Western Capitalism in China: A History of the Shanghai Stock Exchange 075460246X, 9780754602460

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WESTERN CAPITALISM IN CHINA

Er cof am John Eaton Davies Ynysmeudwy a Richard Lloyd Davies Cwmban Fawr

W estern C apitalism in China A History of the Shanghai Stock Exchange

W .A. TH O M A S

Ashgate Aldershot • Burlington • Singapore • Sydney

This edition copyright © W.A. Thomas, 2001 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hants GUI 1 3HR England

Ashgate Publishing Company 131 Main Street Burlington Vermont 05401-5600 USA

Ashgate website: http://www.ashgate.com British Library Cataloguing in Publication Data Thomas, W.A. (William Arthur) Western Capitalism in China: a History of the Shanghai Stock Exchange 1. Stock Exchange - China - Shanghai - History. 2. Capitalism - China. 3. China - Economic conditions - 1644-1912. 4. China - Economic conditions - 1912-1949 I. Title 332.6*4251132 Library of Congress Cataloguing-in-Publication Data Thomas, William Arthur Western Capitalism in China: a history of the Shanghai Stock Exchange/ W.A. Thomas p. cm. Includes bibliographical references and index. 1. Stock Exchange - China - Shanghai - History. 2. Shanghai zheng quan jiao yi suo - History. 3. Investments, Foreign - China - Shanghai History. 4. Shanghai (China) - Economic conditions. I. Title. HG5790.S53 T49 2001 332.64*25l-dc21

00-052595

ISBN 07546 0246 X This book is printed on acid free paper. Typeset by Owain Hammonds, Bontgoch, Talybont, Ceredigion, Wales SY24 SDP Printed in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

Contents List o f illustrations Acknowledgements Introduction

VI

vii ix

Part One: The Shanghai Stock Exchange

1

1

Founding the rising emporium

3

2

The commercial framework

18

3

The supply of securities

35

4

Fixed interest stocks

59

S

The demand for securities

6

Share market and Stock Exchange

78 93

7

Market fluctuations 1860-1909

118

8 9

Shanghai’s rubber boom From revolution to 1929

145 187

10

The final years

209

Part Two: Chinese Stock Exchanges

241

11 12

243

Chinese stock markets 1911-1949 Emerging markets

Bibliography Index

275 313 321

List of illustrations 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17.

Deed of Transfer of Hongkong & Shanghai Bank shares between James Buchanan and Septimus Daly. 173 Bisset’s Share list for June 1890. 174 Bisset’s Plantations Share list, December 1910. 175 David Landale, partner in Jardine, Matheson and rubber plantation promoter. 176 H. H. Read, broker and horseman. 176 Presentation to H.H. Read in 1940, with Ellis Hayim onthe left. 177 R. E. Toeg, broker and ‘King’ of the Shanghai racecourse. 177 Shanghai municipal council debenture. 178 J. P. Bisset’s advertisement for British government bonds during the First World War. 179 G. H. Potts, broker. 180 Harry Ollerdessen, broker and cricketer. 180 Sapajou’s portrayal, in The North-China Herald, of A.W. Reynell and V. D. Gensburger, leading members of the Shanghai Sharebrokers Association, 1929. 181 A. A. Brady, broker. 181 A. U. Fox, partner in Swan, Culbertson & Fritz (Sapajou, November 1938). 182 G. J. W. Morgan, broker (Sapajou, June 1937). 182 The tribulations of the Shanghai Dollar in 1938-39 as seen by Sapajou. 183 Shanghai Stock Exchange’s last list, Friday 5th December1941. 184

Acknowledgements I am grateful to the Trustees of the Nuffield Foundation for a grant which enabled me to visit several libraries in this country and overseas to gather material for this book. In particular, it enabled me to visit the Archive Department of the Hongkong & Shanghai Banking Corporation, at the time located in Hong Kong. There, the Archivist, Mrs Lee gave me every help and facility for which I am most grateful. My thanks are due to the Library of the School of Oriental and African Studies, University of London, for granting me access to the Addis Papers and allowing me to consult their extensive collection of material on China. I am indebted to Jardine, Matheson & Co, London, for permission to consult papers relating to the firm’s history, held at the Library of the University of Cambridge. My thanks are due to the Librarian of the China Collection of the University of Oxford for every help on a visit there to consult the files of The North-China Herald for the early 1940s. I must also record my appreciation to the Superintendent of the Shanghai Municipal Archives, Mrs Huong Miaozhen, who speedily answered my enquiries as to any surviving records of western financial enterprises. Similarly, I am grateful to several US university libraries, especially the Hoover Institution of Stanford University, for supplying me with copies of useful material in their holdings. Nearer home the ‘Stack’ of the Library of the University of Liverpool yielded some surprising items, testimony to the discernment of librarians and scholars of the interwar years. On recent developments I am most grateful to Credit Lyonnais Securities Asia and James Capel Asia for readily making available data and publications on the activities of China’s new stock markets. My other debts are of a more personal nature. In particular, I am most grateful to Professor Pan Shengchu, Central Institute of Finance and Banking, Beijing, Professor Zhu Weimin, Anhui University, and Professor Lizhong Yu, East China Normal University, Shanghai, all of whom made a visit to Beijing and Shanghai possible and memorable. Professor Shyuzu Nishimura, Hosei University, Japan, allowed me to benefit from his expert knowledge of the activities of the British banks in the region and, not least, was a most illuminating guide during a visit to Hong Kong. Also, I am grateful to Mr David Tung, of the Hong Kong firm Chung Lee & Co who elaborated on his memories of the pre-Second World War markets in Shanghai. Dr Robert Bickers, University of Bristol, has left me very much in his debt. His interest and help while researching at SOAS was much appreciated at the time, but beyond that his willingness to read the whole manuscript allowed me to draw

viii

ACKNOWLEDGEMENTS

on his considerable scholarship of the history of the International Settlement. His suggestions have been invaluable. Dr Catherine Schenk, Glasgow University, and Professor Andrea McElderry, University of Louisville, gave ready help in supplying copies of their recent work in this area. I am also grateful to the HSBC Group Archives for permission to reproduce documents from their collection. My colleagues at the University of Liverpool have also assisted in numerous ways. Dr Arnold Cheng has been a constant source of help and encouragement and his generous assistance in seeking out elusive references, in London and Hong Kong, is gratefully acknowledged. Simon Blackman, as ever, gave expert and patient advice on word processing and chart drawing. Yilei Zhang, Fudan University, Shanghai, and Visiting Fellow at the University of Liverpool 1997-98, has helped in numerous ways, not least in sharing her considerable knowledge of the working and problems of the new markets. Finally, my thanks to Professor Phillip Cottrell of the University of Leicester who has been a constant source of help and encouragement. For all the generous assistance I have received I am most grateful. Needless to say, errors, mawr a bach, of commission and omission are all mine.

Introduction In the past ten years or so emerging stock markets have attracted considerable academic interest as well as more practical attention from investment analysts and fund managers eager to secure attractive returns and diversify their extensive portfolios. There are now over 70 emerging markets compared with 31 in 1987; the number of developed markets has remained steady at around 25. In terms of capitalisation (in US$) the new markets have seen an eightfold increase since the mid 1980s, in contrast to the more modest threefold gain for established markets. As a result their share of world stock market capitalisation has increased from 3.5 per cent in the mid 1980s to over 10 per cent in 1996. While many of the new markets have displayed satisfactory returns, even after converting capital gains into dollars, they are generally characterised by high price volatility, variable trading conditions and occasional ‘crashes*. But despite these drawbacks their growth has been impressive as developing countries seek to mobilise both domestic and international funds to finance much needed investment. As a result a stock exchange has become as much a symbol of development as the possession of a central bank is of sign of financial respectability. China entered the ranks of the emerging stock markets in 1992 and the progress, and problems, of the official markets in Shanghai and Shenzhen now receive an increasing amount of attention and investment interest. However, the origins of this work are not to be found in the mounting interest in emerging stock markets, but rather in more accidental stimuli. While there have been several studies of the involvement of British banks in the ‘China trade’ few have been as authoritative as Professor Frank King’s four volume history of The Hongkong and Shanghai Banking Corporation. References there to shareholders and share dealing prompted a search for more information on such activity in Shanghai and, apart from a reference in a work published by Professor King in 1966, Money and Monetary Policy in China 1845-1895, there seemed to be little else. The story of banks and the great trading houses of the Far East have been extensively told but that of the stock market remained in obscurity. A more oblique inducement came from reading about the life and work of Griffith John, a remarkable missionary from Glandwr, near Swansea, who spent over 50 years in China during the second half of the nineteenth century, mostly in Hankow but with frequent visits to Shanghai. But to return to the secular. The usual route for writing a history of a stock

X

INTRODUCTION

market begins by seeking out the formal records of the institution, the essential documents being the minute books of the regulating committee, the original rule book, later additions and amendments, and the share lists. These are the standard primary sources. Unfortunately, in the case of Shanghai such basic pieces of the jigsaw were missing. An extensive search of libraries and other depositories yielded nothing. It seems that the most likely fate of the records of the Shanghai Stock Exchange, which also befell a great mass of other commercial records in Shanghai, is that they were destroyed in the immediate aftermath of the wartime occupation o f the International Settlem ent in December 1941. But all was not lost. Fortunately a comprehensive collection of the weekly share list of the early market, and later of the Stock Exchange, was carried by The North China-Herald. The labour of surveying these columns was greatly lightened by the splendid cartoons of the Russian émigré, Georgi Sapojnikov, (Sapajou). For the interwar years coverage was augmented by the reports in Finance and Commerce, Shanghai’s informative weekly financial journal. These basic sources provided a reliable foundation for tracing the broad development of the market, supplemented by a great deal of further information from contemporary and more recent secondary sources. This combination enabled the various parts of the historical jigsaw to be put together so as to provide a reasonably comprehensive picture of the development of the Shanghai Stock Market. Following a brief outline of the establishment of the International Settlement and its broad commercial development, Chapter 2 provides a picture of the financial evolution of Shanghai, particularly the currency system and the main western banking institutions which financed the import and export trade. A complex financial network was formed to deal with the rapidly growing trade which went through the port, and in this an important role was played by the Chinese Compradore. To promote both finance and trade the International Settlement was quick to take advantage of the newly developed joint stock company form in Britain but adapted to local conditions. In addition, and vital to the growth of the commerce of the Settlement, was the protection of property rights and the enforcement of contracts overseen by the Settlement’s judicial system with its extraterritorial status. With the essential financial and legal foundations in place the creation of a sustainable share market required both a supply of and demand for securities. Chapter 3 provides a detailed account of the main areas of commercial activity where local company formation and associated capital raising provided the share list with a growing supply of entries from the 1860s onwards, the number varying with the pace of commercial activity in the International Settlement and Shanghai generally. But the market was not the

INTRODUCTION

XI

preserve of companies. Even the Imperial government made modest demands on the market, but this proved a temporary national role. More long lasting was the use of the market by the Municipal Council. Its debentures came to be regarded as the local ‘gilt edged* investment alongside the more speculative industrial and commercial offerings. The demand for both fixed interest and equity investments came from a range of local investors, the market throughout being dominated by the investment needs and speculative flurries o f individuals, both western and Chinese. The share market’s genesis, organisational development and dealing methods are set out in Chapter 6, which concludes with a brief account of the leading brokers and broking firms in Shanghai. By the interwar years it was one o f the most developed stock markets in the East in terms of cash and forward dealings. The ensuing chapter chronicles the behaviour of the market and the various influences which produced periodic booms, crises and slumps in the period from its slow beginnings to the watershed of the 1910 Rubber Boom. The Rubber Boom itself, when Shanghai investors risked a relatively large amount of capital in the early development of the plantation industry in Malaysia, provides an instance of an intra-empire capital transfer alongside London’s much larger overseas capital investment. It produced an unprecedented boom in share dealing and in its wake an equally spectacular crisis for Shanghai investors and Stock Exchange alike. While the short term reversal was costly for many, in the long run the instincts of investors about rubber proved correct, but even then the returns they received were not always dependable. It deserves a comer to itself. Chapter 9 takes the market’s progress up to the fateful year of 1929. This was an eventful period when the Stock Exchange witnessed a series of market advances and reversals, some induced by commercial factors, others with more political origins. The final years of the market had an unreal air and witnessed quite remarkable speculative surges (‘bubbles’ in today’s financial terminology) and sharp reversals. These movements in some instances were prompted not so much by the attractions of shares themselves but as a haven of retreat from other even more speculative markets in precious metals and foreign currencies, Shanghai having become a leading regional financial centre with its money, share, foreign exchange, and gold markets. The market’s final demise was not due to financial collapse but to the arrival of war on 8 December 1941. On that day the financial world of the International Settlement came to an abrupt halt. The final chapters relate the history of Chinese stock exchanges. Chapter 11 chronicles the rise of Chinese markets, modelled on their more established counterpart, which provided a convenient and indispensable vehicle for substantial government borrowing by the regime of Chiang Kai-shek, and indeed, its earlier rival. An indigenous equity market never quite took root, a failure attributable more to the reluctance of company owners to offer equity

xa

INTRODUCTION

than to a lack of investment or speculative inclination on the part of local investors. Here again market activity stalled with war in the late 1930s and although revived for a short time afterwards it could not survive the events of 1949. The economic usefulness of a stock market, in transferring the savings of lenders to meet the investment needs of borrowers, was rediscovered in the late 1980s with the market ‘experiment’ in Shanghai and Shenzhen. These emerging stock markets have since grown rapidly and have considerable potential but their early years have been characterised by excessive volatility, difficulties associated with building up a developed financial infrastructure, the slow development of a trusted reporting system and the creation of an effective regulatory system. With gradual improvements in these areas and favourable conditions, China’s stock exchanges have the potential to rank among the leading markets of the world, particularly so if they were to merge with Hong Kong in the future to form a single national market.

Part One The Shanghai Stock Exchange

CHAPTER ONE

Founding the rising emporium China experienced a remarkable commercial revolution in the nineteenth century. Although not a short and spectacular event, nevertheless it was a revolution in that it produced practices and activities which contrasted greatly with those of earlier periods. By the 1890s there were several prominent trading centres along the coast, a considerable expansion had taken place in shipping, new business methods had been adopted, the financial system had developed and expanded, while conditions in the major centre, Shanghai, were such as to lead to the emergence of a share market. All these developments were linked to the steady expansion of trade in the late Ch’ing period. Most of the goods for this trade were not produced by industry but came from the traditional sector of the economy, from agriculture and craft work. The growth of trade was stimulated by the increase in population and the accumulation of wealth, while the gradual shift to specialisation by the end of the century drew more people into commercial and manufacturing activity. Several elements of these changes were to be seen in many parts of China, but they were most visible along the coast where the emergence of ‘commercial capitalism ’ was very evident. Three favourable conditions helped in this: the Treaty system, based on the 1842 Treaty of Nanking, gave protection to private property and contracts, the coastal cities witnessed the setting up of a basic financial system to supply credit facilities, and the coastal area was a long way from the influence of traditional practices and philosophy and far more amenable to the pursuit of profit and the acquisition of wealth.

