China and World Finance History

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Economic History Review , 60, 2 (2007), pp. 267–312

© Economic History Society 2007. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 MainStreet, Malden, MA 02148, USA.

Blackwell Publishing Ltd.Oxford, UK and Malden, USAEHRThe Economic History Review0013-0117Economic History Society 20072007602267312ORIGINAL ARTICLES

CHINA AND THE WORLDFINANCIAL MARKETSGOETZMANN, UKHOV, AND ZHU

China and the world nancial

markets 1870–1939: Modern lessons from historical globalization

1

By WILLIAM N. GOETZMANN, ANDREY D. UKHOV,and NING ZHU

In this article we review the development of Chinese capital markets over acrucial period in the history of markets worldwide, and place that develop-

ment in context. Despite fundamental differences between China today andChina 100 years ago, it is still important to consider the effects of an imbal-ance between domestic and international investor markets, and the mismatchbetween domestic and foreign expectations about investor protection. Thelessons of the last century suggest that China today should consider openingChinese investor access to foreign capital markets in order to equilibrate thelevel of diversication between foreign and domestic investors. In addition,our analysis suggests that protecting of domestic corporate investor rights isat least as important as protecting foreign investor rights.

I INTRODUCTION

n the rst half of the twentieth Century, China attracted considerableinvestment from abroad. One estimate of the foreign capital invested in

China in 1938 put it at US$2.5 billion, third behind India and Argentinaas a target of developing market investment, and not dramatically less thanthe US$7 billion of foreign investment in the United States at the time.Active foreign investment in China, of course, has a much longer history.It began in the mid-Qing era, with direct investment by Britain and otherEuropean countries, and developed by the late-Qing into a quasi-colonialrelationship with effective foreign control of China’s largest commercialport cities.The history of foreign investment in China is a vast topic. However, thisarticle focuses more narrowly on the process of securitization of the assetsof Chinese rms and government debt that began in the late nineteenthcentury, both inside and outside China. Over the period 1870–1930, theChinese nancial system underwent extraordinary change. Chinese enter-prise in major port cities developed from family-based, private equity

1

We thank Zhiwu Chen, Otto Lam, Sir Anthony Neoh, Hidetoshi Mine, Geert Rouwenhorst, andSayuri Shirai for helpful comments. We thank the Tokyo participants in the ADBI/Wharton Seminar onRegulatory Difference-Banking Sector Regulation and Securities Market Regulation.

I



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ventures and quasi-public rms, to publicly held corporations that couldtap domestic and foreign savings through international and domestic stockand bond markets. Chinese government borrowing began in the late nine-teenth century as an informal process of nancial demands levied uponwealthy citizen in times of need. By 1930, despite having defaulted on,and restructured signicant parts of her debt, China was able to issuebonds for major infrastructure projects on the leading exchanges of theworld. In addition, an active domestic bond market provided funding forthe nearly ceaseless internal and external military struggles that lastedfrom the fall of the Qing in 1911 to the revolution that created the currentgovernment in 1949.

2

What makes Chinese nance during this transition era particularly inter-esting is not the speed and progress of development so much as the pro-blems encountered along the way.

3

Despite the eventual success of capitalmarkets in Shanghai and other coastal cities by the mid-twentieth century,Chinese nance lagged behind developments in Europe and Japan duringthis transition period. In this article, we argue that temporary imbalancesin capital market development between China and the rest of the worldbefore the fall of the Qing created political problems for China’s leaders,and left Chinese investors at a competitive disadvantage with respect toforeign capital. While Chinese ofcials in the late Qing tried to remedy thisimbalance through regulatory reform, these remedies were largely ineffec-tual. Despite experimentation in the late nineteenth and early twentiethcenturies with domestic joint-stock companies, China relied primarily onforeign investment and private enterprise through the end of the Qingdynasty. The legacy of this reliance is still visible.

Foreign investment over the period 1870–1930 nanced remarkablegrowth in the Chinese economy. However, it came at a price—the mostvisible being preferential régime concessions to foreign investors, and partialforeign control over government nances. From the foreign perspective,these concessions were simply investor protections. From the Chinese per-spective, however, these terms were viewed as an affront to sovereignty andan impediment to the development of a domestic corporate sector. Inparticular, the imbalance between the protection afforded to foreign inves-

tors and the absence of it for domestic investors caused China to relyincreasingly on foreign investors, at the cost of sovereignty and domesticeconomic growth.

2

For an analysis of the historical economic growth in China, see Perkins, ‘

Growth and structural change

’; and Rawski,Economic growth

.

3

The Chinese experience may be compared to nancial development in other Asian countries. Theexports by Southeast Asian (Burma, Thailand, Malaya, Indonesia, Indochina, and the Philippines)countries in the nineteenth century grew with little nancial development or foreign borrowing. Huff,

Monetization

, argues that this was because they depended almost entirely on small-scale producersbringing more land under cultivation and exploiting easily accessible mineral deposits. The scale of Chinese enterprise may thus have been an important differentiating factor.



