency Purpose Security or collateral if known Place of issue
Date
Type
1919 1919 1919 1919 1919 1919 1919 5.5 12 5 9 9 8 10.2 6 8 5 9 8 9 12 8 10 10 Treasury repay debts wine and tobacco revenues earnings from Taokow-Tchingwha railway wine and tobacco revenues
loan bond loan loan bond bond loan
8,122,000 796,300 448,000 27,700 3,703,000 25,000,000 5,727,000
8 5 10.8 9 7 6 7.5
sterling franc taels franc franc dollar sterling
transportation Treasury none none Treasury Treasury rail
New York New York Chicago
1919 1920
bond loan
5,500,000
1920 1920 1920 1920 1920
1920 1920 1920 rail telecommunication
bond bond loan loan loan loan loan loan loan
2,593,000 1,075,500 36,590 104,070 410,000 15,384 70,000 60,000
none none education local none none education education Haikow harbour
LTUH railway line telegraph installations, equipment, properties and revenues
Brussels Tokyo Amsterdam
1920 1920
loan loan
545,400 3,076,000
dollar Chinese dollar franc franc sterling franc yen yen dollar dollar Belgian franc sterling yen
1,328,000
1920 1920 1921 1921 1921 1921 1921
loan loan loan bond loan loan loan
701,000 1,718,800
45,100
yen taels yen yen sterling franc
rail none Treasury Treasury none none education
Date 8 14 10 8 8 15 8 6 8 rail yen Treasury sterling London salt-surplus revenues Tokyo Tokyo rail Brussels
Type
1921
loan
1921 1921 1921 1921 1921 1922 1922
loan loan loan loan loan bond loan
25,000 28,850 938,983 240,000 1,442,000 14,234,000 541,000
Belgian franc yen yen dollar yen yen yen yen education education none rail rail repay debts forestry and mining rail
1922
loan
3,720,000
1922
bond
6,831,000
1923
loan
7,121,000
projected railway from Paotow to Ningshia and from Peking to Paotow customs and salt revenues after all prior claims LTUH railway line
Brussels Amsterdam Shanghai London Paris New York Paris New York
1923 1923 1923 1925 8 8 8 sterling reorganize bonds franc sterling rail rail
loan bond loan bond
6,870,000 19,417,000
43,893,900
8 6 8 5
Belgium francs yen taels dollar rail Treasury rail indemnity
1925 1925
loan loan
4,340,000 21,600
1925
loan
33,010,000
5,000,000
LTUH railway line railway and government guarantee railway maritime customers revenues and native Chinese custom revenues LTUH railway line Chinas shared prots in ShanghaiNanking railway taxes on transfer of property and title deeds and Peking octroi maritime customs revenues rolling stock purchased
1928 1928 1929 1930 1933 1933 1933 1933
bond bond bond bond loan bond bond lLoan
757,300 20,000,000 17,105,386 100,000,000 4,400,000 5,000,000
6 8 8 2 5 5.5 9.6 6
gold sterling dollar dollar dollar dollar sterling
indemnity rail rail repay debts purchase treasury indemnity
Brussels
maritime customs
309
310
Yield 6 6 secured on a portion of the original boxer indemnity 5.5 6 6 6 6 rail reorganize bonds rail rail rail rail rail rail dollar sterling taels sterling rail rail London Currency Purpose Security or collateral if known Place of issue
Date
Type
1934 1934
lLoan bond
4,000,000 7,352,000
1934 1935 1935 1936 1936
lLoan lLoan bond loan loan
5,333,000 1,172,000 5,294,000 750,000 5,500,000
taels sterling yen sterling sterling
rail bridge rail industry rail
Tokyo Shanghai
2,000,000 13,500,000
direct obligation of the government and also secured on railway/bridge revenues Canton customs Canton local tax and railway income direct charge on entire salt revenues surplus salt revenues not yet pledged rail
4,900,000 15,000,000 18,500,000 4,000,000
1936 1936 1937 1937 1937 1937 1937 1937 1937 1937 1937 1938 1939 1939 1940 1941 1945 1946 1982 4 5 5 6 6 6 6 6 7 5 5 5 4 4 20 8.7 None dollar sterling sterling sterling cgu sterling dollar sterling francs sterling dollar dollar dollar dollar dollar yen
loan bond loan loan loan loan loan lLoan lLoan lLoan lLoan lLoan lLoan loan lLoan lLoan lLoan
1,920,000 50,000,000 50,000,000
40,000,000 45,980,000 10,000,000 99,800,000 400,000,000 300,000,000 40,816,000
salt tax salt tax Kwangtung mining taxes national income national income highway income
Tokyo
311
APPENDIX II: Analysis of the cost of capital with foreign and domestic investors
Consider the following stylized example. Suppose there are two separate capital markets, market 1 and market 2 in which investors holding shares in market 1 cannot hold shares in market 2 and vice versa. Take market 1 to be China and market 2 to be the European capital markets of the turn of the century. Now consider a new project, n, which pays a random cash ow and needs nancing. The project owner must decide which market will give the best terms. In effect, he will choose the market with the lowest cost of capital for the project which is the expected rate of return E[Rn1] or E[Rn2]. Let us assume that the capital asset pricing model (CAPM) holds in each separate market, that the coefcient of risk aversion for the representative investor in each market is equal, that each project is atomistic in its respective market, and that the riskless rate of return, Rf, is the same in each market. Using standard notation for betas, correlations, variances, and covariances, and letting be the coefcient of risk aversion, the conditions determining the relative costs of capital in each market are then straightforward.
b n1[Rm1 R f ] = b n2 [Rm2 R f ] s n1 s 2 R R f ] = n2 [Rm2 R f ] 2 [ m1 s1 s2 s n1 2 s n2 2 qs 1 = 2 qs 2 2 s1 s2 s n1 = s n2