Early trade with the West Before the opening of the Treaty ports in 1842 the bulk of trade between China and the West was confined to Canton. On the British side it was conducted through the monopoly held by the East India Company, and in Canton by the local ’Cohong’. This was the foreign trade guild of Canton ‘hong’ merchants, establish«! with official support, which supervised and controlled the activities of foreign merchants. By this arrangement foreign traders were confined to ‘trading factories’ and allowed into Canton only in

4

WESTERN CAPITALISM IN CHINA

the trading season from September to April. The Canton merchants handled the trade in the staple products of tea and silk, and some others, using their own capital in the pursuit of profit. A concession was, however, allowed to ‘outside merchants’ (called ‘shopmen’) who handled goods needed for the personal use of foreign residents in China. They also did a large amount of business in a wide range of products, helped by the lesser ‘hong’ houses, and with no financial obligations to the government they were able to offer better prices than the official merchants. Whilst the East India Company honoured the privileges of the Cohong, other private British and American traders had no such loyalty and traded freely with the ‘shopmen’. All attempts to restrain them proved ineffective and their activities contributed to the gradual liberalisation of trade.1 Although the East India Company did not fully control western trade with China its domination in the early years was considerable. Up until 1834 the company had a legal monopoly of trade as far as British subjects were concerned and its directors jealously guarded the Canton trade. But as the volume of tea and silk imported into Britain increased dramatically at the turn of the century a problem arose in finding suitable cargoes to export to China; there was little demand for staple woollen garments. The answer was found in the East India Company’s link with India and a triangular trade was soon built up. Tea and silk were exported to England, cotton goods were then exported to India, and India sent raw cotton and opium to China. But it was a one way trade and financial arrangements had to be developed to perpetuate the flow of goods and remit profits from India to England. This was done through the use of bills of exchange drawn on the East India Company and by the illegal acquisition o f silver obtained by selling opium beyond Canton. As the country trade grew a challenge to the dominance of the East India Company was inevitable. Enterprising British subjects, posing as the nominal representatives of other European governments, set themselves up as agents for merchants in London or India and handled the details of the receipting of cargoes and their sale, all done on a commission basis. By 1800 there were some 40 such agencies offering a wide variety of services, including the acquisition of ships, insurance and banking facilities. They were soon prominent in trading activity, with many new entrants to their ranks, including in 1824, Magniac & Co, later to become, in 1832, the famous firm of Jardine Matheson & Co. By this time the private merchants were particularly impatient with the restraints imposed on them and they actively sought free trade with China. The ‘Honourable Company’ could do little about the mounting competition and the clamour for change from the private traders, indeed, it even needed their specie from opium sales to balance its own trade with China, which due to large tea purchases was unfavourable. The

FOUNDING THE RISING EMPORIUM

5

dependence of the private traders on the East India Company continued to lessen as they enlisted the help o f American houses to remit funds. The merchants demanded an end to the monopoly, as did M anchester m anufacturas who felt that the East India Company monopoly merely served to restrict their exports. Persistent pleading produced the abolition of the monopoly in 1834.2 The monopoly o f the East India Company did not apply to other nations. Although some European vessels came to China it was the American traders who were the most important. In the 1820s several American commission houses became prominent; Russell & Co was formed in 1824 and Olyphant & Co in 1828. They went to China to get tea and silk, but like the traditional British exports their goods also had little attraction and they eagerly looked for an alternative to the large amount of silver used. They soon resorted to opium, but since they had no access to Indian supplies they were at a disadvantage compared with their British rivals. Nevertheless, most of the American houses, with the exception of Olyphant & Co, traded heavily in opium.2 Canton trade expanded rapidly with the ending of the monopoly. The new ‘free’ merchants, about 200 in 18 firms and practising free trade, were much more dynamic than the ‘Honourable Company’. They eagerly sought out new business. During the 1830s exports of tea and silk increased by some threequarters, while imports rose by two-thirds, which included 40,000 chests of opium in 1838-39, the eve of the Opium War.

The opium war As a medicine opium had been used in China for centuries but smoking opium as a narcotic only became widespread in the eighteenth century. The Imperial government tried to stop the practice by passing various edicts and in 1800 prohibited all imports. This merely served to make it contraband and the object of a flourishing cash trade beyond the reach of customs officials. Lintin Island in the Pearl River soon became the centre of this traffic, attracting merchant adventurers from east and west. Finally, in 1839, an Imperial commissioner, Lin Tse-hsu, was despatched to Canton with orders to suppress the trade. Previous attempts to do so had been weak but this time action was swift and decisive. All the opium in the possession of foreign merchants was confiscated and there were demands that no more should be imported, while the more notorious offenders should be handed over as hostages to the commissioner. The British gave up the opium but rejected other demands, including one asking foreigners to sign a bond promising never again to deal in opium (‘foreign mud’).4

6

WESTERN CAPITALISM IN CHINA

When the Chinese commissioner destroyed over 21,000 chests of opium the local British superintendent of trade requested military intervention in support of the British merchants, all of whom were greatly affronted at the destruction of their stock-in-trade and frustrated by being denied direct access to a vast new market. Hostilities were inevitable. The British government sought security for the merchants either by the cessation of territory or by a treaty with adequate guarantees. In the meantime ‘one or more islands* would be occupied. An expeditionary force was despatched in 1840 under Captain Charles Elliott and when early negotiations failed the force occupied the Bogue Forts near Canton.9 Following a truce, the Convention o f Chuenpi (later disavowed by both sides) gave British merchants free access to Canton and Hong Kong island was ceded to Britain, and in 1841 it was occupied by a naval force. This solution did not meet with the approval of the Foreign Office in London, Palmerston smarting at Elliott’s reluctance to extract a larger indemnity from China and at his acceptance of an arid island, Hong Kong, in exchange for Chusan. A new commander (Sir Henry Pöttinger) was sent out to the expeditionary force with more precise instructions. The foreign secretary, Palmerston, wanted ‘four or five principal commercial towns* to be made accessible to British trade with resident consuls to look after British interests, or if an island was to be ceded, there should be free commercial links with towns on the mainland. Meanwhile, they would keep Hong Kong until a better alternative near Canton became available. When a new government took office in London under Sir Robert Peel the instructions were not altered and the military campaign pushed further north to gain access to the Yangtze River and the Grand Canal, and capture the second city in China, Nanking. The hope was that such disruption to China’s trade and the strategy of cutting the empire in two at the Yangtze, would force the Imperial government to give in to British demands. In order to achieve these aims it would be necessary to capture Woosung and Shanghai. On its way there the fleet had taken over Amoy, Unghai and Ningpo. Although well defended by cannon the battle for Woosung was short due to inaccurate shelling. Some days later the British forces moved up overland to Shanghai and along the Whangpoo River. Again there were strong batteries on the river bank but the fire was haphazard and caused little damage to the invading warships. Meanwhile, the land army approached the city from the rear but met with little resistance. Many of the officials and residents had already left. After consolidating the position in Shanghai the invasion force continued up river intent on capturing the Grand Canal and then Nanking. Soon Chinkiang, at the junction of the Grand Canal and the Yangtze, had fallen and provided the British with a base to launch an attack on Nanking. With Peking now cut off from its traditional food supply and all north-south

FOUNDING THE RISING EMPORIUM

7

traffic disrupted, and facing further defeat, the Imperial government moved swiftly to secure a negotiated peace. On 9 August 1842 the British troops arrived at Nanking, and under the threat of an invasion of the City, British terms were accepted by the Chinese and the Treaty of Nanking, together with French and American agreements were signed on board the warship Cornwallis, moored in the Yangtze River.' The Treaty of Nanking more than satisfied British demands. China agreed to pay compensation for the opium destroyed in Canton, the cost of the expeditionary force, and to end the monopoly of Canton by opening four additional ports, Amoy, Foochow, Ningpo and Shanghai, to foreign consuls, businessmen and missionaries. That would certainly have satisfied Lord Palmerston’s early instruction to Sir Henry Pöttinger. But Pöttinger also delivered the island of Hong Kong, ceded in perpetuity on the grounds that it was essential for the British to have a ‘port whereat they may careen and refit their ships’. Pöttinger, like his predecessor Captain Elliott, appreciated the strategic location and the excellent harbour of Hong Kong; they did not share Palmerston’s view of it as a ‘barren rock’. Rather, he saw it as an ideal centre for trade and *a place from which Her M ajesty’s subjects in China may be alike protected and controlled’.7 Article 2 of the Treaty of Nanking not only opened the ports to trade, it also stated ‘that British subjects with their families and establishment, shall be allowed to reside, for the purpose of carrying on their mercantile pursuits, without molestation or restraint’ at the ports. It gave the British government the right to appoint ‘Consular officers... to be the medium of communication between the Chinese authorities and said merchants, and to see that the just duties and other duties of the Chinese governm ent... are duly discharged by her Britannic M ajesty’s subjects’.' There was recognition of the extraterritorial rights of foreigners to be tried by their own consuls and later courts. Once trade was allowed the foreign merchants needed residences but it suited both sides that these should be in a separate enclave; the merchants sought protection and customary standards of housing and hygiene, while the Chinese government was anxious not to expose its own citizens to the influence of western life. The precise location where the British merchants would live in Shanghai was agreed later in 1843 and local agreements were made with the Shanghai Taotai. The settlement for the foreign residents was to be built on land bought at a fair price from the Chinese owners. Later, in 1844, the Americans obtained a similar right for its citizens, followed by the French and then other European nations. The British were prepared to allow others access to the China trade (under the most favoured nation principle) and this laid the basis for a great cosmopolitan city and ‘one of the chief commercial emporia of the world’.'

8

WESTERN CAPITALISM IN CHINA

An international settlement When the first British consul. Captain George Balfour, arrived in Shanghai in November 1843 his first task was to secure a suitable location for the consulate, preferably inside the old City walls. However, the Chinese intendant (Taotai) took a different view and it was later agreed that the foreigners would be located away from the City and along the banks of the Whangpoo, thereby providing a deep-water anchorage. At first sight the location did not seem at all promising since it was covered by mulberry trees, cotton plants and ancestral graves. Despite this the European traders and the consul soon came to the view that they would prefer to occupy this inhospitable tract rather than stay within the City walls. With a population of 100,000 or so, they perceived it as being overcrowded and somewhat insanitary; an alternative seemed desirable. What prompted the final move was the monopoly position of the local Chinese merchants who insisted that all goods should be stored in their warehouses. The foreign merchants objected strongly to such a condition and sought their own facilities as soon as possible. Under land regulations drawn up by the consul the process of acquisition, building and development of the British settlement soon began, the whole enterprise presided over by the consul, helped by a small committee of three merchants who looked after roads and jetties. By 1854 this select trinity had evolved to become the elected Municipal Council, a body which ran the International Settlement for the rest of the century and beyond. The Treaty of Wanghia between the Chinese and the Americans, made in July 1844, allowed American traders the same rights as those enjoyed by British merchants in the Treaty ports. At the outset, however, there was little need for an American consular presence since most American traders conducted their transactions through a British firm. This was because they were prohibited by the Treaty from dealing in opium, but they got around the prohibition by using British agents. Later, when the Americans decided to have an area of their own, disliking the prospects in the Chinese city and the price of land in the British Settlement, they opted for the land to the North of the Soochow Creek, known as Hongkew and which had a lengthy frontage to the Whangpoo River. This was at some distance from the British Settlement where some American houses, such as Russell & Co, already had their offices and warehouses. This and other factors led to the eventual merger of the two Settlements to form the International Settlement in 1863. Excluded from the Nanking negotiations the French obtained, by the Treaty of Champoa (1844), the right for their nationals to live and trade in the Treaty ports. Rather than intrude into the British Settlement they sought their own exclusive territory in Shanghai, and after considerable diplomatic moves secured the narrow strip o f land between the British Settlement and

FOUNDING THE RISING EMPORIUM

9

the walls of the Chinese City. This also gave them a short frontage on the Whangpoo River, equal to about a quarter of the British waterfront. French nationals were given priority in the allocation of sites within the Settlement, unlike the British practice where businessmen were treated alike wherever they came from.10

A difficult beginning The Treaty of Nanking was greeted in England with enthusiasm, especially by the cloth manufacturers of Lancashire who relished the prospect of supplying their ‘shirtings’ to such a populous market." As Sir Henry Pöttinger, the British Plenipotentiary, saw matters, ‘all the mills in Lancashire could not make stocking stuff sufficient for one of its provinces’. There was excessive optimism; ‘Not only were recognised and staple imports shipped in excess quantities, as during the years 1843-45, but ridiculous ventures like large consignments o f table knives and forks, pianofortes etc. were sent to China on speculation’.12 But the early hopes of a rapid growth of imports and exports through the Treaty ports were dashed by the prolonged Taiping Rebellion and the extensive disorder it caused. This eventually reached the hinterland of Shanghai and, for a short time caused difficulties in Shanghai itself, where it was perpetrated by the Small Swords Society. For several decades the combined effect of the increasing population, sluggish food production and heavy Imperial taxation had prompted many Chinese to band together in secret societies. Deteriorating economic conditions after the Opium War merely added to the difficulties. The Treaty of Nanking had been silent on the opium question and as a result the ‘foreign mud’ flooded into the country with a debilitating effect on the population and resulting in a large drain of silver abroad. Neither did the arrival of foreign imports to compete with traditional craft products serve to help the local economy. As silver flowed out the rate of conversion between silver and copper cash, used for retail purchases, worsened sharply to three times the official rate. Wages were paid in copper cash but taxes had to be paid in silver, and the problem was further compounded by the practice of having wholesale prices in silver but retail prices in copper, which gave the inflationary spiral a further sharp tw ist Forced into destitution many of the common people became wandering vagabonds and their ranks were swelled by labour displaced by the loss of trade in Canton, caused by competition from the new Treaty ports, especially Shanghai. Here was a ready constituency for Hung Hsiu-ch’iian who led the anti-government rebellion and who in 1851 proclaimed ‘The Heavenly Kingdom of Great Peace’ (the Taiping Kingdom, as it was called in the West).