CHINA AND THE WORLD FINANCIAL MARKETS

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As a consequence, the terms of Chinese external investments contributedto a backlash against foreign ownership of Chinese capital and foreignencroachment on Chinese sovereignty. Although a vigorous capitalist systememerged in cities such as Shanghai after the treaty of Shimonoseki in 1895,the seeds of resentment towards foreign capital ultimately served as acatalyst for the Revolution in 1949, an event that shifted China away fromwidespread economic and nancial relationships with large sectors of thedeveloped world. Only in the last two decades has China returned to theglobal nancial community, and only in the last decade has China begunto rebuild her own domestic capital market.

China today confronts some of the same problems she faced a centuryago with respect to the tension between domestic and foreign capital mar-kets. Chinese investors today have access to a large domestic market, butthey are still largely prohibited from investing overseas. We show that thisconstraint can have a signicant impact on the cost of capital for develop-ment, and on the risks confronted by savers. Despite great progress recentlyin the modernization of Chinese capital markets, Chinese investors do notyet enjoy the same kinds of protections as investors in other countries. Onelesson from Chinese nancial history is that a lack of investor protectionmay have impeded progress towards a strong domestic capital market, andsuperior protections negotiated for foreign investors created severe politicalproblems for the government.

One cannot consider the Chinese experience independent of the contem-poraneous context of nancial and economic development around theworld. The nancial history of China clearly has parallels to the experienceof Latin America, North Africa, and Southeast Asia in the late nineteenthcentury. As Bordo, Taylor, and Williamson

4

and Clemens and Williamson

5

point out, the global context for the joint evolution of nancial institutionsand economic growth make it clear that, while globalization brings incapital, technology and institutions, it also imposes external constraints onlocal development, because it forces nascent local systems to competeagainst the foreign systems. Our analysis in this article focuses on preciselythis experience in China at a critical juncture in that nation’s history.Although the evolution in China was clearly part of the broad economic

globalization of a century ago, the specic Chinese experience is instructive.Economic forces may be global, but the events and conicts that channelor frustrate them can be local. The failure of globalization in Chinesemarkets can help understand the challenges to nancial market develop-ment when international capital encounters domestic interests and alterna-tive market structures.

The article is organized as follows. In the next section, we place thedevelopment of China’s equity markets in the context of the global nancial

4

Bordo, Taylor, and Williamson, Globalization

.

5

Clemens and Williamson, ‘Closed jaguar, open dragon: comparing tariffs in Latin America and Asiabefore World War II, working paper, NBER (2002)’.



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system of the day. In section III

we do the same for China’s governmentbond market. Section IV

focuses specically on the case of Chinese railroadnance. Section V

develops a model of segmented foreign investment andexamines the impact of diversication opportunities on investors. Section

VI

concludes.

II EQUITY MARKET DEVELOPMENT

In contrast to Europe, the United States, and Japan, the development of China’s capital market in the late nineteenth century was modest. Thedomestic investor’s opportunity set was relatively small, geographicallylimited, and suffered from early turbulence, all problems that might havedissuaded more widespread investment. Nevertheless, the path of thedevelopment of the equity and debt markets in China suggests some reasonsfor the discrepancy, and also makes clear that proposals and potential fordevelopment existed relatively early.

Chinese Enterprise and Early Corporate Forms

The original impetus for tapping Chinese investor capital for developmentcame in part from a Chinese scholar who studied overseas. Yung Wing( ), famous reformer and a graduate of Yale College in 1854, proposedthe joint-stock nancing of a Chinese steamship transportation company tothe governor of Kiansu province in 1867. His plan was approved, but it was

not until 1872 that Shanghai entrepreneur Sheng Hsun-Huai ( )founded the China Merchant’s Steamship Navigation Company as a joint-stock company to compete with foreign-operated maritime transportationlines.

6

The company was essentially quasi-private. Local merchants wereinduced by the provincial government to own shares and to manage therm, and the government provided a loan that was eventually forgiven. Thecompany was operated with the joint goal of generating prots for share-holders and providing a domestic rival to foreign-owned shipping rms.

Other Chinese joint-stock companies were formed in the 1870s bySheng and by other entrepreneurs in the 1870s and 1880s under the auspices

of the guandu shangban ( ) system—‘Ofcial Supervision and Mer-chant Management’. The shares of these ventures, including the ImperialTelegraph Administration, the Hua-sheng Textile Mill in Shanghai, and theImperial Bank of China, were sold primarily to wealthy merchants and weresubject to virtually no ofcial securities laws. Shares in guandu shangbanventures were occasionally traded, and prices for most of the 1880s wereprinted in Chinese language newspapers in Shanghai. However, there wasno ofcial exchange for Chinese securities. In the 1880s, the governmentmoderated its role in such enterprises by introducing another organiza-tional form called guanshang heban (implying joint government-merchant

6

Feuerwerker, China’s early industrialization

, p. 97.




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management).

7

It was not until the promulgation of the Company Law in1904 that direct ofcial involvement, and implicit government sponsorshipof business enterprise in China was replaced by a western-style set of indirectregulations and institutions for shareholder protection.