Equation (1)
E [Rn1 R f ] = E [Rn2 R f ]
For the owner to be indifferent between sources of nancing, the covariances of the cash ows of project n with respect to the segmented market portfolios must be equal. However, suppose there is an inequality? Equation 1 suggests that the required rate of return on the project in market 1 will be larger than in market 2 when the covariance of the project with respect to the market index 1 is greater. For China, it is natural to assume that domestic development projects have a higher covariance with a domestic, market-weighted portfolio of Chinese companies than with a market-weighted portfolio of the rest of the worlds companies, excluding China. This suggests that the cost of capital in the domestic marketif fully segmentedwill be higher. This interpretation should be tempered, however, with the understanding that the requirements for a pricing model like the CAPM to holdparticularly the liquidity requirementsare probably unrealistic for China in the last century. In addition, it is not clear whether a railway project in China would have a higher covariance with other economic activity in China, or with a world index, which is heavily weighted to railway companies. This is an empirical matter for further research. Lastly, Shanghai at the turn of the century had banks and equity markets. Did these allow Chinese investors to diversify their portfolios internationally effectively making our assumption of segmentation incorrect? Again, this is a matter for further research. Equation 1 characterizes conditions in terms of covariances, but this effect can be decomposed into correlations and standard deviations, which allows us to
312
consider the relative importance of diversication. Under what conditions will we nd the cost of capital to be smaller for market 2 than for market 1? Assuming correlations to be positive:
s n1 > s n2 rn1s ns 1 > rn2s ns 2 rn1 s 2 > rn2 s 1
Equation (2)
Equation 2 suggests that even in the case where the n1 = n2, if the standard deviation of the world wealth portfolio (excluding China) were lower than the standard deviation of the Chinese market index, then the owner would nd external nancing more attractive. As Stulz (Globalization of equity markets) points out, and as contemporary commentators on international investing have noted, the risk of a global investors portfolio was reduced through geographical diversication.80 In a world where one group of investors is diversied and another group is not, the diversied investors are simply willing to pay more for the same asset. This holds when the added asset is more highly correlated to the domestic investors portfolio, and also when the volatility of the domestic portfolio is higher. If this were true in China 100 years ago, we would expect to nd reluctance by Chinese investors to invest capital in domestic projects on the same terms provided to foreign investors. Of course, this analysis may simply presuppose too much about the relative development of Chinese capital markets.
80
Stulz, Globalisation of equity markets.


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60 Blackwell Publishing Ltd.

Economic History Review, 60, 2 (2007), pp. 267312

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

EQUITY MARKET DEVELOPMENT

Feuerwerker, Chinas early industrialization, p. 97.

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Foreign Shares Trades in Shanghai

Separation of Chinese domestic and foreign stocks in the 1880s

CHINA AND THE WORLD FINANCIAL MARKETS

GOETZMANN, UKHOV, AND ZHU

CHINA AND THE WORLD FINANCIAL MARKETS

GOVERNMENT DEBT: SECURITIES ISSUES AND FINANCIAL INTERMEDIARIES

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Year China Russia Japan India

Yields of foreign public debts of China, Russia, Japan, and India

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

GOETZMANN, UKHOV, AND ZHU

CHINA AND THE WORLD FINANCIAL MARKETS

Chinese domestic debt issues

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Yield 8 8 9.6 8.4 8 9.6 9.6 9.6 9.6 8 6 6 6 6 6 6 6 6 7.2 7.2 6 6 6 6 6 6 6 6 6 6 4 6 4 4 6 5 4 6 6 6 6 6 5 6 6 6 6 6 6 15 5 5

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

-5 Year China Russia Japan India

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

CHINA AND THE WORLD FINANCIAL MARKETS

Quoted in Kuhlmann, Chinas foreign debt, p. 73.

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Simpson, Economic development in Spain.

CHINA AND THE WORLD FINANCIAL MARKETS

Economic History Society 2007 Economic History Review, 60, 2 (2007)

GOETZMANN, UKHOV, AND ZHU

Economic History Society 2007 Economic History Review, 60, 2 (2007)

CHINA AND THE WORLD FINANCIAL MARKETS