10

WESTERN CAPITALISM IN CHINA

By 1853 he and his supporters had swept through the provinces of Hunan and Hubei and then onwards into Anhui, finally capturing Nanking. Here was a threat to the Manchu dynasty and to the safety of the Treaty port of Shanghai.1’ Fearful that the Taiping, already disrupting shipping on the Yangtze River, would soon overwhelm Shanghai, the senior British officer stationed in China, ‘the Governor of Hong Kong and Plenipotentiary and Superintendent of Trade’, went to Shanghai to see the situation for himself. Realising that the threat was serious, and not very hopeful of receiving any useful orders from London where the government was pre-occupied with domestic matters and the war in the Crimea, the governor set out on a gunboat for Nanking to find out the Rebels’ precise intentions. After due negotiations he decided on a policy of neutrality, despite pleas from the Imperial government and the British consul in Shanghai for British military intervention. Neutrality did little to comfort the British Settlement in Shanghai. They feared an invasion from the West, or an uprising in the nearby Chinese City, or both. Accordingly, they set up the Shanghai Volunteer Corps, a joint ‘home defence’ force with the Americans. Their foreboding proved correct since the Small Sword Society, which had promoted a popular uprising around Shanghai, moved into the Chinese City in September 1853.14The threat to the Settlement was obvious and near. All business came to an abrupt halt. Although the rebels did not enter the Settlements they occupied the China Customs House and so prevented several loaded vessels, waiting to pay their dues, from sailing. To hastened their departure, and to keep to the terms of the Sino-British agreement, the British consul took over the collection of such duties, happily accepting promissory notes since cash was unobtainable. Later, the foreign powers in Shanghai made an agreement with the governor of the province to collect duties at Shanghai, and this arrangement became the basis of the Chinese Customs Service whereby all maritime customs was placed under the control of the new foreign inspectorate of customs. Renamed the Imperial Maritime Customs Service in 1860 it was presided over, from 1863 to 1911 by the redoutable Sir Robert Hart. In the meantime, attempts by Imperial forces to end the occupation proved unsuccessful, while the plundering activities of the troops merely served to drive an increasing number of refugees, eager for some protection, into the foreign Settlements. Indeed, it was the unruly conduct of the Imperial forces which led the British and American fences to abandon their neutrality. They broke it not to drive the Taiping out of the Chinese City but to rid the foreign Settlements of the annoyance of Imperial troops. The celebrated Battle of Muddy Flats in 1854 succeeded in this aim but not before the British and American contingents had managed to shoot at each other. The Chinese City

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was finally rid of the rebels in February 1855 when Imperial troops, backed by French naval units, stormed the City.11But if the local threat had ended, the Taiping Rebellion rumbled on in the hinterland, and until it was finally put down the trade of the Treaty port was unlikely to flourish. Before that was achieved there was another conflict involving British and Chinese forces. The Second Anglo-Chinese War o f 1856 arose from the Chinese practice of chartering British ships for the coastal trade. However, the Treaty o f Nanking did not give formal authority for ships under a foreign flag to work in the coastal trade, but nevertheless it was a common practice. Sometimes foreign flags were assumed illegally, or consuls might grant the right to fly them to Chinese vessels, which often led to disputes. Such an incident gave rise to the Second Anglo-Chinese War in Canton. The pretext was the arrest by the Chinese commissioner in Canton of a Chinese owned but Hong Kong registered lorcha, The Arrow. The British response was to attack Canton while the Chinese retaliated by burning down the abandoned ‘factories’. A year later the British captured Canton and after further hostilities peace was finally made by the Treaty of Tientsin in 1858, supplemented by the Convention of Peking in I860.1* In addition to giving foreign powers the right to appoint ministers to the Imperial Court, part of the Kowloon peninsular was ceded to the British, 11 new Treaty ports were opened, foreigners were allowed to trade and travel in the interior and the great artery of trade to inland China, the Yangtze River, was opened to foreign merchant ships, a concession of great importance to the future o f Shanghai. The foreign powers pressed their advantage further. With the maritime customs duty limited to 5 per cent ad valorem, the Imperial Government found it could not obtain more revenue from that source when military expenditure increased during the Taiping Rebellion. To help finance the suppression of the rebels it imposed, in 1853, a tax of 2 per cent (likin) on goods in transit from one province to another, and even between towns in the same province.17 By 1858 it was widely collected throughout south China and the Yangtze valley. However, the Treaty of Tientsin allowed foreign merchants to commute all inland customs duties by paying an extra 2 per cent to the Maritime Customs on imported goods and exported Chinese goods. This concession gave foreign merchants an advantage over their Chinese competitors and assisted the foreign penetration of the China trade. Although the Tientsin Treaty did not grant foreign merchants the right to participate in the coastal trade, the provisions to re-export own cargoes and discharge part of a cargo, meant that in practice it was impossible to prevent foreign traders from engaging in native trade. Later the change from sail to steam aided the transfer of the Chinese coastal trade from native junks to foreign vessels.

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The rumblings of the Taiping in the hinterland finally turned into a threat to Shanghai in 1860 when the rebels went in search of a port. The initial effect was to produce a flood of Chinese into the Settlements seeking some security. There had already been an influx of gentry and officialdom, and although previous contact had been slight the new arrivals were quick to leant western methods and to emulate them. The expanding silk and tea trade provided much needed employment. The influx soon induced a major building boom to meet the demand for accommodation, but much of this was later abandoned when the final victory over the Taiping was achieved. Faced with a direct threat to the Settlements, and fearing that the rebels would not recognise the agreements allowing foreign trade on the Yangtze, new defences were quickly erected along the surrounding creeks of Shanghai. In 1862 command of one section of the ‘Ever Victorious Army’ (a mercenary army led by a flamboyant American adventurer, Frederick Townsend Ward) passed to Major Charles George ‘China’ Gordon, who later found greater fame on another continent. At that stage of the conflict there had been no direct British military involvement, although several hundred British troops were stationed in Shanghai. Further threats from the Taiping persuaded the Imperial authorities to ask for foreign naval protection and in response to the appeal British reinforcements arrived in the city. Within a few months these combined forces ended the direct threat to Shanghai, but it took another two years to subdue the rebels completely.1* With the port and the Yangtze waterway secure the way was open for trade to expand on the framework provided by the Treaty of Tientsin. There were now several additional treaty ports, the customs was centralised and efficient, provision had been made for the privileged movement of goods in the interior, foreign merchants and ships knew they could trade safely under the provisions of the various treaties, and always with the protection of the local consuls. The foundation had been laid for an ample expansion of trade. The concession allowing foreigners to engage in manufacturing activity at the Treaty ports had to wait until 1895 and the Treaty of Shimonoseki, signed between China and Japan after the war over the sovereignty of Korea. Under the terms of the Treaty China agreed to open further ports and to allow the subjects of Japan (and by virtue of the most favoured nation clause those of other nations also) to ‘engage in all kinds of manufacturing industries in all the open cities, towns and ports of China a n d ... to import into China all kinds of machinery’.19 This led to a flourish of factory formations, especially in Shanghai, while the arrival of foreign undertakings produced a more tolerant attitude on the part of the Imperial government towards native private industrial enterprise.

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The expansion o f trade Freed from the confines of the Canton factories, and the influence of the local Cohong, the volume of foreign trade grew rapidly, its composition changed and it shifted to other Treaty ports, most notably to Shanghai. In terms of volume exports grew steadily once the uncertainties of the early 1860s had ended, reaching some 160 per cent of the 1867 level by the mid 1880s, while a similar trend was seen in imports. Thereafter, the pace quickened markedly, despite some sharp short term fluctuations, the level of exports rising by about 140 per cent between 1890 and the early 1900s. The trend of imports was somewhat higher, the increase being of the order of 175 per cent. Overall, in the half century from 1860 exports from China had doubled, and the volume of imports more than trebled. As to the trade balance this moved from a modest surplus in the 1870s to a substantial deficit by the end of the century, estimated at around Haekwan Taels 121mn (approximately £18.6mn), an amount covered by the inflow of capital in the form of loans and industrial investment, and the export of gold and silver.20 Tea and silk continued to dominate the export market after the Treaty of Nanking, much as it had done before. Indeed, the two staples occupied this position until the end of the Ch’ing dynasty in 1911, although with fading importance. In 1870 tea accounted for 50 per cent of exports and silk goods another 39 per cent. By 1900 tea had lost its pre-eminence, down to 16 per cent and silk had fallen to 30 per cent, with further declines by 1910. Meanwhile, a range of other products had come to the fore, including seeds, oil, beans, hides, wool and raw cotton, in all accounting for about 30 per cent of exports by 1910, compared with only 8 per cent in 1870.21 The decline in tea exports was due not to high prices since the value of the tael fell over the period, but rather to the appearance of new sources of supply with better quality, in India and Japan. Export merchants of Shanghai found it difficult to enforce quality standards among the interior producers and trade suffered as a result. Silk exports on the other hand held up well over the period, testimony to the quality produced by a major rural handicraft industry. On the import side opium continued to rank as the most important item until it was overtaken by cotton piece goods in the 1890s. From 43 per cent of imports in 1870, opium fell to 15 per cent in 1900 and 12 per cent in 1910. This decline reflected the continued campaign against the use of opium, but more than that it reflected the arrival of better quality domestic supplies. Its rival in the import figures, cotton piece goods, had been imported from Britain since the early decades of the century and had grown steadily, but not by as much as Lancashire mill owners had hoped. Here the attitude of British merchants had not helped since their enthusiasm for British goods was dampened by the difficulty in selling them coupled with the ‘petty bothers of

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the system of taxation in transit, and the small profits at the end of everything’.22 While cotton piece goods’ share in imports fell gradually between 1860 and 1900, that of cotton yarn grew rapidly to about 15 per cent, drawn in by the development of domestic production. The growth in the imports of cereals, flour and sugar, some 10 per cent of imports in 1900, reflected the expansion of the large coastal ports and the prohibitive transportation costs of bringing such items to them from areas beyond their immediate hinterland. The other notable feature in the import trade was the demand for an increasing variety of western goods, including kerosene to replace vegetable oil for lighting, along with metal wares, matches, soap, cigarettes and other consumption goods.23 From the beginning the China trade had been dominated by British interests and this continued long after the demise of the East India Company. Although no adequate trade records exist for the early years of the Treaty ports (since the local Chinese customs houses kept no records) the available reports for Canton and Shanghai suggest that Britain accounted for well over two-thirds of all trade, with the United States the only other country of importance.24 While later, trade returns collected by the Maritime Customs were far more comprehensive, attempts to provide an accurate country distribution are complicated by the shipment of goods to and from Hong Kong. Despite this the available returns indicate that Britain remained China’s most important trading partner until the end of the century, and a little beyond, if empire trade is included. By the 1880s Britain and Hong Kong’s direct external trade with China amounted to some 60 per cent of all trade, while the figure for the British Empire (including India and the Colonies) amounted to 75 per cent. By 1900 the British share had fallen to around 12 per cent, but the Hong Kong and colonial contribution sustained the Imperial figure at 60 per cent. As the British share declined, powerful rivalry came from Japan following the 1895 Treaty of Shimonoseki and its role in Manchuria after 1905. Japan’s share of trade increased from 4 per cent in the early 1880s to 16 per cent by 1911, and by the end of the First World War it stood at over 30 per cent. Alongside, there were less dramatic increases in the trade with America and Russia.23

The flourishing emporium ^ening Shanghai had easily overshadowed the other moy, Foochow and Ningpo) and by 1864 it had hief centre of foreign trade. Its domination of the associated commercial expansion of the City,

FOUNDING THE RISING EMPORIUM

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were due to several factors. Well before being given Treaty status it had been the major sea port for the Yangtze basin and native traders had already established large warehouses. Indeed, Shanghai’s potential for foreign trade was recognised in the 1830s when a British mission reported on the extensive domestic trade, describing it as the ‘principal emporium of eastern Asia’, and claiming that ‘the advantages which foreigners would derive from the liberty of trade with this place are incalculable’.26 Geography as well as history sided with Shanghai. It soon challenged the domination of Canton in the export of the two great staples: tea and silk. The major silk producing regions lay in the lower basin of the Yangtze, while tea for export was grown mainly in the hills to the south west of Shanghai. Apart from the cost of inland transport to Canton, the vulnerability of these long traditional routes were quickly exposed by the Taiping rebels. Also, opium which in the early days dominated the import trade, could be distributed more easily and cheaply from Shanghai, along the Yangtze, than from any other port. Geographical advantage was further boosted by the reluctance of Canton to abandon the Cohong system. The freedom enjoyed by Shanghai traders contrasted sharply with the restraints previously imposed by the southern guild. Despite its status as a Treaty port foreigners were not allowed within Canton’s walls, while officials did all they could to keep trade to the old restricted ways for the benefit of the Imperial coffers. Shanghai officials allowed new methods of trade and foreign firms quickly took advantage of the freedom to send Chinese agents into the interior to buy tea and silk. This produced not only a bigger export trade but also, for the Chinese suppliers, better prices than previously obtained from the restricted trade channels through Canton. Business could now be conducted without any semi-official supervision as practised by the Cohong, which was often acting as the watchful eye of Peking. The contrast was quickly and startlingly revealed in finance of trade. Before the Treaty foreign merchants estimated that the average total dues per ship imposed at Canton was of the order of Tls240,000 (about £84,000) and of this Tls200,000 was officially connived ‘squeeze’. The comparable figure for the same facilities at Shanghai was Tls50,000 (some £17,500), of which only T ls15,000 was ‘squeeze’. Little wonder, therefore, that the number of foreign ships which entered and cleared the port of Shanghai between 1844 and 1855 increased from 44 to 437.” Endowed with so many advantages Shanghai quickly built on the promising start. Between 1865 and 1900 the net value of trade passing through the Maritime Customs increased five fold.2* Virtually throughout this period Shanghai was a net importer but this was not surprising since it was a major distribution centre for the entire Yangtze basin. During the 1860s and

16

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1870s the export trade was dominated by tea and silk, between them accounting for 90 per cent of exports, while on the import side two items, opium and cotton, stood out above all else, together making up 80 per cent of the total. In the ensuing decades the traditional staples lost their relative share, tea and silk exports reflecting the erosion of China’s monopoly, and on the import side opium lost its dominance. Cotton also fell off in terms of the value of trade but its share remained remarkably buoyant despite the growth of domestic production. W hile the merchants handling foreign trade at Shanghai viewed competition from new producers, especially of tea, with some concern, they were able to substitute a large variety of new goods, which after 1890 became more important than the old staples of tea and silk. From 1890s the importance of manufactured exports from Shanghai increased rapidly and by the 1930s exports of m iscellaneous manufactures exceeded that of miscellaneous raw materials. As local manufacturing developed a similar trend was evident in the port’s imports, so that the most important categories were machinery, metals and minerals, a far cry from the opium and cotton textiles of earlier years. The boom in manufacturing in the early twentieth century was given a substantial boost by the removal of European competition during the First World War, and this was reflected in the meteoric growth of the port’s trade between 1918 and 1930.

Notes 1. Yen-p’ing Hao, The Commercial Revolution in Nineteenth-Century China, (University of California Press, 1986), pp. 17-20. For details of the early opium trade and the Canton system see J. K. Fairbank, Trade *e.88 10,000.81 i l liae. 00

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was spurred on by Deng Xiaoping’s tour of southern China and his statements favouring faster reform. The market, however, was probably more moved by the removal in February of price limits on a range of shares, followed later by the general removal of price and turnover limits. From around 400 in early April the Shanghai index advanced spectacularly to a peak of 1503 on 25 May, a three-fold gain. The critical surge took place in the third week in May when prices virtually doubled in the space of two days and took the market’s average price/eamings ratio to a heady level of 250. Few stock exchange advances have been so electric. The market had responded immediately to the removal of all limits on daily price advances.41 Up to that point the price advances had been impressive but not spectacular; the gain from early April to the early part of the third week of May was 50 per cent. To the south the Shenzhen market also displayed an impressive advance and to a somewhat similar timetable. From 117 in late March the index advanced some 2.5 times to reach 312 at the end of May. The euphoria generated by the headlong advance encouraged a belief that the market rise would persist for a considerable time, if not indefinitely. However, no market could sustain such a pace. Generally, as prices rise, taking the price/eamings ratio to unsustainable levels, the return on equities falls to very low levels, and sooner or later investors will make a comparison with higher and safer yields on other assets. The higher the market climbs investors become more nervous at the prospect that even a small fall in price will wipe out all the yield received. Furthermore, in such market conditions new issues appear on the market, increasing the supply of shares and inducing investors to switch to new offerings. Sellers inevitably appear and once prices start to fall selling pressure soon drive them sharply down. Both markets experienced such a reversal, Shanghai more so than Shenzhen. As is evident from Chart 12.1 Shanghai’s fall was as pronounced as its rise and within a few months the market returned to its starting point. Having risen sharply after lifting the limits on daily price changes the market quickly went into reverse as the authorities sought to bar investment syndicates from ’ramping’ shares. A shadow had been caste over the market by the revelation of large-scale manipulations. Selling pressure mounted when the authorities’ comments indicated that official funds should take their gains. Such news induced a sharp fall in mid-August. Institutions took a similar view, as no doubt did the managers of securities companies funds. The Shanghai market fell to below the 400 level, where it started early in the year. Apart from temporary pauses the market’s fall was as dramatic as its rise, reaching its low point in mid-November (369), losing three-quarters of its earlier value. Shenzhen fared a little better, the fall being more gradual and the market only losing half of its value.42 The contrast in the two markets’ experience can probably be explained by