Recently, scholars have employed in-depth studies of Chinese rms in thelate Qing and early Republican period to explore how these evolving own-ership and governance structures affected the capacity of Chinese rms tocompete economically. For example, Pomeranz analyses the experience of one company, the Yutang Company of Jining ( ).

8

The rm, foundedin 1779, evolved over its lifetime from an entrepreneurial venture to a mer-cantile partnership to a family-owned enterprise and nally to a state-ownedbusiness. Pomeranz points out that Yutang was able to effectively competewith domestic and foreign rivals in the food business without having to adopta western-style corporate form. Indeed, in 1905, a year after the CompanyAct, all external shareholders were bought out by a single family. In contrast,Köll’s study of the Dasheng Cotton Mill ( ) in Nantong analyses theexperience of another Chinese regional enterprise that began as a guandushangban rm founded by an ofcial in the region of Nantong in 1895.

9

Unlike the Yutang company, The Dasheng Spinning Mill No. 1 registered asa public company in 1905 and continued as a joint-stock enterprise untilnationalization. Köll points out that, while nominally a shareholder cor-poration, Dasheng was under the effective control of its founder. These par-allel experiences suggest that various forms of rm ownership and nancingcoexisted in the period. While some rms, such as Dasheng, offered externalinvestors the opportunity to share in their prots—if not entirely in their gov-ernance—others, such as Yutang remained private.

Public Securities Market Development

China’s rst domestic stock price boom occurred in the 1880s when thelist of publicly traded rms nearly tripled from 10 to 29, and stock pricesexceeded par value by 1882, apparently feeding investor speculativedemand.

10

Unfortunately, the Shanghai market crashed in the mid-1880s,reducing the traded list to 12 and dropping share prices to roughly half

their book value. This early bubble may have had a long-term inuence oninvestor appetite for shares. Meanwhile, gure 1 shows that the stock pricesof foreign-registered companies trading in Shanghai stayed relatively stable,indicating that domestic and foreign equity markets were functionally dis-jointed during this period.

11

An interesting hypothesis is that this lack of

7

See Goetzmann and Köll, ‘History of corporate ownership’, for details about the evolution of corporate ownership structures in the late Qing.

8

Pomeranz, ‘ “Traditional” Chinese business forms’.

9

Köll’s study of the Dasheng Cotton Mill, Cotton mill to business empire

.

10

Zhu, ‘Three market crashes’.

11

Adapted from data in Zhu, ‘Three market crashes’.



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correlation was a clientele effect—the dynamics of the Chinese share marketreected uctuations in capital supply by investors who were simply notaccessing the foreign-registered share market. Whatever the reason for thetumult, following the crash, prices were no longer recorded in local news-papers—the collapse of Chinese shares in the 1880s seems to have damp-ened investor enthusiasm for local equity investing for nearly two decades.

China’s rst stock exchange, the Shanghai Share Broker’s Association,was founded in 1891 in Shanghai by foreign businessmen. Foreignersfounded another stock exchange, the Shanghai Stock Exchange, in 1904,which later merged into the Shanghai Share Broker Association.

12

Theseexchanges initially only traded shares of foreign-registered companies. It isnot clear the extent to which these foreigner-founded exchanges served theneeds and interests of Chinese investors. Only members could trade in theShanghai Share Broker Association (SSBA), and out of the 100 members,about 10 were Chinese. Do these proportions reect anything about theclient-base of the brokers? We do not know. Like other well-known restric-tions by the foreign merchants on Chinese access to institutions, until 1935,Chinese were prohibited from trading through the SSBA.

13

Trading indomestic shares thus took place apart from the leading exchanges, and in

12

McElderry, ‘Shanghai securities exchanges’ provides a chronology. Thomas, ‘Western Capitalismin China’ documents the history of the Shanghai exchange.

13

Shanghai Archive,Shanghai Stock Exchange

, p. 399.

Figure 1.

Separation of Chinese domestic and foreign stocks in the 1880s

Price indices of Chinese Domestic and Foreign Stocks in 1880s

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all likelihood remained relatively small around the turn of the century. Thenumber of domestic listings reached a maximum of 37 in the late Qing era,investors were geographically limited to the vicinity of Shanghai, and trans-actions were infrequent.

By 1935, the Shanghai China Merchants Stock Exchange had grown tobecome one of the biggest exchanges in the far east, with a list of 190companies and an annual trading volume from 2–5 trillion Yuan. Interest-ingly, the Shanghai China Merchants Stock Exchange itself was a publiccompany listed on the Exchange. Shanghai was by then one of the mostimportant capital markets in Asia, with a strong domestic and internationalbanking sector and a vigorous market for domestic and foreign stocks andbonds. This had not been the case three decades earlier, when thoughtfulattempts to develop home-grown Chinese capitalism experienced sporadicsuccesses and failures that limited the ability of domestic investors to holddiversied portfolios. The early lack of functional capital markets likewiselimited the ability of Chinese commercial enterprises to access signicantcapital. These two effects can re-enforce each other.

14

While foreigner-controlled exchanges functioned relatively earlier than Chinese-controlledexchanges, even they could not be compared to the scale and scope of European markets, or to contemporaneous capital markets in Japan. Beyondcapital constraints on enterprise, the lagging development affected domesticChinese investors by leaving them relatively undiversied when comparedto foreign investors who accessed more fully developed markets.

Development and Reform

It has been pointed out that embryonic capitalism existed in China fromthe Late Ming onwards, particularly in the mining and manufacturingindustries. However, there is little question that the encounters with thewest, particularly in the major trading ports, was a major stimulus todomestic enterprise.

15

For all of its negative effects on China, British gun-boat diplomacy in the nineteenth century generated considerable opportu-nity for the development of domestic manufacturing development. Thesuccess of European business practices and nancial institutions in trading

ports such as Shanghai and Hong Kong elicited a movement in China todevelop her own nancial system based upon securitization of nancialclaims.

In 1904, the Chinese Ministry of Commerce promulgated a number of reforms of the commercial code to facilitate the development of domes-tic corporations and to limit the ability of foreign shareholders and bond-holders to gain control. It further established a bankruptcy code in 1905.

14

Goetzmann and Köll, ‘History of corporate ownership’, point out that when the price of attractingexternal capital is too high, companies will prefer self-nancing.

15

See, for example, Dixin and Chengming ,Chinese capitalism

.



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According to one estimate, these efforts attracted 130 million taels (orroughly US$100 million) in Chinese capital to 265 new domestic corpora-tions between 1903 and 1908.

16

Ten of these new rms were railwaycompanies, representing about half of the capitalization of all Chinesecorporations registered under the company act of 1904. Besides com-panies organized under the ofcial code, there were a number of otherbusinesses devised to nance railroad development and to compete directlywith foreign concessionaires. Table 1 in the paper, taken from Lee (1977)lists 19 rail companies formed from 1903 to 1909, many of which receivedofcial provincial subsidies in the form of revenues from surtaxes on rice,opium, opium pipes, tea, salt, lottery tickets, lumber, stamps, rent, ofcial’ssalaries, and land.

17

As the table suggests, the promised rate of return onthese investments was not high—ranging from 4 per cent to 7 per cent— although it is not clear whether this included the potential for capital gains,since the type of security—equity or debt—is not identied. What is clearis that the targets for capital were not met. Even with ofcial subsidies formany of the rms, the actual amount raised rarely reached half of the goal.It is unlikely that this was because of a lack of personal domestic capital.Macroeconomic estimates of domestic wealth from China in the 1930s, aswell as accounts of major personal fortunes of her citizens, both suggestthat China had considerable capacity to nance defence and infrastructuredomestically. One problem was surely the lack of experience with shareissuance and bond underwriting processes that European markets hadalready mastered.

18

Another problem was corporate governance. Despite legal reforms andactive efforts to charter domestic enterprises, evidence suggests that mostof the new businesses after the 1904 reforms did not have the governancestructures, managerial expertise, and independence from governmentalcontrol to allow them to compete effectively against foreign concerns. Lee’sstudy of the Chinese chartered railroad companies in this era attributes theirfailure to (1) undercapitalization due to higher alternative uses of capital,(2) lack of engineering and technical skill, (3) lack of managerial expertise,and (4) corruption and embezzlement.

19

Of course, the rst problem of undercapitalization is a symptom and not a cause. Chinese reluctance to

invest may have been because of competition with internationally diversiedinvestors, or to rational investor expectations about governance problems,or both. In connection with this hypothesis, we will detail a particularlyimportant company in our later discussion of railway nance.

16

Lee, En-Han , China’s quest for railway autonomy

, p. 268. These gures differ slightly fromthose in Feuerweker,China’s early industrialization , table 1, presumably because of the addition of railwaycompanies, studied more completely by Lee.

17

Lee, China’s quest for railway autonomy

.

18

For macroeconomic estimates of China’s savings capacity, see Riskin, ‘Surplus and stagnation’. Fora discussion of personal fortunes see Huenemann, ‘China’s foreign debt’, p. 126.

19

Lee, En-Han , China’s quest for railway autonomy

, pp. 132–41.




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III GOVERNMENT DEBT: SECURITIES ISSUES ANDFINANCIAL INTERMEDIARIES

Debt nancing is the alternative to equity nancing, and is the primary

nancing avenue available to governments. While this article focuses onpublicly traded securities, it is impossible to ignore the key role played bynancial institutions in China as intermediates of public nance and assources of loan capital for companies. In this section we examine thedevelopment of external and internal markets for sovereign and corporateChinese debt.

Beginnings

There is a long history of native Chinese banks serving the need for savings,

remittance, and borrowing. Yang describes Pre-Qing pawnshops, money-shops, and mutual savings associations as local providers of credit services.

20

Interregional banks called piao-hao

( ) appeared in the nineteenth cen-tury and facilitated long-distance remittances for private enterprise as wellas the Chinese government.

21

Many of these family-owned piao-hao

( )were concentrated in Shanxi, although, as Shanghai rapidly developed intoChina’s nancial center through the nineteenth century, native banks our-ished there as well.