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their different characteristics. Shanghai was dominated by large enterprises heavily dependent on the inland domestic market, with a high percentage of shares held by the state. This tended to produce relatively thin markets in which smaller investors dictated the drift of market prices. Once doubt had been voiced over the level of prices this combination of features, coupled with the large number of new listings in the new year drove prices sharply downwards. The Shanghai market certainly was not helped by the extensive ’black market* for subscription certificates for new issues which siphoned off funds from the secondary market. Investors who had bought certificates at black market prices were only too eager to sell their new shares once dealings started. By contrast the Shenzhen market, itself not immune from speculative excesses especially with new issues, was composed of medium-sized manufacturing and service companies linked into the rapid growth of the province and with a greater proportion of capital in market hands. The Shenzhen market had greater breadth and depth than its northern rival; these features may have tempered its rise and later its fall as investors struggled to extricate themselves from the fledgling equity market. After such an intensely volatile episode with the market surging upwards by an average of some 50 points a day over a period of a month and then falling back to its original level, albeit over a longer period and interspersed with some abrupt falls, it seemed that both investors and the authorities might have settled for a period of reflection. The expectation would perhaps be that such extreme volatility would have completely depleted the market’s confidence. On the contrary, the market soon launched into another bullish episode, taking the index from the 300 level to a record high of 1615 on Monday, 15 February 1993. Shanghai was not alone in this speculative outburst. Shenzhen climbed from its low of 170 to a peak of 379, a few days after its northern rival. By any standards these were spectacular gains. Even the normally subdued B share market reacted to the A share market surge. Several factors spurred on the rise. Investors were attracted back to the market by better corporate earnings and proposed bonus issues, and their interest was intensified as the market rose, fuelled by speculative buying financed by easy bank credit. This took place against a background of rapid industrial growth, monetary inflation running at over 20 per cent and falling real interest rates which drove savers to the share market.43 When investors decided to take their profits the market fell sharply losing virtually half the earlier gains within a month. A brief rally in April gave way to a further downward trend as the market responded to the credit squeeze with high interest rates and official sales of bonds to mop up liquidity, all part of the austerity programme launched by the government to dampen the overheating economy and bring down inflation. In July the authorities ordered the banks to stop their involvement in the securities market and with securities

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companies, and also instructed them to call in loans made for unauthorised real estate and share loans.44 Further depressing influences came from the anticipation of a very large number of new listings in the autumn, while investors reacted adversely to unconfirmed reports of a transactions tax appearing in the coming year.41 The market rallied briefly in the summer in response to the government’s programme to bring discipline to its activities but it was short-lived. After the volatility of the early phase and with the prospect of a new regulatory structure headed by the CSRC, the market might have looked forward to a degree of greater stability. But 1994 proved just as volatile. In the early months the market lost half its value in a very steep fall (see Chart 12.1). Local investors withdrew their money in response to growing uncertainty about the government’s commitment to the future of the capital market experiment. The market also had to accommodate the unification of the exchange rates involving the abolition of the managed rate and the adoption of the prevailing rate of Y8.7 to the US$.* A further depressing influence came from the heavy volume of new listings, taking the total listings on the market from 183 to 269 between January and May. Fearing that the market might collapse altogether the authorities postponed further listings and promised action to deal with price manipulation and insider dealing. In August the CSRC announced a series of stock market reforms which aimed at stimulating demand. Local securities firms would benefit from a loan programme to strengthen their financial position, and plans were announced for the opening of the A share market to foreign investors. Not surprisingly, the prospect of such a capital inflow propelled prices vertically upwards, the Shanghai A share index rising from a low of 328 at the end of August to 1,057 in mid-September, along with record turnover. The Shenzhen market mirrored the movement, the A share index rising from 95 to 233. When market expectations were dashed by wavering on the part of CSRC in implementing the proposed reforms and halting the programme of allowing direct foreign investment, share prices fell as sharply as they had risen. Further depressing influences came from the prospect of credit tightening to curb inflation. Having played a leading part in inducing much of the volatility the authorities then tried to dampen down speculation by banning day-trades and tightening controls on media reports that could affect share prices.47Investors added their own downward twist by switching from equities to the safe haven of bonds, made more attractive by the offer of additional bonus terms. Continued concern over inflation, along with credit restraint and a slowdown in the economy, kept share prices depressed. Weak corporate results and increased inter-company debt did little to attract investors, while a large issue of Treasury Bonds and some new issues took support away from the secondary market. Confidence was further weakened in February with the

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trading scandal in the Shanghai bond futures market. Fearful of facing large losses on the futures market, after prices moved against them, traders who had taken short positions (sold contracts in anticipation of a fall in price) engaged in a massive wave of selling just before trading closed on Thursday 23 February. It was desperate attempt to force down prices.4* The Stock Exchange authorities promptly cancelled the contracts, ordered traders to unwind the positions by negotiation and closed the market. The episode unnerved the share market and prices fell by some 5 per cent, local brokerage firms contributing to the slide by selling shares to cover bond trading losses.4* Whatever losses shareholders might have suffered in the early part of the year they were given a brief but spectacular advance by which to recoup the position. In mid-May 1995 the government imposed a ban on bond futures trading (the CSRC issued The Urgent Circular on Suspension o f Treasury Bond Futures Trading) which immediately released investment funds into the equity market.30 The stock market surged upwards. The Shanghai index quickly moved from 602 to 895 in three days; a 48 per cent leap. Shenzhen went from 120 to 171; a jump of 42.5 per cent. The advance, however, came to an abrupt halt shortly afterwards when the authorities announced the new issue quota of Y5.5 billion (£0.4billion) and investors took fright at the prospect of a glut of shares. Two policy decisions had sent the market through a cycle of several hundred index points; its fragile nature was clearly evident. Shares, however, soon recovered as companies reported better half-year profits with the improved economic climate, but even this good news could not negate the effects of successive new issues and the ambiguities associated with regulations aimed at stopping illegal trades.*' By the end of the year the market had virtually returned to its New Year starting point, depressed by announcements of changes to China’s preferential tax policies and protectionist tariffs. Real estate and property stocks fell heavily on news that tax incentives for foreign businesses in the five special economic zones would gradually be phased out.*1 Despite its volatility 1996 was a novel year for China’s investors. From the market’s inception the share index had usually ended the year at or below where it had started. Favoured by the general economic climate, with falling inflation, and a relaxed monetary policy which produced a recovery in corporate profits from their cyclical trough, the Shanghai A share index started the year at 575 and reached 950 by the close, a 60 per cent gain. Shenzhen recorded a far more spectacular increase of 190 per cent, the index moving from 117 to 341. As in all such market movements the upward pressure on price is exacerbated by the limited choice of financial assets available to local investors when bank deposit interest rates fall. Local speculators took to the share market with added interest towards the close of the year when rumours again circulated that the A share market might be

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opened to foreign investment, albeit as a limited experiment The effect on the A share market was electrifying. Over the period 22 November to 9 December the market index rose 30 per cent. Such an advance clearly unnerved the authorities who promptly imposed trading limits on the m arket accompanied by statements of official displeasure at excessive speculation.” The market’s response was as speedy as its earlier rise, the index falling back below the 1000 level by the year end. If the authorities had intended to induce more gradual price movements their hopes were soon dashed as the market advanced even more rapidly in the first quarter of 1997. Against a background of falling inflation, lower interest rates and improved company performance, the Shanghai A share index showed gains of some 55 per cent by mid-April, with Shenzhen following a little behind at 50 per cent. In Shenzhen’s case this was a record high, while Shanghai was a mere 46 points below its 1992 record level. In the market advance it proved possible to bring out a stream of new issues, with the authorities hoping that large enterprises with good returns and prospects would lend greater stability to the market in the long term. On the secondary market quality stocks moved ahead sharply but the so-called ‘junk stocks’ attracted little attention. Investors were once again induced to switch out of savings deposits for the more attractive equity market. The authorities became increasingly concerned at the pace of the advance and the mounting speculative activity. In May came the traditional package of measures to cool the market. A very large quota of new issues, Y30 billion, was announced and the trading stamp tax was raised from 0.3 per cent to 0.5 per cent. Dealings in seven stocks were suspended following suspected trading violations. In June measures were taken against state-owned banks to prevent further breaches of banking laws to fund speculative transactions. Broking firms were also fined and suspended from trading. Under this barrage of restraint and official censure the markets fell back to a level more consistent with the general trend from 1995 onwards.

Volatility Since its formation the dominant feature of the market has been high price volatility. Charts 12.1 and 12.2 give a clear picture of the sharp and substantial price movements on both markets. Although there are differences in the timing of market turning points and in the extent of price fluctuations, nevertheless, the two markets have moved very much in step, the correlation coefficient for the A share markets over the period 1992-97 being 0.8. Other measures also testify to the general impression conveyed by the share index charts. The World Bank’s International Finance Corporation calculated that for the period

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1993-95 the annualised mean return (in US$) was a mere 0.24 per cent for the China markets and that the annualised standard deviation (a measure of variation) was 76.28 per cent, the second largest volatility of the 26 emerging stock markets analysed.14This statistic was based on IFC Global Price Indexes, a composite index for the China markets. Charts 12.3 and 12.4 give the means and standard deviations of daily price changes for the Shanghai and Shenzhen A share markets. Ignoring the extraordinary performance of Shanghai in its infancy, the volatility of both markets is very similar and accords with the general picture given by the more selective statistics provided by the World Bank. A final statistic to reflect the market’s volatility is to take the ratio of high to low prices. In Shanghai’s case the average ratio for the years 1993-96 was 234 per cent and for Shenzhen 251 per cent. The general reasons for this exceptional level of price volatility are to be found in the underlying features of the market. While there has been a rapid increase in the number of companies listed (see Table 12.3) from 52 in 1992 to 764 in 1997, even so, the markets in individual shares remain comparatively ’thin*. A large percentage of the capital remains under state control with the market in the shares being correspondingly restricted.15At the end of 1995, of the 85.1 billion shares in issue, only 30 billion were in general circulation. This leaves a large overhang of shares giving rise to market fears of possible future sales. A further factor inducing greater volatility is the proportion of low value speculative shares which are listed, sometimes referred to ‘junk stocks’ or ‘concept stocks’, and these are targeted by operators who push up prices and then unload them on to small investors as they enter the market.1* During rapid market advances, followed by sharp reversals, they attract considerable interest as speculative counters, contributing to overall market volatility. Possibly linked to this feature is that the main speculative interest in the market comes from the dominant investor group drawn from the personal sector, especially the newly rich, powerful ‘big players’. At the end of 1995 it was estimated that for the Shanghai listed companies there were over 6 million retail shareholders, one-third of whom lived in Shanghai. By the end of the ’bull’ market of 1996 a large number of retail investors had been drawn into the market, with an estimated number of individual investors country-wide of around 21 million, up substantially from the 12 million at the start of the year. Drawing on very substantial personal sector savings this mass of mobile funds sent share prices sharply upwards, which heightened the impression of the markets as being driven by liquidity factors rather than the ‘fundamentals’ of company earnings and dividends. With no appreciable element of institutional involvement (apart from the activities of securities firms and state owned enterprises, which are short term in nature) market activity is dominated by retail activity. In such conditions it is not difficult to ‘stir fry’ the market, with allegations that wealthy individuals

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collude to manipulate prices. A final factor is the effect of unpredictable official pronouncements and actions which have produced some abrupt changes in market direction. The authorities have not hesitated from supporting the market by withholding new issues or loosening supplies of bank credit, while at price peaks they have used restraints on (Mice movements (price limits) and announcements regarding future listings to cool the market and more often than not bring about a downward spiral.

B Shares» H Shares and ‘Red Chips* Following the decision, in 1991, by the State Council’s Stock Market Office Conference to allow the issue of B shares to non-resident holders, and the subsequent first issues of B shares by Shanghai Vacuum Electronics Co, China South Glass Co and Shenzhen Real Estate Co Ltd, the number of B shares listed increased to 36 in Shanghai and 34 in Shenzhen by the end of 1995, raising in all US$3.01 billion. By 1997 the number had risen to 50 and 51 respectively, the bulk of the companies drawn from the industrial sector. Shanghai’s B shares are denominated in US dollars, whereas Shenzhen shares are in Hong Kong dollars. The shares cany the same voting rights and dividends as A shares, the only difference is that dividends are always paid in cash whereas with A shares cash and shares are used. The B share markets are, of course, small in relation to their domestic counterparts. In 1996 the Shanghai B share market was only 3.3 per cent of the A share market, while the comparable figure for Shenzhen was slightly higher at 5.5 per cent. The bulk of the B shares are in fact held by Chinese interests, 61 per cent, with a further 21 per cent held in Hong Kong and Macao, and 14 per cent divided between North America, Europe and elsewhere.57 The contrast in size is also evident in market turnover figures. For the period January-September 1997 daily turnover for Shanghai A shares averaged Rmb7,524 million, while B shares averaged Rmb97 million. Chart 12.5 shows the price changes on the two B share markets, based on the indices complied by Credit Lyonnais Securities Asia. Apart from the initial sharp price rises in 1992 and in the first quarter of 1993, followed by a further rise in the autumn associated with exaggerated movements in A shares, the B share markets exhibited a downward trend, both markets losing some 60 per cent of their value between the high of December 1993 and m id-1996 when the market again sprang into life. In general terms the performance of B shares has been disappointing for overseas investors. Two features may explain this. First, their performance reflects the general path of the A shares over the period, and second, the most striking feature of B shares has been the substantial discount of their prices to those of A shares.