22

With the expansion of interregional Chinese com-merce, as well as the needs of the government to move sums of cash aroundthe country for military purposes during the Taiping Rebellion of the 1850sand 1860s and the Moslem rebellion of the 1870s, the need for interregionalbanking services was clear.

23

Stanley cites the role that at least one Shanxibank played in nancial transfers for military operations during 1870s.

24

Jinotes that the Shanxi banks served as lenders to Shanghai native banks whoin turn provided local banking services,25 and McElderry argues that theShanghai native banks also intermediated between foreign banks and localenterprise.26 Despite the emergence of domestic Chinese banks, their expe-rience with facilitating government money transfers, and their ability tosource and supply capital for business loans, Chinese government ofcialsturned rst to foreigners for loans.

Stanley argues that the Taiping Rebellion (1851–1864) represented awatershed in Chinese government nance. Not only did it cause China toreturn to the issuance of paper money, but, for the rst time in dynastichistory, it initiated decit nance. In 1861, the provincial governor of Kiangsu, Hsüeh Huan, was given imperial permission to borrow 300,000

20 Yang, Money and credit in China , p. 81. Also see Wu, ‘Chinese native banks’, pp. 89–93.21 Stanley, Late Ch’ing nance , p. 22.22 See McElderry, Shanghai old-style banks .23 Interestingly, one of the rst proposals for a domestic bank was also made by Yung Wing. See Cheng,

Banking in modern China , p. 23.24 Stanley, Late Ch’ing nance .25 Ji, History of modern Shanghai banking .26 McElderry, Shanghai old-style banks .



276 GOETZMANN, UKHOV, AND ZHU

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

taels from foreign merchants during the Taiping rebellion. The one-year loanwas secured by vouchers for Shanghai customs receipts. Foreign merchantsagain made provincial loans in 1862, 1864, and 1866 for military purposes.In 1866, the governor of Fukien, Tso Tsung-t’tang ( ) was chargedwith putting down the Islamic rebellion in western China. He used theearlier experience with loans from foreign merchants as a model for militarynancing on a larger scale, using the maritime customs receipts in Fukien,Canton, Chekiang Shanghai, and Hankow as collateral.27 The MaritimeCustoms duties, one of the largest sources of government revenue, werecollected directly by foreign government ofcials at Chinese ports, anddeposited in the Hong Kong and Shanghai Bank (HSBC), and this nancialarrangement led naturally to the bank acting as a nancial intermediary infuture government borrowing.28

In appendix I, we enumerate the Chinese external loans listed in Kuhl-mann and Stanley and code each according to the security pledged for theloan.29 The external loans over the late nineteenth and early twentiethcenturies essentially securitized an array of specic government revenues,including China’s maritime customs, salt taxes, internal provincial transfertaxes (likin ), mining taxes, alcohol and tobacco taxes, opium revenues,property transfer taxes, and revenues for railways. Of course, vericationand collection of these revenues was an important feature of the loancontract.

The next recorded Chinese government loan was oated to defendagainst the Japanese designs on Taiwan in 1874. It was made by HSBC andlikewise secured on the Maritime Customs. HSBC arranged the rst publicoffering of Chinese government bonds in 1877 in the form of a ve milliontael loan in silver. With this issue, the Chinese government nally enteredthe international capital markets. HSBC continued to play a major role inunderwriting the issuance of Chinese debt through the nineteenth and earlytwentieth centuries, although other foreign banks, including Barings andthe Deutsche-Asiatische Bank managed some of its foreign issues. Later,larger loans required international banking syndicates to simultaneouslyoat bond issues in nancial capitals around the world.

Maritime Customs again backed the 7 per cent £1.5 million sterling

bonds sold in London to nance China’s defence against France in the1880s. All of the debt incurred in the 1894–5 war with Japan and theresulting indemnity was secured by Customs revenues, as were the BoxerIndemnities—the debt settled on China by the consortium of powers after

27 Stanley, Late Ch’ing nance , gives a complete account of these early loans, pp. 48ff.28 Cf. Stanley, Late Ch’ing nance , ibid., p. 82. The foreign oversight of Chinese maritime customs

revenues began as a method for the British and French to collect their war indemnity of 8 million silvertaels. Forty per cent of custom revenues were paid directly to Britain and France in equal share fromcollections in all open ports, until the completion of the obligation in 1866. From that point on, the40% share was paid directly to the Imperial Government in Peking, which found it convenient tomaintain the same structure and oversight of the customs duties.29 Kuhlmann, China’s foreign debt ; Stanley, Late Ch’ing nance .



CHINA AND THE WORLD FINANCIAL MARKETS 277


the Boxer Rebellion. The Boxer Indemnity of £67.5 million was dividedamong 14 powers with roughly 75 per cent going to Russia, Germany,France, and Great Britain. It effectively absorbed the previously remainingunpledged portion of China’s customs revenues and placed her import taxesentirely under foreign control.With her customs revenues largely pledged after 1900, China had topromise alternative sources of revenue as collateral on major loans. Someof the last obligations of the Chinese Imperial Government, such as the1910 Kiagnan loan issued in France and Belgium, were secured by salttaxes. The Qing dynasty fell in 1911 and recognition of the Chinese Repub-lic by the great powers was conditional upon honouring the debts of theprevious government. Thus, the rst major loan of the new Republic in1912 (the 5 per cent Crisp Gold Loan), oated in London, negotiated andapproved by the new political leaders, Sun Yat-sen ( ) and YuanShi-kai ( ), was backed explicitly by salt revenues. Loans secured bysalt taxes followed in 1917, 1918, 1922, and 1937 under a variety of Chinesegovernments. Internal transit taxes, called likin ( ), existed after the Tai-Ping Rebellion. These were pledged as security on Chinese external loansin 1898, 1909, 1911, and in 1912. Why are all of these revenues and taxesimportant? Because they represented security to foreign investors. Chinafaced constant external and internal military challenges throughout theperiod of our study, and by the end of the nineteenth century, the weaknessof the Imperial Government was well known. Thus, without such backing,Imperial promises to repay were not worth much, even if repayment weredeemed to be expedient.Perhaps the most remarkable feature of Chinese bonds over the period isthe stability of their yields until 1918. Figure 2 shows the time-series of yields on Chinese, Indian, Japanese, and Russian bonds over the period.This was a time of political tumult for China; a period that included twoexternal wars, the Boxer Rebellion, indemnity payments, a revolution thattoppled the Qing Dynasty, and participation in a world war. Despite theseevents, the yields on Chinese bonds never moved outside of a narrow tradingband between 5 1/2 and 6 per cent from 1899 to 1913, and from 6 per centto 7 per cent from 1913 to 1918. 30

This stability of the Chinese yields is particularly striking in light of evidence that European and American securities reacted strongly to war-time events. European bond markets reected the wartime fortunes of

30 The data in this chart are from Global Financial Database, which collected the data from the seriesof yields on Chinese Government bonds quoted on the London market and published in the Investors

Monthly Manual , a monthly publication of The Economist . The bonds used are the 8% Taiwan War Loanof 1874, the 6% Sterling Loan issued in London by Baring Brothers in 1885, and the 5% ReorganizationLoan of 1912/13 issued in London, Paris, Frankfurt, and St. Petersburg. The rst two bonds werebacked by maritime customs receipts. The third bond was a direct obligation of the Chinese government,backed by a salt tax and surplus maritime customs. Semi-annual data for all securities listed in theLondon Exchange are currently available on the website of the International Center for Finance at theYale School of Management [http://www.icf.yale.edu].





combatants during the First World War, and European equity marketsreected the relative advantages of combatants during the Second WorldWar. 31 Studies of the United States debt during its civil war indicate thatthe nancial markets reacted to, and in some cases anticipated, outcomesof major battles.32 The rationale for market reactions to news from major

political events is based on the presumption that the likelihood of paymenton the security uctuates with the political and military events affecting theissuing authority. Conversely, if the foreign shareholder protection wereriskless, one would expect to see no price reaction to political events.

In China, the rst political event we examine for a bond price reactionis the 1894–5 war with Japan and treaty negotiations on indemnity

31 For yield uctuations in Europe during the World Wars, see Ferguson, Cash nexus . For equityuctuations during the Second World War, see Jorion and Goetzmann, ‘Global stock markets’.

32 See Roll, ‘Interest rates and price expectations’ during the Civil War; and Willard, K. L., Guinnane,T. W., Harvey, and Rosen, S., ‘Turning points in the civil war: views from the greenback market’, NBER,working paper no. W5381 (1996), and Rosen, ‘Turning points in the Civil War’.

Figure 2. Yields of foreign public debts of China, Russia, Japan, and IndiaSources: The data are from Global Financial Database, which collected it from the series of yields on Chinesegovernment bonds quoted on the London market and published in the Investors Monthly Manual , a monthly publicationof The Economist . The bonds used are the 8% Taiwan War Loan of 1874, the 6% Sterling Loan issued in London byBaring Brothers in 1885, and the 5% Reorganization Loan of 1912/13 issued in London, Paris, Frankfurt, and St.Petersburg. The rst two bonds were backed by maritime customs receipts. The third bond was a direct obligation of the Chinese government, backed by a salt tax and surplus maritime customs. Semi-annual data for all securities listedin the London Exchange are currently available on the website of the International Center for Finance at the YaleSchool of Management [http://www.icf.yale.edu].

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payments. Speculation about the treaty and proposed indemnity paymentsmight have been seen in prices in early 1895, and the terms of the200 million tael indemnity would have become public after 17 April1895.33 If anything, the 8 per cent treasury bond prices decreased duringthe war years, despite the fact that the loans to defease the indemnity,issued in 1895 at 6 per cent, were also largely secured on the MaritimeCustoms revenues.

The second date we look to for yields to reect an increasing risk of Chinese default is the funding of the Boxer Indemnities in 1901, whichwere not publicly issued as bonds, but which captured most if not all of theremaining Customs Revenues until the end of the First World War, at whichtime some of the indemnity was postponed or cancelled by various nations.The Boxer Indemnities had a junior claim on the Maritime Revenues, withpriority following previous charges.34 However, despite their lower priority,they must have represented a severe economic burden to the government,and they were owed directly to nation states with armies, as opposed tobondholders who would have to seek legal protection in the event of default. Despite these issues, there were no price reactions in the Londonmarket.