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Over the period from early 1993 to early 1996 the B share index reflects the general path of the A share market, which experienced a long ‘bear’ market . The correlation between the A and B markets, certainly for the Shenzhen market confirms the close association with a figure of 0.79. However, the degree of correlation for the Shanghai market was much lower at 0.3. This difference probably arises from the structural characteristics of the two markets in that the Shanghai market is dominated by former state enteiprises, with its B shares denominated in US$, whereas Shenzhen, with its greater proximity to Hong Kong, has more diverse company structure and a more ready supply of investors with the financial ability to trade. The most striking feature of B shares is the discount relative to A share prices. This has been a persistent feature. A study of B share discounts for a sample of companies for 1992-93 recorded a range of discounts from 20 to 60 per cen t3* A sample of 24 companies for mid-September 1997 gave discounts in the range of 46.2 per cent to 84.6 per cent for Shanghai, with an average of 73.5 per cent, and for 29 Shenzhen companies discounts varied from 40.5 per cent to 74.9 per cent, with an average of 64.1 per cent. A number of factors lie behind this aspect of the market. First, many of the later listings had small capitalisations and mediocre performance. The small capitalisations tended to restrict marketability and while foreign investors found it relatively easy to build up holdings it was then very difficult to sell the shares on ‘thin’ markets. This in itself made the shares prey to exaggerated short-term speculative swings; US pension funds were apparently reluctant to invest in B shares for these reasons.39 However, after 1995 the quality of issues is reported to have improved and the issue of shares in Huaxin Cement Co, followed by other relatively large high-quality issues, with good accounting and reporting standards, improved the market’s standing. Second, at various times and especially during 1992-94 the authorities were vigilant in confining trading in B shares to foreign holders. After a market slump in the first half of 1994 the stock exchanges loosened their control and quietly let some domestic investors open accounts, which help marketability. Third, the level of company results proved disappointing, especially from the former state enterprises listed in Shanghai. Further doubts have been expressed over the prospect of listing more companies from the central and western areas of the country, since these are not seen as profitable as the manufacturing companies situated in the development zones around Shanghai and Shenzhen. Additionally, foreign investors were not impressed by some companies making dividend payments at the expense of ploughing back earnings for future investment. Even more offensive in their eyes was the practice of making larger dividend payments to state shareholders. Fourthly, the valuation of B shares was not helped by the advent of H shares which, with their greater marketability in Hong Kong, proved a preferential vehicle for

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international investment in China. Finally, B shares cany significant political and economic risks and a large proportion of such shares are held by Chinese investors who are not in a position to diversify away this risks. Accordingly, they seek a heavy discount as compensation for assuming such uncertainty. It could also be added that the discount may reflect the acceptance by subscribers to A shares of lower returns on capital (given the absence of alternatives), that is, a willingness to support high prices. With the improvement displayed in the A share market during 1996 the B share market reacted with greater speed and movement than previously. This was partly prompted by confidence among Chinese investors that they could take up B shares without official disapproval. The advance was led by the Shenzhen market, rising sharply in November 1996 by 106 per cent (from 850 in mid-November to 1755 early in December). Shanghai’s gains were more modest at 46 per cent; US$ were more difficult to get hold of than Hong Kong dollars. Certainly, the market became much more lively over this period, exhibiting the same sort of volatility as the A share market (see Chart 12.4). Much of this increase in interest can be attributed to the large price differences in the two classes of shares, coupled with the increased proportion of B shares held, legally or otherwise, by domestic investors. Even securities firms were reported to have invested in them, and the authorities remained unconcerned by the violation. In all, domestic investors probably account for well over half the trading volume in B shares.*0While most observers agree that the general answer to the problems of the B share market is to end the present segmentation and merge the two share groups, this does not seem an imminent prospect. Investors will have to wait until the government decides to end restrictions on capital movements, but this is most unlikely to occur until after the turn of the century at the earliest.*1 The authorities further widened the sources from which companies could acquire foreign exchange by permitting selected companies to offer H shares, listed on the Hong Kong Stock Exchange. The shares, therefore, had to meet the listing requirements of the Hong Kong market, thus offering overseas investors a more attractive alternative than B shares. Unlike domestic issues H shares were not subject to an overall quota but the authorities set out to select large well-known companies which had major capital needs and would be able to generate sufficient foreign exchange to service dividend payments. In line with such criteria the first offer came in July 1993 from the Tsingtao Brewery, 347 million shares at HK2.80 (39 per cent of the issued capital), the proceeds to be used to expand beer production capacity. The offer met with an unprecedented response, being oversubscribed 110 times, with ’huge sacks used to cart off applications’.*2In later market dealings the price climbed from an opening level of HK3.5 to over HK10.0 by December; it then languished well below this, occasionally sinking below the offer price.

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Three other issues followed in quick succession; Guangzhou Shipyard International (157mn shares at HKÎ2.08, oversubscribed 77 times), Beiren Printing (lOOmn shares at HK2.08, oversubscribed 25 times) and Shanghai Petrochemical (l,680mn shares at HKS1.74, oversubscribed 1.2 times). The latter issue met with far less enthusiasm, suffering from its size, controversy over the Hong Kong listing together with doubts in the minds of fund managers over prospectus declarations, and from the likely effects of the domestic austerity drive.0 Despite these difficulties further issues followed and during the year HK$8,224million was raised, twice the amount on the home capital market.64 Up to the year end the clientele of H shares enjoyed handsome gains, the index (compiled by CLSA) moving from 986 in the summer to 2,239 in December (see Chart 12.5). The H share market commanded a price earnings ratio of 45, evidence of general investor confidence. Overall, it was a highly successful debut for Chinese capital raising, and for listing on the more liquid Hong Kong market, where the total capitalisation of H shares exceeded that of the mainland B share markets. But it all proved short lived. Within six months the gains were removed as dramatically as they had been compiled. By the middle of July 1994 the index had fallen to 1,090. Apart from a brief recovery in the autumn H shares remained depressed until the summer of 1997 as international investors remained cautious of further involvement69 However, further issues were not altogether deterred but the number was trimmed to reflect the state of the market and the suitability of prospective companies. Thus, by December 1996, 21 H shares were listed in Hong Kong with a total market capitalisation of HK$31,121million (an average capitalisation of HK$l,482mn). Three companies dominated the list, namely, Shanghai Petrochemical (HK$5,123mn), Guangzhou Railway (HK$4,795mn) and Quingling Motors (HK$4,190mn), the three representing 45 per cent of the market’s H share capitalisation. In addition, there is a small number of other foreign currency denominated shares listed on offshore markets, for example, N shares on the New York Stock Exchange, S shares on the Singapore Stock exchange and L shares on the London Stock Exchange. In all they amount to only a small fraction of outstanding shares. Several factors account for the guarded resort to the Hong Kong market as a source of hard currency and for the disappointing performance of the H share market after the initial euphoria of 1993. Many of the issues came from former state-owned enterprises who found it difficult to shed excess labour and reduce their traditional welfare burdens. Moreover, they operated in capital intensive industries with high fixed costs and with earnings closely tied to the state of the country’s economic cycle.66The introduction in 1993 of tight credit policies to reduce inflation eroded optimism as to the prospective

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growth of earnings per share as sales and profits fell. The results for 1993-94 ranged from good to appalling, hardly the encouragement needed to launch a stream of new issues. The profit prospects were further depressed by the removal of state subsidies and the reduction of import tariffs. This created a far more competitive marketplace and one in which domestic firms found it increasingly difficult to compete against larger and more efficient international firms. Company behaviour also undermined investor confidence. Poor disclosure practices and management, together with the news that some companies were diverting H share subscriptions into property deals, share trading, and loans to third parties at low interest rates, all provided an inducement to sell shares rather than hold them." While B shares and H shares enjoyed a chequered history over recent years, the other vehicle used by state-controlled enterprises to obtain access to outside capital, the so-called ‘Red Chips’, displayed an impressive record of share gains, particularly during 1996-97 (see Chart 12.5). In broad terms a portfolio of Red Chips would have made five-fold gains over two and a half years. Credit Lyonnais Securities Asia statistics for this sector listed 17 Red Chips on the Hong Kong market in September 1997, with a market capitalisation of HKS421 million. The main method whereby Red Chips have come to the market is through ‘back door listings’. This was pioneered by Guangdong Investment and CITIC Pacific in 1987 and 1990. Usually the mainland enterprise (controlled either by the central, provincial or local government) acquired a stake in a listed company followed by an exchange of assets with the new controlling shareholders through share issues." Controlling stakes were usually obtained at a low price but immediately the market learnt of such a buy-out the price would became highly volatile as speculators quickly took up shares. Following an injection of assets and a rise in the share price, capital was raised from the Hong Kong market by a rights issue or a share placement with institutional investors who were attracted to Red Chips. A few have resorted to a public issue, which have generated considerable oversubscription. For example, an offer of HK2.3 billion in Beijing Enterprises (the investment arm of the capital’s municipal government) in May 1997, resulted in an oversubscription of more than a thousand tim es." The attraction was the prospect of links with the mainland economy and of a repeat of earlier Red Chip capital gains. The popularity of these shares, reflected in their buoyant price record, stem from several features. Generally, the mainland enterprises have injected high quality assets into the ‘shell’ companies and have done so at considerable discounts which has tended to avoid any dilution of prospective earnings per share. With the likelihood of good earnings levels, institutional investors have been keen to take up the issues. The companies have also benefited from good

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management and strong fund-raising capacity, while their reporting performance has assured investors on the question of transparency. But above all, perhaps, their record offered a somewhat safer haven in which to participate in China’s growth and to do so at one remove from the turbulence of the domestic stock markets.

Problems and prospects The long-term potential of China’s stock market is considerable. Given the traditional high savings ratio, coupled with the declared intention of bringing a large number of state-owned enterprise to the market, in effect to partially privatise them, then the share list will continue to expand and eventually include most of the major companies in the economy. The early ‘experiment’ has taken on a crucial role in the transition of the economy to greater market orientation. Significant progress has already been made. There are some 750 listed companies on the two markets, and this growth is now recognised in the change in weighting, recently increased from 0.6 per cent to 2.4 per cent, accorded to China’s shares in the indices of the IFC. Their preparation for market listing and the need afterwards to consider shareholders’ preferences has helped to improve corporate management practices and hastened the adoption of international accounting standards. On the quantitative side a conservative estimate would be that there are probably some 1,000 large stateowned enterprises which could be made ready for listing over the next few years if present policies of creating a more efficient and productive economy are maintained. In the near term several problems remain. All stock markets display varying degrees of volatility, but China’s markets have exhibited extreme swings in share values. The main contributory causes have already been outlined, but the policies which might serve to reduce such price fluctuations would include the following. First, while the authorities have a duty to regulate the markets in a prudential context and the framework for this is now being developed, random policy interventions and changes should be minimised since they in themselves produce sharp price changes. In the formative stage official nursing of the market was inevitable, but this should be gradually reduced as it moves to the growth phase of enlarging the list and enhancing the market’s ‘depth’, that is, the ability to handle larger than average transactions with little variation in price. For example, the imposition and removal of price limits may give the impression of firm control but in practice they have little effect in regulating the extent of market price movements. The general principle should be to allow markets to find their own level within the prevailing broad financial and economic conditions.

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Similarly, the current practice of bringing new issues to the market involves the public announcement of an annual quota, for example, Y15 billion for 1997 (about El.lm illion), and while this serves to regulate the pace of new issues its random suspension to boost the secondary market is not conducive to the smooth development of the market's pricing mechanism or issuing procedure. Again, it may well be expedient in the early state of the market’s evolution and in view of the potential offerings that some restraint is adopted. But as the market develops and expands then new issues should be made in response to the quality of the companies coming forward, the rate of return they offer prospective shareholders, and the absorptive capacity of the m arket The market rather than the authorities should in the long term ‘pick the winners’. As investors become more discerning and varied, with greater institutional participation, low quality issues will find the penalty o f undersubscription a deterrent. There is, however, an additional problem in that the development of stock market over recent years has outstripped that of the financial system, especially the modernisation and strengthening of the banks, who could play a useful role in the distribution of new issues. A major cause of instability arises from the market being overwhelmingly driven by liquidity rather than the earnings prospects of companies; investors are often more interested in capital gain than in income streams (but this is not a uniquely Chinese preference). This facet of market activity is due to a combination of the nature of present shareholding, the use of extensive liquid balances to finance share transactions, and the limited range of asset choices available to investors. The markets are dominated by personal sector holdings, buttressed by dealing from securities firms when prompted by the authorities. Not infrequently this is done using clients cash deposits. As yet there is too little institutional involvement and there is considerable scope for developing the general structure of asset holding. While approximately 100 close-end mutual funds exist (a third listed on the stock markets), they are mostly small and indeed some are unofficial. In 1997 authority was given for the setting up of open-ended mutual investment funds with the stipulation that they must invest no less than 80 per cent of assets in the equity and debt markets. Such funds would allow investors to buy and sell units at any time and would draw them indirectly into the market. However, they would only do so provided that a compliment of competent professional fund managers emerged which commanded the confidence of investors.70 In the long term th a t is scope for the growth of domestic insurance and pension fund provision, which would constitute an important demand for equity and fixed interest assets. Reducing volatility and improving liquidity are not best served by the segmented nature of the share markets.71 Company capital is divisible into A shares for domestic holders, B shares for overseas holders, H shares for shares listed in Hong Kong, and few N shares listed in New York. Over recent years

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there have been calls to merge the A and B markets, particularly in the light of the low liquidity of B shares and that they only represent IS per cent o f the overall market capitalisation. Not only would such a measure improve liquidity it would also foster the adoption of international accounting reporting practices, mandatory on B shares, to the company sector generally. This issue, however, is closely bound up with the control of capital movements and the adoption of hill convertibility of the yuan. Following the major disruption to financial markets in the Far East in the latter half of 1997, from which China was largely insulated by its capital controls, full convertibility seems a more distant prospect The market is gradually offering a wider range of investments, although industrial concerns still dominate (some 60 per cent of companies). However, improving the depth of the market is hindered by the large state holding in the majority of listed companies. For example, in 1993 on the Shanghai market the state held 46 per cent of the issued capital of the listed companies. The holding of the state in some companies was greater than this, approaching 70 per cent. This represents a considerable volume of shares ‘overhanging’ the market, with continuing uncertainty as to how the authorities will decide to treat this holding; as a residual control lever or as a potential source of funds through public issues. For investors it has a potentially depressive effect on price and the prospect of diluting dividends. The disposal of this large holding will need to be carefully phased in order not to add to the strains on the market’s price level. But in the long term companies must be wholly privatised if they are to operate independently of official influence. Only then will they be able to respond fully to shareholder preferences and be subject to the sort of market discipline found on mature markets. Conditions must also be created to foster the emergence of privately established companies and facilitate their growth so that they can eventually seek a market flotation.72 A more distant prospect, but likely, as the two markets are governed by the same central authority and follow the same general regulations, is that they should amalgamate. The Shanghai and the Shenzhen markets started as a result of local initiatives rather than central action; the state was permissive rather than innovative. While the markets list different companies which have strong geographical attachment the question will inevitably arise as to whether a more integrated market would bring advantages of reduced unit costs at the operational level, and adding greater breadth and depth to dealing activity. At the moment they operate their own ‘floors’ but this is more of a regulatory convenience than a dealing necessity. With a computerised order matching system central trading floors are not essential. A national dealing system could easily supplant the present segmented structure. The determining factor in the emergence of a single market will probably be where the bulk of future new issues will be listed as the remaining major SOEs are

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brought to the market. If most o f the state enterprises are listed in Shanghai, eager to establish itself as the financial capital of the Far East, then Shenzhen will lapse into a secondary position and its activities could easily absorbed by the near and well developed market in Hong Kong. A further possibility is that the three markets could merge to form a national stock exchange. Whichever market structure emerges over the next ten to IS years it seems fairly certain, given present trends, that the stock market will enjoy a growing role both in the financial system and in the finance of China’s changing economy.

Notes 1. For an authoritative review of these developments see J. K. Faitbank, China: A New History, (Harvard University Press, 1992), chapters 19-21. 2. C. Goodhart & C. Xu, 'The Rise of China as an Economic Power’, National Institute Economic Review, February 19%, p. 60. 3. The change was achieved without widespread bankruptcy since the state continued to provide large subsidies (around US$120 billion in 1993). However, as a percentage of GDP they fell from S.3 per cent in 1990 to 2.4 per cent in 1993; The Economist, 10 June 1995, p. 69. 4. Goodhart & Xu, op. tit., p. 60. 5. Ibid., pp. 65-66. The numbers increased from 794,000 in 1978 to 6,986,000 in 1994 and dominated production in coal, cement, cotton cloth, paper, canned food and electric fans. Some 75 per cent of TVEs are in the industrial sector. 6. Foreign ventures were attracted by generous concessions. They were not liable for tax on imported equipment, while joint ventures in the Special Economic Zones only paid 15 per cent corporation tax, those outside paid 30 per cent, compared with 55 per cent paid by state companies; Financial Times, 24 November 1995. 7. Goodhart & Xu, op. tit., p. 59; Faitbank, op. tit., p. 416. 8. Goodhart & Xu, op. tit., p. 69. It was estimated that SOEs losses in 19% amounted to Y69 billion, twice the 1990 level, and that government subsidies amounted to over 84 per cent of these sums. 9. The SOEs had become heavily dependent on loans from the state banks, estimated in 1993 at US$120 billion, much of which constituted bad debts. Most of the SOEs were bankrupt but refused to acknowledge the position. 10. China’s state banking monopoly ended in April 1987 with the opening of Shanghai’s Bank of Communications, the first bank since 1949 to be allowed to compete for both local and foreign currency business. 11. Bank lending practices only changed slowly with the banks refusing few applications for loans - ‘soft credit’ continued to be available. Banks displayed low levels of bad debt but this arose from the Chinese accounting convention whereby such debts referred only to non-payment of interest and not repayment of principle; see P. Bowles & G. White, ‘Contradictions in China’s Financial Reforms: the Relationship between Banks and Enterprise’, Cambridge Journal o f Economics, Vol 13, No 4,1989, pp. 487-89. 12. Li Yining, ‘Possibilities for China’s Ownership Reform’, Beijing Review, 9 December 1986.