The third and perhaps most important event with the potential to causedefault on Chinese sovereign debt was the Chinese Revolution of October1911. It is only reasonable to assume that an investor holding a promiseby the Chinese Imperial Government would be concerned by the newsthat the government had been violently overthrown and replaced by amilitary strongman with an unclear popular mandate to rule. Again, nomovement in the bond prices in London hint at elevated uncertaintyabout whether the new government would honour its external obliga-tions—despite an obvious, immediate need to consolidate internal popularsupport.

Recognition of the new government by world powers was conditionalupon honouring international debts, and the rst step towards this was the1913 Reorganization Loan, a £25 million loan negotiated by China’s newruler Yuan Shi-kai ( ) with Great Britain, Germany, France, Russia,Belgium, and Japan. The US did not participate, on the grounds that the

loan interfered in Chinese sovereignty. The terms effectively preventedChina from using the loan proceeds to defend herself against Russian and Japanese designs on Manchuria.35 Indeed, political power was directly tiedto nancial power in the Reorganization Loan negotiations, and Americaninuence in the course of the complex negotiations over the ReorganizationLoan was hampered by the lack of a liquid market in the US for foreigngovernment securities. Not until the end of the First World War did the US

33 For details of the treaty negotiations see Beasley, Japanese imperialism , p. 64.34 Kuhlmann, China’s foreign debt , p. 34.35 Scholes and Scholes, Foreign policies of the Taft administration , pp. 237 and ff.





assume prominence as a global capital market, in effect, stepping into thevacuum created by wartime nancial crises in Great Britain and the conti-nent.36 By the time the Reorganization Loan was nally negotiated andproceeds issued in 1913, the Chinese government was in dire nancialstraits and needed the cash to meet imperial and provincial loans comingdue, back pay for the army, and administrative expenses of the new govern-ment. Certainly some of the loan proceeds went to pay the army in Beijingloyal to Yuan Shih-kai ( ), but contemporary observers suspectedmuch of it ended up in the pockets of high ofcials.37

The Reorganization Loan marks the beginning of the nances of the newRepublic, and a period of higher rates and higher volatility for Chinesebonds. Loan rates averaged over 6 per cent in the period up to 1919, whichby historical accounts marks the beginning of ‘High Warlordism’ by whichtime the Republic had fractured into a number of battling regional powerswith shifting alliances and uncertain nances. It is really the rst evidencein the time-series of yields on Chinese bonds suggesting that political eventsin China had any bearing at all on the likelihood of bondholder repayment.Until that time, apparently the bondholders in London and elsewhere inEurope felt condence that regardless of China’s internal turmoil, themechanisms were in place to insure against governmental expropriation.

On 19 October 1921, the Chinese government declared bankruptcy, andwith few exceptions, China began to default on her foreign loans in the1920s. Only bonds backed directly by the Maritime Customs Revenues,including the 1898 Anglo–German Loan and the 1913 Reorganization Loancontinued to pay. It is interesting to note that appendix I indicates cleartrends in the sourcing of Chinese debt. After the First World War, Japanbecame a more important lender to China, apparently taking up the slackleft by the weakened European capital markets.

By 1939, virtually all Chinese external loans were in default.38The erosionof China’s ability to pay her debts is generally attributed to the breakdownof the mechanism for directing revenues to claimants—provincial seizure of revenues during her civil war were apparently common as regional warlordsneeded to nance military operations. Finally, the Great Depression, thedevaluation of silver and natural disasters nished off China’s ability to

borrow externally.Although the Imperial government relied almost exclusively on foreigndebt, the government of the Chinese Republic started to issue domesticdebt immediately after the revolution. We report the domestic public debtissuance in table 1. In 1914, the government of the Chinese Republicestablished a new agency, the Internal Debts Bureau, to oversee the issuanceof bonds. Most of the high-ranking ofcers of this bureau were foreigners.The biggest problem with Chinese domestic bonds during that time is that

36 Atkin, British overseas investment , pp. 23 and ff.37 Kuhlmann, China’s foreign debt , p. 87.38 Kuhlmann, Ibid., p. 5.