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13. 'Peking D ucks the Issue’, Far Eastern Economic Review, M atch 1989, p. 72. 14. Sunday Morning Post, 9 February 1992; 'Suddenly the Stock M arket is O K ’, Eummoney, June 1986, p. 49. 15. ‘Stock M arket D ebut in C hina’, Beijing Review, N o 3 3 ,1 9 8 6 , p. 6. 16. The Times, 1 O ctober 1986. 17. It w as reported that there w ere 18 com panies w ith share issues in Shanghai, o f w hich six applied to be listed, but only tw o w ere successful at the outset; Wall Street Journal, 10 N ovem ber 1986. 18. ‘Shanghai T ries Stocks and Shares’, Beijing Review, N o 4 2 ,1 9 8 6 , pp. 7 -8 . It was repotted that there w ere five locations in Shanghai dealing in Yanzhong shares at slightly different prices and that the governm ent bank in charge o f the m arket, the Shanghai First Industrial & C om m ercial B ank, kept a lid on prices for fear o f inducing too much speculative activity. 19. Sm all bondholders shied aw ay from the official m arkets since ‘the service w as poor and queues long’. Instead, they sold th eir bonds to illegal speculators at a discount. In 1988 full-tim e speculators w ere reported to be buying up bonds and selling them on in larger parcels to financial institutions and also exploiting price differentials betw een trading centres; Far Eastern Economic Review, 10 M arch 1989, p. 58. 20. 'B orrow ing Boom ’, Far Eastern Economic Review, 14 Septem ber 1989, p. 63. 21. ‘Counters R evolution’, Far Eastern Economic Review, 26 July 1990, pp. 5 4-55; The Times, 14 M ay 1992. 22. For exam ple, in the case o f the m arket’s favourite share, Shanghai Vacuum, o f the Rm b200 m illion o f capital issued, 75 per cent w as held by state-run enterprises, 1 per cent by private com panies and the rest by individuals; Far Eastern Economic Review, 21 M arch 1991. 23. T here had also been an illegal curb m arket, greatly facilitated by share certificates being freely transferable betw een investors (effectively bearer securities). In the early stages securities houses w ere m erely used to form alise transactions. 24. Far Eastern Economic Review, 24 A pril 1991, p. 3 9 ,4 July 1991, p. 69. 25. W ith over 750 com panies listed, and given future potential, this figure is likely to m ore than double w ithin the next ten years. O nly som e h alf dozen stock m arkets list over 1,000 com panies; Emerging Stock Markets Factbook 1998, (International Finance C orporation (IFC ): W orld B ank), p. 24. 26. Shanghai Stock Exchange Statistical Annual, (Shanghai), p. 2. 27. China Research, (C redit Lyonnais Securities A sia (C LSA ), H ong K ong), February 1997, pp. 318-19. 28. For a detailed treatm ent o f the early R ed C hips see The Red Chips Directory, (W ardley Jam es Capel (W JC ), H ong K ong), June 1993, pp. 3 -4 . 29. R elative to the Hong Kong m arket at th e rim e this represented som e 4.5 per cent o f its capitalisation. 30. Emerging Stock Markets Factbook 1996, (IFC : W orld B ank), p. 139. CSRC has signed agreem ents to list C hinese shares w ith the US, UK , Japan, A ustralia, Singapore, M alaysia and B razil; China Securities Bulletin, 17 N ovem ber 1997. 31. M. Spencer, ‘Securities M arkets in China*, Finance A Development, June 1995, p. 29. 32. For a detailed discussion o f th e virtues o f tenders over conventional fixed price public offers see A. J. M errett, M . H ow e & G . D. N ew bould, Equity Issues and the London Capital Market, (London, 1967).

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33. Far Eastern Economic Review, 16 A pril 1992, p. 66. 34. Far Eastern Economic Review, 27 A ugust 1992, p. S3. See also ‘Share-frenzy in Shenzhen’, The Economist, 13 A ugust 1992, p. SO; ‘A s m any as one m illion people poured into Shenzhen to queue fo r share applications’. The authorities took quick action against officials alleged to have abused th eir position. T here w ere fears that the w hole process could get out o f hand. 33. For a full account o f the different m echanism s used see Yilei Zhang and W. A . Thom as, ‘O perational M echanism s and C harateristics o f C hina’s Prim ary and Secondary M arkets’, Journal o f Asian Business, Spring 1999. 36. For a detailed account o f the requirem ents and the regulatory fram ew ork see L. B rahm & L i D ao R an, The Business Guide to China, (Singapore, 1996), pp. 137-40. 37. Shanghai’s floor traders are apparently w ell qualified academ ically in that som e 60 per cent are recruited from undergraduates m ajoring in econom ics; Shanghai Stock Exchange Statistical Annual, (Shanghai, 1996), p. 6. 38. M . Spencer, op. cit., p. 31. 39. Ibid., p. 31. D espite the advent o f new national regulations, local rules and regulations continued to be relied on for som e tim e afterw ards; see D. E. A yling A Z . Jiang, ’C hinese and W estern Stock M arkets: International Influences and D evelopm ent’, (Institute o f European Finance, Bangor, N o 16,1 9 9 4 ), p. 3. 40. Far Eastern Economic Review, 26 July 1990, p. 33. T hese restrictions w ere easily evaded by professional investors w ho rigged sales in the V IP room s o f the different brokerages; for a detailed account see E. H ertz, The Trading Crowd: An Ethnography o f the Shanghai Stock Exchange, (C am bridge U niversity Press, 1998), pp. 175-77. 41. Financial Times, 16 June 1992. T his surge and the w idespread popularity o f stocks led other cities to contem plate opening th eir ow n stock exchanges b u t the central authorities w ere content w ith the policy o f concentrating dealing in the tw o m ajor centres. 42. Far Eastern Economic Review, 10 Septem ber 1992, p. 82. F or an interesting analysis o f this boom and m arket fall, from an ethnographic perspective, see E llen H ertz, op. d t. 43. China Quarterly, (W ardley Jam es C apel, H ong K ong), M arch 1993, pp. 2 -3 ; ‘R aging B ulls’, Far Eastern Economic Review, 3 June 1993, p. 59; Beijing Review, 7 February 1993, p. 6. 44. International Capital Markets: Development Prospects and Policy Issues, (IM F: W ashington), p. 99. 43. Emerging Stock Markets Factbook 1994, (IFC : W orld B ank), pp. 136-37. M arkets w ere also depressed by reports o f m ounting inter-com pany debts. T he ‘debt-chain’ w as reported to have reached Y 600 billion (U S$70.5 billion) by the end o f 1994; Financial Times, 12 February 1995. 46. O n 1 January 1994 the governm ent unified the dual currency system by abolishing foreign exchange certificates acquired through the exchange o f foreign currency in to yuan. 47. O ffirial displeasure arose from a report in the China Securities News that the governm ent m ight allow pension funds and insurance com panies to put up to 10 p er cent o f their assets into A shares. D espite official denials A shares jum ped 5 per cent; Emerging Stock Markets Factbook 1995, (IFC : W orld B ank), p. 137. 48. It w as reported that there had been a turnover o f som e U S$37 billion in about eight m inutes; Financial Times, 27 February 1995.

EMERGING MARKETS

311

49. T he largest C hinese stockbroker, Shanghai International Securities, lost around U S$100 m illion in three days trading; The Economist, 4 M arch 199S, p.104. 50. Social Funds also jo in ed in the speculative flurry. 51. M arket activity w as sustained by take-over speculation, m ost o f w hich proved fictitious. 52. Emerging Stock Markets Factbook 1996, (IFC : W orld B ank), p. 139. 53. O ther m easures tak en to in flu en ce th e m arket included a natio n -w id e investigation into illegal share purchases, th e suspension o r cancellation o f the licences o f securities em ployees found gu ilty o f illegal trading, and the surveillance o f press reports about the m arkets. E arlier, the CSRC had set lim its on trading by stockbrokers on th eir ow n account and assigned investigators to the tw o Exchanges. 54. Emerging Stock Markets Factbook 1995, (IC F: W orld B ank), pp. 4 8 -4 9 . Poland had the highest volatility, approaching 87 per c e n t T he statistics w ere based on m onthly figures. 55. It is alleged that m any com panies are run as political ‘fiefs* rather than as com m ercial concerns. 56. T he usual features are low value and no record o f dividend paym ents. 57. China Securities & Futures Markets, C hina Securities R egulatory C om m ission, D ecem ber 1995, p. 22. 58. W. Bailey, ‘R isk and return on C hina’s new stock m arkets: som e prelim inary evidence’, Pacific-Basin Finance Journal, Vol 2, 1994, pp. 254-55. T he study also concluded that there w ere only sm all links betw een the volatility o f B share prices and broader international influences. 59. Financial Times, 23 Septem ber 1996, 14 January 1997. 60. Chinese Research, (CLSA , H ong K ong), February 1997, pp. 18-19. 61. Follow ing the flight o f capital from T liailand, M alaysia and Singapore in the autum n o f 1997, the C hinese authorities adopted a m ore cautious attitude to any future relaxation o f capital controls. 62. Financial Times, 12 February 1996. 63. Far Eastern Economic Review, 12 A ugust 1993, p. 76. The lead underw riters, Peregrine C apital and M errill Lynch, w ere forced to take in shares to help the flotation. 64. China Quarterly, (W ardley Jam es C apel, H ong K ong), M arch 1994, p. 5. 65. The m arket’s rise and fall w as reflected in changes in turnover volum es. T ùm over increased from H K $9,050m n in Q3 to H K $22,097m n in Q 4 1993. By the second quarter o f 1994 turnover had fallen to HK $4,715m n. From a tum over/issued shares ratio o f 4.1 in Q 4 1993 activity then settled at a m ore norm al 0.6 ratio: China Quarterly, (W ardley Jam es C apel, Hong K ong), D ecem ber 1994, p. 9. 66. China Research, (CLSA , Hong K ong), February 1997, pp. 16-17. 67. Financial Times, 18 M arch 1996. H shares, along w ith other state com panies, continued to be troubled by the perennial ‘triangular debt’ problem . 68. M any o f the controlling shareholders in the m ainland com panies are draw n from m inisterial ranks and are adm inistered directly by the state council (C ITIC , C hinese A erospace, Poly G roup, C hina N ational N on-ferrous M etals C orp, and C hina N ational Petroleum ), o r they are under a prom inent central m inistry (C hina R esources, C hina M erchants and C hina T ravel S ervices). L ocal governm ent and m unicipal authorities gradually becam e m ore active in this area; The Red Chips Directory, (W ardley Jam es C apel, H ong K ong), June 1993, p. 2. 69. Financial Times, 23 A pril 1997, 20 M ay 1997. T he attractions o f Red C hips in

312

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th e first h alf o f 1997 w ere such as to lead to a m assive oversubscription for new issues. Investors applied for the full value o f the public offering, fearing th at allocations w ould be severely scaled dow n. To ensure a w ider distribution o f shareholdings specific am ounts w ere set aside for sm aller applications. A m ong banks handling the R ed C hips w ere M errill Lynch, G oldm an Sachs, M organ Stanley, BZW A sia, ABN A m ro R othschilds and Peregrine C apital (w hich w ent bankrupt in January 1998 follow ing bad banking debts in M alaysia). 70. Financial Tunes, 10 O ctober 1997. In 1994 proposals w ere m ade for setting up jo in t Sino-foreign investm ent com panies to m anage m utual funds investing in H shares. H ow ever, opposition from various governm ent agencies, including the C entral B ank, led to the idea being shelved; M . Spencer, op. cit., p. 31. 71. For a detailed account o f other exam ples o f segm ented share m arkets see, I. D om ow itz, J. G len & A. M adlavan, ‘M arket Segm entation and Stock Prices: E vidence from an Em erging Market*, Journal o f Finance, Vol L II, N o 3, July 1997. 72. J. R. Bow en 11 and D. C . R ose in ‘O n the A bsence o f Privately O w ned, Publicly T raded C orporatons in C hina: The K irby Puzzle’, The Journal o f Asian Studies, Vol 57, N o 2 (M ay 1998), argue that true public traded corporations w ill not em erge until ‘the existing deep seated pattern o f governm ent opportunism that is facilitated by a tradition o f fiscal discretion’ com es to an end. O w ners w ill alw ays be w ary o f the governm ent’s abiding inclination to extract revenues through the im position o f discretionary fees and charges; pp. 442-451.

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Index A cum , 26 A dam son, B ell & C o, 132 A glen, Sir Francis, 254 A gra B ank, 80 A gra & M asterm an’s B ank, 3 8 ,4 9 A hyce, 26 A leet, 26 A m erican C igarette Co, 136 A m erican D epository R eceipts, 283 A m erican Settlem ent, 1 9 ,2 0 A nglo-C hinese W ar 1856,11 A nglo French L and C o, 70 A nti-Japanese B oycott A ssociation,

211 A nton, J.R ., 80 A poon, 87 A rnold K erby & C o, 136

Arrow, 11 A sia Realty, 70 A siatic B anking C orporation, 38 A stor H ouse H otel, 5 4 ,7 0 ,1 0 8 ,2 8 7 A ugustine H eard & C o, 2 1 ,2 5 ,2 6 ,4 4 , 4 7 ,8 7 A uto Palace C o, 54 B alfour, C aptain G eorge, 8 ,1 8 ,1 9 Bank o f C hina, 2 4 6 ,2 4 9 ,2 5 2 ,2 6 7 Bank o f C hina & Japan, 41 Bank o f C hina, Japan, & Straits, 40, 4 1 ,8 3 ,1 3 3 Bank for Com m unications, 2 4 6 ,2 4 9 , 252 Bank o f H industan, C hina & Japan, 38 B anking reform , 2 7 6 -7 Banque de N ord, 41 B âm es, F.D., 79 B ates, W , % B attle o f M uddy Flats 1 8 5 4 ,1 0 B eijing E nterprises, 304 Benjam in & Danby, 110,131 Benjam in, K elly & Potts, 110 Benjam in & Potts, 7 0 ,9 7 ,1 0 9 ,1 1 0 , 1 1 2 ,2 2 7 ,2 2 9

B enjam in, Salom on Sassoon, 110 B enstead & C o, Edw ard, 148 B ishop, J.D ., 107 B isset, John Petrie, 7 9 ,9 4 B isset & C o, J.P., 3 7 .7 9 ,8 0 .8 1 ,9 3 , 9 4 ,9 7 , 1 0 0 ,1 0 9 ,1 3 3 , 139, 141,142,157-8,162, 189, 1 9 0 -9 1 ,1 9 5 ,1 9 9 B lack m arket dealing, 233 Bond futures m arket, 294 B ooth, R.H , G ore, 164 Bottom ley, C harles D ., 80 B oxer Indem nity, 2 4 9 ,2 5 2 B oxer U prising, 1 1 0 ,1 3 8 -9 Boyd & C o, 45 Brady, A.A .. 110-11 B rand, M onro & C o, 79 B rand, R obert, 79 B rand, W illiam , 79 B randt, O scar, 8 0 ,9 3 B ritish A m erican Tobacco C o, 111 B ubble A ct 1825, 28 B uchanan, Jam es, 9 4 ,9 6 ,1 3 4 B ukit R ayah R ubber C o, 146 B ull, Purdon & Co, 79 B urkill, A.P. & Sons, 219 B urt’s W harf, 88 B utterfield & Sw ire, 2 1 ,2 6 ,2 7 ,4 3 ,5 2 , 129 C am eron, Ew en, 88 C anton-H ankow Railw ay C o, 244 C anton Insurance C o, 4 6 ,4 7 ,8 8 C arolus dollars, 22 C athay Land C o, 70 C athay T rust, 159-60 C entral B ank o f C hina, 262 C entral B ank o f W estern India, 38 C entral Properties, 7 0 ,2 1 7 C entral Stores, 5 4 ,7 0 C ham ps de C ourses Français, 203 C hang Jen-chieh, 254 C h’ang-lo C opper M ine, 125

322 C hartered B ank o f India, A ustralia A C hina, 2 4 ,2 8 .3 8 .6 3 .1 6 2 C hattered M ercantile Bank o f India, London A C hina, 24, 38 C hefoo Silk Filature C o, 90 C heng K uan-ying, 26 C hester A Vernon, 131 C hiang K ai-shek, 2 0 1 ,2 4 7 ,2 S 4 ,239, 260 C hicago B oard o f Trade, 112 C h’i-hsing Com pany, 233 C hina A ssociation, 89 C hina Bank o f Industry A Com m erce, 278 C hina C oast Steam N avigation C o, 26, 2 7 ,4 3 ,8 7 ,1 2 3 C hina Fire Insurance C o, 4 7 ,1 2 8 C hina Flour M ill C o, 9 0 ,1 3 6 C hina G as C o, 48 C hina Japan Telephone C o, 107 C hina M atch, 263 C hina M erchants Steam N avigation C o, 2 6 ,4 3 ,5 1 ,6 9 ,8 3 ,1 2 2 ,1 2 4 , 125,243 C hina M erchants’ Stock A Com m odity E xchange, 2 4 6 ,2 3 7 ,2 3 9 C hina M utual Insurance C o, 110 C hina M utual Steam N avigation C o, 87 C hina N avigation C o, 2 7 ,4 3 C hina R ice M ill, 136 C hina Securities R egulatory Com m ission, 283 C hina Shippers M utual Steam N avigation C o, 44 C hina South G lass Co, 299 C hina Sugar R efining Co, 5 1 ,9 0 ,1 3 0 , 133 C hina Tannery, 90 C hina Telegram Co, 93 C hina Traders Insurance C o, 4 7 ,8 3 C hina T rust, 40-41 C hinese bank m oratorium , 2 1 8 -1 9 C hinese bond consolidation, 263 C hinese bonds:volatility, 2 3 2 ,2 3 6 , 259,261 C hinese com panies, 1 2 4 ,2 4 3 -4 C hinese com pany law, 2 4 4 -5 ,2 6 4 C hinese C ustom s Service, 1 0 ,8 6 C hinese dollar, 2 2 0 ,2 2 3 C hinese E ducational Society, 188 C hinese governm ent loans, 198

INDEX C hinese Insurance C o, 4 7 ,8 8 C hinese investors, 8 6 -9 1 ,1 5 3 , 155, 298 C hinese M erchants Securities Exchange, 2 6 5 ,2 6 6 C hinese R e-organisation L oan, 63 C hing Yue, 162 C hinoy, C .H ., 80 C hoping, 87 C hou P ’ei-chen, 234 C hun & K w ok, 112 C IT IC Pacific, 2 8 2 -3 ,3 0 4 C larke, S.H ., 79 C ohen & G eorge, 131 C ohen A H eaton, 131 C ohong system , 3 ,1 3 ,2 5 ,2 8 C olonial R egistration A ct 1883, 31 C om m ercial B anking C orporation o f India A the E ast, 24, 38 C om m ins, C harles, 94 C om m issions, 9 6 ,9 8 ,1 0 3 -4 C om panie du G az, 4 8 ,4 9 ,9 0 C om panies A ct 1 8 6 2 ,2 8 ,2 9 C om panies A ct 1900,91 C om panies L ocal (R egisters) O rdinance 1907,31 C om panies O rdinance No. 1 1 8 63,29,

86 C om panies O rdinance No. 3 1 8 6 6 ,2 9 , 39 C om panies O rdinance 1911, 31 C om panies O rdinance 1932 ,2 3 4 C om panies (Sale o f Shares) R egulations 1913,193 Com pany debentures, 6 8 -7 0 ,2 1 7 Com pany registration, 2 9 -3 2 C om pradores, 2 4 ,2 3 C om ptoir d ’Escom pte de Paris, 2 4 ,3 8 , 95 C ontract notes, 1 01,167 C onvention o f C huenpi, 6 C onvention o f Peking 1860,11 C ooperative C argo B oat C o, 44, 87, 136 Cornwallis. 7 C otton spinning com panies, 1 3 6 ,1 3 7 , 1 9 0 ,1 % , 204 C ountry C lub, 70, 108 C ulbertson, C .D ., 111 C ulty D airy, 34 C unningham , Edw ard, 4 2 ,4 6 ,8 7 , 88 C ushny, A lex, 9 4 ,1 3 4

INDEX C ushny A Sm ith, 97 D allas, A lexander G rant, 26 D allas H orse R epository C o, 31 D aly, Septim us, 8 0 ,8 1 ,9 3 D avid, S., 105 D ent, B eale & C o, 88 D ent & C o. 2 1 ,2 6 , 3 9 ,4 0 ,4 6 ,8 1 ,1 3 6 D eutsch-A siatische B u rk , 8 2 ,1 6 2 D eutsche G artenverein, 108 D ollar Loan 1885,65 D om inion R ubber C o, 1 4 7 ,1 5 0 D ouglas Steam ship Co, 44 D rum m ond, W.V., 165 D rysdale, R inger A C o, 134 D ual capacity, 99 D unn, C .A .L ., 8 0 ,8 1 D unning & C o., 54 E ast India C o, 3 ,2 3 ,2 8 E lectric Light Co, 49 E lkins, Rev. D r Joseph, 82 E lliot, C aptain C harles, 6 ,7 Em press D ow ager, 1 3 8 ,1 8 7 E ndicott & C o, 97 Ew o C otton Spinning & W eaving C o, 3 6 ,5 0 ,9 0 Ew o Silk Filature C o, 5 1 ,9 0 ,2 2 0 ,2 2 1 , 224 Exchange banks, 2 4 ,3 9 Exchange control, 231 Exchange Law 1 9 1 4 ,2 4 5 ,2 5 7 E xtraterritoriality, 3 2 ,2 3 3 ,2 4 4 ,2 6 6 Fam ham , Boyd A C o, 4 5 ,8 8 Fam ham , S.C. A C o, 45 Federal R eserve B ank o f N orth C hina,

220 Feile A coustics, 2 7 8 ,2 8 4 Ferguson, A ., 94 Fassenden, Stirling, 161 Financial liberalisation, 276 Foochow loan 1 8 7 4 ,6 5 ,6 6 -6 7 Forbes, F.W ., 79 Form osa C risis 1874,65 Forw ard transactions, 1 0 0 -1 0 2 ,1 6 7 , 205 French Settlem ent, 1 9 ,2 0 ,6 1 Fritz, C hester, 111 Fu-K ’ang Bank. 126

fitk u .il

323

G ensburger, O .B ., 111 G ensbutger, V.D., 105 G erm an C lub C oncordia, 108 G ibb & Livingstone, 81 G len A C astle U n e, 42 G lover & C o, 4 3 ,8 7 G lover A Dow A C o, 79 G oldring, T.B., 94 G old Standard, 209 G ordon, C harles G eorge, 12 G raham , A nderson & C o, 97 G raham , John, 9 4 ,1 0 2 G raybum , V.M., 151 G rayrigge, G eorge, 1 5 8 ,1 5 9 ,1 6 1 G reat N orthern Telegraph C o, 107,111 G reen G ang, 2 0 1 ,2 5 4 G reyhound racing shares, 203 G room , F.A., 8 0 ,8 1 ,9 3 ,1 2 2 G uangdong Investm ent, 2 8 2 ,3 0 4 G ubbay, R .A ., 109 G uthrie & C o, 148 H aekw an tael, 22 H all & H oltz, 54 H ankow brokers. 111 H ardoon, R .I., 111 H ardoon, S.A ., 165 H ardoon, M rs Silas, 188 H arris, M. Reader, 203 H arrison A C rossfield, 1 46,148 H art, Sir R obert, 10 H ayes, A. A ., 79 H ayim E llis, 110,203 H enderson, F., 79 H ickling, N.W ., 216 H ock, L.C ., 94 H olliday, W ise A C o, 7 9 ,8 1 H olt, J. A lfred A Co. 42 H ongkong, C anton A M acau Steam boat C o, 44 Hong Kong C ham ber o f Com m erce, 29 H ong Kong com panies, 128 H ongkong E lectric C o, 129 H ongkong Fire Insurance C o, 47, 129 H ongkong H otel, 54 H ongkong & K ow loon W harf C o, 45 H ongkong Land Investm ent A A gency C o, 5 2 ,1 2 9 ,1 3 3 H ong Kong L egislative C buncil, 29 H ongkong R ope M anufacturing C o, 129

324 H ongkong & Shanghai Bank, 2 3 ,2 4 , 2 7 ,2 9 , 3 5 ,3 8 , 3 9 -4 0 ,4 1 ,6 3 ,6 5 , 6 6 ,6 7 ,6 8 ,7 0 ,7 9 .8 0 -8 2 ,8 8 ,9 3 , 9 5 ,9 7 ,9 9 ,1 1 8 ,1 2 5 ,1 2 8 ,1 2 9 , 1 3 1 ,1 3 2 -3 ,1 3 6 ,1 5 2 ,1 5 8 ,1 6 2 , 1 6 3 ,2 1 4 ,2 3 2 ,2 4 8 H ong Kong Stock Exchange, 131-2, 2 3 4 ,2 8 2 , 302 H ongkong & W ham pao D ock C o, 45, 1 2 9 ,1 3 0 H ong-que W harf C o, 44 H orm ujee, B & A , 132 H Shares, 2 8 2 ,2 8 4 ,2 8 6 , 3 0 1 ,3 0 2 -3 H su Jun, 2 6 ,4 3 ,1 2 5 H uaneng Pow er International, 283 H uaxin C ernent C o, 301 H ughes & E zra, 131 H ughes & L egge, 131 Hu K w ang-yung, 125,126 H um m el, G.M .W ., 109 H um m el, R. U te, 109 H um phreys E state & Finance C o, 52 H ung H siu-ch’uan, 9

Idzumo, 218 Ilbert & C o, 50 Im perial loans, 3 8 ,6 4 —8 Im perial M aritim e C ustom s Service, 1 0 ,6 5 Im uris M ines, 5 1 ,1 3 3 Indo C hina S.N . Co, 142 Indo C hina Sugar C o, 123 Industrial & Com m ercial Bank, 112 Industrial com panies, 48-51 Initial public offerings, 2 8 2 -6 Insurance bonus paym ents, 4 7 -8 Insurance com panies, 4 6 -8 International C otton M anufacturing Co, 5 0 ,9 0 International Investm ent T rust o f China, 212 International Settlem ent: form ation, 8 -9 ,1 8 -2 1 Irvine Edblad & C o, 97 Jacques, Joseph, 82 Jam ieson & C o, 97 Jardine, M atheson & Co, 4 ,2 1 ,2 5 ,2 7 , 2 8 ,3 6 ,3 9 ,4 4 ,4 5 ,4 6 ,5 0 ,5 1 , 5 2 ,7 0 , 8 1 ,8 8 ,9 0 ,9 5 ,1 2 9 , 136, 151 Jarvie & C o, 79

INDEX Jehol C opper M ine, 125 Jesus, M ontalto de, 18,21 Jew ish refugees, 110 Joint Stock C om panies A ct 1 844,28 Joint Stock C om panies A ct 1856,29 Judah, D .B ., 105 Judah, J.J., 111 K adoorie & C o, 97, 111 K adoorie, E llis, 111 K adoorie, Reuben E zekiel, 96, 111 K aiping m ines, 26, 5 1 ,1 2 4 ,1 2 5 , 243 K alum pong R ubber C o, 5 3 ,1 4 7 ,1 5 2 K ang Youw ei, 138 K ansu loans, 6 6 ,6 7 K aye, W illiam , 80 K em m erer C om m ission, 256 K esw ick, W illiam , 40 K esw ick’s Share O rdinance 1891,132, 193 K oofunsing, 87 K ota B ahroe R ubber E states C o, 147, 152 K ow loon L and & B uilding C o, 52 K uang-hsu Em peror, 187 K ung, H .H ., 2 6 1 ,2 6 3 K uom intang, 189, 247 L alcaca, E.P., 80 L andale, D avid, 1 5 1 ,1 5 9 Land R egulations, 19-20, 5 9 -6 0 Lane, C raw ford & C o, 5 4 ,7 0 ,1 1 0 L eem an’sA c t, 193 L em archand, W .R. ‘Fash’, 108 L’H otel des C olonies, 9 4 ,1 0 8 L ethbridge, G eorge, 80 Liang Q uichao, 245 L ightw ood & Scott, 131 Likin, 11 Lim ited liability, 29 L in T&e-hsu, 5 L intin Island, 5 L i Sung-yun, 90 L ittle, A rchibald, 107 L ittle. Edw ard S., 1 64,165 Liu Pak-sim , 102 L lew ellyn, J. & C o, 5 0 ,5 4 Loau K ung M ow C otton Spinning & W eaving C o, 5 0 ,9 0 London & C ounties Bank, 65 London Stock E xchange, 6 1 ,6 5 ,7 1 , 104

INDEX Low e, B ingham & M athew s, 161 L Shares, 303 Luzon Sugar R efinery C o, 52 Lyceum T heatre, 69 M cBain, G eorge, 53 M cLean, D avid, 4 0 ,8 1 ,8 8 ,9 5 M cLoughlin, E .M ., 80 M aatschapij., etc in L angkat, 1 4 2 ,1 5 5 , 1 6 3 ,1 9 0 ,1 9 1 ,1 9 8 ,2 1 4 M acall, Edw ard, 80 M ackay Treaty 1 902,89 M actavish & Lehm ann, 99 M agniac & C o, 4 M aitland, J.A ., 79 M ajor B ros, 5 0 ,9 0 M anchuria, 2 1 1 ,2 1 3 ,2 5 7 M arco Polo B ridge, 263 M arshall. F.L., 101 M arshall v N azer 1909,101 M arshall v N gu 1 909,99 M asonic C lub, 108 M ayar Silk, 265 M ayers, W. E , 54 M eller A C o, 93 M endota M ining C o, 5 1 ,1 3 4 M etal Industries, 227 M etropolitan Land, 70 M exican dollars, 23 M ichael, I. R ., 1 5 5 ,1 6 0 ,1 6 1 M incing Lane, 149 M ining com panies, 51 M itchell, W illiam . 8 0 ,9 4 M ixed Court R iot 1905,141 M orel, Edouard, 9 3 ,9 5 ,1 3 1 M outrie, S., 54 M unicipal Investm ent B ank, 61, 86 M urray,W illiam , 8 1 ,9 6 M utual Telephone Exchange A ssociation, 107 N anking bond issues, 2 5 2 -6 4 N ational Bank o f C hina, 4 0 ,4 1 , 89 National Consolidated D ebt O ffice, 250 N ational Finance Com m ission, 259 N ational Loans Sinking Fund A dvisory C om m ittee, 260 N ative banks, 2 3 ,1 2 1 ,2 6 2 N eilsen, G onus Frederick, 111 New C hina Textile C o, 229 New E ngineering A Shipbuilding W orks C o, 1 95,204

325

N ew O riental B anking C orporation, 4 0 N ew York Stock E xchange, 104,283 N ippon Yusen K aisha, 85 N isshin R isen K aisha, 85 N ixon, H .E ., 151 N oel A M urray & C o. 9 7 .1 1 0 -1 1 N orth C hina Insurance C o, 3 0 ,4 6 ,8 8 , 123 N orth C hina S team «' C o, 4 2 ,8 7 N Shares. 283, 303 O ctober 1911 R evolution, 187-9 O llerdessen, Harry, 1 0 9 ,1 6 0 ,1 6 1 O lyphant A C o, 5 ,4 4 ,7 9 , 81 O pium W ars, 5 -7 O rdinance C oncerning Com m ercial A ssociations, 244 O riental B ank, 2 1 ,2 4 , 3 8 ,4 0 ,6 5 ,9 0 O saka Shosen K aisha, 85 O utside brokers, 104 Palace H otel, 108 Palm erston, Lord, 6 ,7 Panm ure G ordon A C o, 65 Paper H unt, 9 4 ,1 0 9 Pataling E states Syndicate Ltd, 146, 148 Paterson, W illiam , 125 Peel, Sir R obert, 6 Peking bond issues, 2 4 8 -5 2 ,2 5 4 Peking brokers. 111 Peking Stock Exchange, 2 4 6 ,2 4 9 Peninsular & O riental Steam N avigation C o, 2 8 ,4 2 ,1 0 9 Peoples Bank o f C hina, 2 7 8 ,2 7 9 ,2 8 3 , 2 8 5 ,2 8 6 ,2 8 7 Peoples L iberation Army, 266 Perak R ubber Plantations, 146 Perak Sugar C o, 3 8 ,5 2 ,7 0 Pereira, Frank, 8 0 ,9 4 Photo Lithography W orks, 126 P ’ing-ch’uan C opper M ine, 125 P irie & Potts, 159 Plantations, 5 2 -4 Pootung W harf & G odow n C o, 4 5 ,1 2 6 Pöttinger, S ir Henry, 6 ,7 ,9 Potts, G eorge H utton, 110,165 Potts v R ustom jee 1 8 8 9 ,1 3 0 Punjom A Sunghue D ua Sam antan G old M ining C o, 129 Puyi, 189

INDEX

326 Q uotation requirem ents, 7 0 -7 1 ,7 4 , 167-8 R ace C lub, 70 R ace C ourse, 107,108 R ailw ay bonds, 59 R aphael, R .S., 80 R ead, H .H ., 8 1 ,1 0 8 ,1 0 9 ,1 1 0 R ed C hip shares. 2 8 2 -3 , 304-5 Reform M ovem ent, 138 Reform program m e, 276-7 R egistrar o f C om panies, H ong Kong, 30 R eid, Frank, 94 R epublic loan issues, 2 4 8 -5 2 ,2 5 4 R euters, 112 R evolutionary A lliance, 188 R eynell, A.W ., 105 R ichard, Rev. Tim othy, 138 R ivington, C harles, 9 3 ,9 5 R obertson, A .L ., 9 4 ,9 6 R obertson, W .B., 82 Ropes C om er, 130 R oyal W elch Fusiliers, 218 R ubber R estriction A greem ent 1934, 214 R ubber shares: consolidation proposals, 164-6 London prom otions, 1 4 7 ,1 4 8 -5 0 origins, 145-6 price stabilisation, 197-8 raw rubber prices, 1 4 7 -8 ,1 9 9 ,2 0 2 , 2 0 3 -4 ,2 1 2 ,2 1 3 -1 7 ,2 2 1 settlem ent, 1 5 7 -6 2 ,1 6 7 Shanghai prom oters, 151-2 Shanghai prom otions, 37, 147, 150-53 Share prices, 1 5 3 -7 ,1 6 3 ,1 9 9 -2 0 1 , 2 0 2 ,2 1 2 , 2 3 1 -7 ,2 2 1 ,2 2 2 ,2 2 4 ,

226 225 229 230 R u sse ll& C o , 5 ,8 ,2 1 .2 5 ,2 6 .2 7 ,4 0 , 4 1 ,4 6 , 5 1 ,7 9 ,8 1 ,8 7 ,1 0 6 ,1 2 2 , 1 30,132 R usso-A siatic Bank, 41 R usso-C hinese Bank, 41 R usso-Japanese W ar, 141 Sassoon, D. & C o, 2 1 ,2 5 ,4 6 ,8 8 ,1 1 0 Sassoon, E .A ., 82 Sassoon, E.D . 109, 111 Sassoon, S.D ., 79 Sassoon, S ir Victor, 110

Sausm arez, S ir H avilland d e, 3 2 ,1 5 5 , 1 6 1 ,1 8 7 Schuffenhauer, A . O tto, 8 0 ,9 4 ,1 0 9 , 134 Scott, G eoige D ., 96 Second Sino-Japanese W ar, 218 See K ai, 26 Selangor R ubber C o, 5 3 ,1 4 6 ,1 4 8 Selangor T in M ining C o, 5 1 ,1 2 6 Shandong H uaneng Pow er D evelopm ent, 283 Shanghai B enevolent Institution, 85 Shanghai bond m arket, 2 7 8 -9 Shanghai B rick & Saw M ill C o, 48 Shanghai C argo B oat C o, 4 4 ,1 2 6 ,1 3 6 Shanghai C hartered Stock & Produce Exchange, 2 4 6 .2 5 4 ,2 5 7 Shanghai C hinese Stock E xchange, 2 6 4 -5 Shanghai C lub. 5 4 ,7 0 ,9 7 .9 9 .1 0 8 , 187 Shanghai C otton M anufacturing C o, 190 Shanghai D ebating Society, 94 Shanghai D ockyards L td, 230 Shanghai E lectric C o, 4 9 ,6 0 ,9 0 Shanghai E xploration & D evelopm ent C o, 1 9 8 ,2 2 8 ,2 3 0 Shanghai Feather C leaning C o, 136 Shanghai G as C o, 3 8 ,4 8 ,7 0 ,9 0 ,1 1 8 , 1 2 1 ,2 0 9 Shanghai G old E xchange, 2 0 9 ,2 1 1 ,

212 Shanghai G reyhound A ssociation (C hina) Ltd, 203 Shanghai & H ongkew W harf C o, 38, 4 4 -5 ,7 0 , 83. 8 8 .1 2 3 , 128,136 Shanghai H orse B azaar C o, 54 Shanghai H otels, 70 Shanghai Ice C o, 5 0 ,9 0 ,1 3 6 Shanghai International G reyhounds Ltd, 203 Shanghai L and Investm ent C o, 3 8 ,5 2 , 69, 8 3 ,1 2 9 ,1 3 9 ,1 9 0 , 230 Shanghai L angkat Tobacco C o, 5 3 ,1 3 7 Shanghai M ercury, 54 Shanghai M unicipal C ouncil, 8 ,2 0 -2 1 , 3 8 ,4 8 .4 9 , 5 9 -6 4 Shanghai m unicipal debentures, 59 -6 4 , 8 4 -6 , 2 1 7 ,2 3 0 Shanghai M utual T elephone C o, 107, 209

INDEX Shanghai Paper M ill, 126 Shanghai Pow er C o, 4 9 ,6 4 ,7 0 ,2 1 7 Shanghai R ubber A ssociation Ltd, 165 Shanghai Securities E xchange, 2 3 3 -4 Shanghai Securities Ltd, 227 Shanghai Sharebrokers’ A ssociation, 9 6 ,9 9 Shanghai Sharebrokers’ A ssociation (1909), 104-5 Shanghai Shareholders’ Protection A ssociation, 216 Shanghai Standard Stock C o, 124 Shanghai Standard Stock Exchange, 245 Shanghai Steam N avigation C o, 27, 4 2 ,4 3 ,4 6 ,8 3 ,8 7 ,8 8 ,1 1 8 ,1 2 2 Shanghai Stock & Bond Trading A ssociation, 245 Shanghai Stock Exchange (International Settlem ent): am algam ation, 105-06 closure, 2 1 1 -2 ,2 1 8 -2 0 ,2 3 2 -4 com m issions, 103-4 defaulting brokers, 205 dollar quotations, 214 First W orld W ar, 191-3 form ation, 9 8 ,1 4 2 location, 99 m em bership conditions, 98 quotation requirem ents, 7 1 -4 settlem ent, 1 01,205 trading, 9 9 -1 0 0 Shanghai Stock Exchange (1990): dealing system , 2 8 6 -7 early business, 280 form ation, 280 grow th, 2 8 1 -2 m em bership, 286 price fluctuations, 2 8 8 -9 5 ,2 9 9 -3 0 5 prim ary issues, 2 8 2 -6 ,3 0 6 regulation, 2 8 7 -8 share categories, 2 8 2 ,2 9 9 ,3 0 6 -7 volatility, 2 9 5 -9 Shanghai Sum atra Tobacco C o, 53, 137,155 Shanghai T rust & Investm ent T rust C o, 278 Shanghai T ig & L ighter C o, 83 Shanghai Vacuum E lectronics C o, 280, 299 Shanghai W aterw orks Co, 3 8 ,4 9 ,6 3 , 6 9 ,8 3 ,9 0

327

Shanghai W harf C o, 44 Shansi banks, 2 3 ,1 2 5 Share capital system , 277 Shareholders, 78 -8 3 Sharp & C o, 131 Share registers, 234 Shaw & Co, 21 Shekuty, G .I., 1 5 5 ,1 6 0 Shell Transport & Trading C o, 4 4 Shenyang T rust & Investm ent C orporation, 278 Shenzhen Real E state C o, 299 Shenzhen Stock Exchange: dealing system , 28 6 -7 early business, 279 form ation, 280-81 grow th, 2 8 1 -2 m em bership, 286 price fluctuations, 2 8 8 -9 5 ,2 9 9 -3 0 5 prim ary issues, 2 8 2 -6 ,3 0 6 regulation, 2 8 7 -8 share categories 2 8 2 ,2 9 9 , 30 6 -7 volatility, 2 9 5 -9 Sheridan M ining co, 5 1 ,1 3 3 , 134 Short selling, 102-3 Shroffs, 24 Siegfried, C W ., 94 S ilver Purchase A ct 1934,262, Sino-Japanese W ar, 6 7 ,6 8 ,1 3 8 ,2 5 9 , 263 Sm all Sw ords (K nife) Society, 9 ,1 0 , 1 8 ,2 0 Sm uggler U nion M ining C o, 5 1 ,1 3 4 Soong, T.V., 2 5 2 ,2 5 5 , 2 5 9 ,2 6 0 Soy Chee C otton Spinning C o, 5 0 ,9 0 Special Econom ic Z ones, 276 Spunt, J., 105 S Shares, 303 Stabilisation Fund, 2 2 3 -4 Stam p duty, 2 7 9 ,2 8 8 ,2 9 5 Standard C hartered Bank, 48 Standard O il, 110 S tar Ferry C o, 44 State Planning Com m ission, 283 Steam Launch C o, 129 Stevenson, Sir Jam es, 197 Stevenson R estriction Schem e, 197, 1 9 9 ,2 0 1 ,2 0 2 ’Stock Exchange Storm ’, 2 4 6 -7 Stock & Sharebrokers’ A ssociation, 71, 9 6 -8 Stokes & Young, 131

328

INDEX

Stonew all C olorado M ine, 126 Sullivan, J.A ., 9 4 ,1 0 0 ,1 0 1 Sunchong, 26 Sun Yat Sen, 3 7 .1 8 8 ,1 8 9 ,2 4 6 Suprem e C ourt, 32 Sw an, C ulberston A Fritz, 7 0 ,1 1 1 -1 2 , 2 1 3 ,2 1 4 Sw an, J.E .& C o, 111-12

Tsingtao Brew ery, 2 8 2 ,2 8 5 , 302 T i Y euh-sheng, 2 5 4 ,2 5 5

Tael, 22 Taikoo Sugar R efinery C o, 5 2 ,1 2 9 Taiping R ebellion, 9 ,1 0 ,1 5 ,2 0 ,2 2 , 25, 3 9 ,4 2 , 108 Talcu T ig A L ighter C o, 44, 87 Tebong R ubber A Tapioca E states C o, 1 4 7 ,1 5 0 Tegle & C o, 67 Telegraph, 106-7 Telephone, 107 T hom e B ros, 79 Thurbum , A lexander, 8 0 ,9 3 ,9 5 ,1 3 4 lie n stin brokers. 111 Toeg & B arff, 9 7 .1 0 1 Toeg & B arff v G raham A nderson 1903,102 Toeg A R ead, 109 Toeg, R .E ., 102, 1 0 8 ,1 0 9 -1 0 Tong K ing-sing, 2 6 ,4 3 ,5 1 ,8 7 ,9 0 Tongling C oal M ining C o, 129 Tong M ow -chee, 8 7 ,9 0 Tootal, J.B ., 79 Trade expansion, 13-14 Trautm an A C o, 42 Treaty o f Cham poa, 8 Treaty o f N anking, 3 ,7 ,9 ,8 7 Treaty o f Shim onoseki, 1 2 ,1 4 ,3 6 ,5 0 , 7 5 .9 0 . 134 T reaty o f T ientsin, 1 1 ,1 2 ,4 2 T reaty o f W anghia, 8 T rust A ssociation o f Shanghai, 265 T rust & Loan C o. o f C hina, Japan A Straits, 4 0 ,8 2 , 88 Tsai M o-chung, 112

Vacuum O il C o, 110 V allabrose R ubber C o, 146 V iceroy o f C hihli, 43 V iceroy o f Fukien, 65 V iceroy o f L iang-K w ang, 67 V olunteer C orps, 1 0 ,1 3 9 ,2 1 1 ,2 1 8

U nion C hurch, 9 4 ,1 6 5 U nion Insurance Society, 46, 88 U nion Steam N avigation C o, 4 3 ,8 7 U rc, C harles W., 9 4 ,9 9 ,1 0 9 U .S. C otton A W heat L oan, 260

W ade, Sm ith A C o, 123 W ah Sam , 81 W aller, Ede LI, 94 W all Street C rash, 204 W alter, John, 81 W ard, Frederick Tow nsend, 121 W ar Loan issues, 195 W attie, J.A ., 1 5 1 ,1 5 5 ,1 5 9 ,2 1 6 W atts v D unn 1911,102 W eeks A C o, 5 4 ,7 0 Wei-Wah, 219 W harfs, 4 4 -6 W heelock A C o, 2 2 7 ,2 3 0 W hittal, Jam es, 29 W ilson & Tod, 79 W ing-on, 2 6 5 ,2 6 6 W u Jim Pah, 81. 88 Yah Loong C otton Spinning C o, 136 Y angtze Insurance A ssocation Ltd, 46 Yangtze Insurance C o, 83, 8 8 ,1 1 8 , 123 Yanzhong Industrial C orporation, 278 Yanzhong Photocopy Co, 2 7 7 ,2 8 5 Young, A rthur N ., 256 Yuan Feng-yun Exchange B ank, 163 Yuan Shikai, 1 8 9 ,1 9 1 ,2 4 9 Yung Tsung K ing, 85