Table 1. Chinese domestic debt issues

Year

Amount (converted into

US$) Yield Converted

yield Securities Currency

1894 8,476,900 8.4 6.46 Rent tax Taels1898 7,692,300 6 4.62 Taels1910 7,407,400 7.2 5.33 Yuan1911 1,146,800 6 4.20 Department income Yuan1912 4,848,600 8 5.26 National income Yuan1912 89,407,800 6 3.95 National transactional tax Yuan1913 16,077,400 6 3.87 Railway income Yuan1914 15,194,100 6 3.53 Unsecured custom Yuan1914 1,647,000 6 3.53 Bond fund Yuan1915 11,428,500 6 3.43 Tobacco tax Yuan1917 43,636,300 6 5.45 Special fund Yuan1918 52,941,100 7 8.24 Commodity tax Yuan1919 80,000,000 6 8.00 Unsecured custom Yuan1919 2,880,000 7 9.33 Commodity tax Yuan1920 13,064,500 6 6.45 Tobacco tax and special fund Yuan1920 1,301,100 7 7.53 Tobacco tax and special fund Yuan1920 58,483,800 6 6.45 Special fund Yuan1920 14,623,600 7 7.53 Special fund Yuan1921 40,278,500 8 5.71 Salt tax Yuan1921 10,000,000 18 12.86 Yuan1921 7,142,800 7 5.00 Stopped indemnity Yuan1922 3,731,300 8 5.97 Stopped indemnity Yuan1923 746,300 8 5.97 Stopped indemnity Yuan1923 3,134,300 8 5.97 Stopped indemnity Yuan1924 11,111,000 8 5.93 Stopped indemnity Yuan1924 5,882,300 8 5.88 Railway income Yuan1925 6,060,600 8 6.06 Special fund Yuan1925 2,255,600 8 6.02 Special fund Yuan1925 1,515,200 8 6.06 Stopped indemnity Yuan1925 1,818,200 8 6.06 Stopped indemnity Yuan1925 12,878,700 National income Yuan1926 4 2.72 Hupei export tax Yuan1926 4,033,100 8 5.30 Hupei export tax Yuan1926 8,867,550 6 3.97 National income Yuan1926 19,736,800 7 4.61 River custom Yuan1926 26,315,800 9.6 6.32 River custom Yuan1927 10,126,600 8 5.06 Tobacco tax Yuan1927 6,250,000 8 5.00 Yin hua tax Yuan1927 8 5.00 Gasoline tax Yuan

1927 5,660,400 9.6 6.04 Tianjin custom tax Yuan1927 8 5.00 National income andtransportation income

Yuan

1927 18,750,000 8 5.00 Stopped indemnity Yuan1927 28,481,000 2.5 1.58 Remaining customs Yuan1928 6,666,700 8 5.33 Custom increment Yuan1928 31,847,100 8 5.10 Custom increment Yuan1928 15,894,000 9.6 6.36 Tobacco tax Yuan1928 2,649,000 9.6 6.36 Tianjin custom tax Yuan1928 26,143,800 8.4 5.49 Custom increment Yuan1928 45,751,600 8.4 5.49 Custom increment Yuan1929 12,500,000 2 1.25 Railway income Yuan1929 937,500 6 3.75 Eletronic plant income Yuan1929 1,373,600 8 4.40 Eletronic plant income Yuan1929 11,111,100 8 4.44 Custom increment Yuan1929 5,681,800 8 4.55 Telecomm. income Yuan





Table 1. Continued

1929 13,714,300 8 4.57 Tobacco tax Yuan1929 45,454,500 8 4.55 Custom increment Yuan1929 28,409,100 9.6 5.45 Custom increment Yuan1930 23,904,400 8.4 3.35 Tobacco tax Yuan1930 3,174,600 8 3.17 Export income Yuan1930 31,746,000 9.6 3.81 Custom increment Yuan1930 31,746,000 9.6 3.81 Tobacco and our tax Yuan1930 31,746,000 9.6 3.81 Salt tax Yuan1930 31,746,000 9.6 3.81 National tax Yuan1930 31,746,000 8 3.17 Stopped indemnity Yuan1932 6,006,000 6 1.80 Tobacco tax and special fund Yuan1932 1,801,800 6 1.80 Eletronic plant income Yuan1932 1,201,200 6 1.80 Salt tax and special fund Yuan1932 30,030,000 6 1.80 Custom increment Yuan1933 25,000,000 6 1.50 Custom increment Yuan1933 3,000,000 6 1.50 Railway income Yuan1933 3,000,000 6 1.50 Salt tax Yuan1934 34,482,800 6 2.07 Yuan1934 41,379,300 7.2 2.48 Stopped indemnity Yuan1934 41,379,300 7.2 2.48 Stopped indemnity Yuan1934 34,482,800 6 2.07 Custom increment Yuan1934 241,379,300 6 2.07 Salt tax Yuan1934 10,344,800 6 2.07 Szechuan local tax Yuan1934 3,448,300 6 2.07 Telecomm. income Yuan1934 6,896,500 6 2.07 Custom increment Yuan1935 561,538,500 6 2.31 Yuan1935 130,769,200 6 2.31 Stopped indemnity and special

bondYuan

1935 10,384,600 6 2.31 Railway income Yuan1935 30,769,200 6 2.31 Railway income Yuan1935 5,769,200 6 2.31 Szechuan local tax Yuan1935 46,153,800 4 1.54 Canton local tax Yuan1936 5,384,600 6 2.31 Railway income1936 189,230,800 4 1.54 National Income Yuan1936 6,538,500 4 1.54 Guang’xi salt tax Yuan1937 148,656,700 6 1.79 Income tax Yuan1937 29,850,700 5 1.49 Salt tax Yuan1937 7,440,500 4 1.19 National income Yuan1938 1,153,846,100 6 1.15 National income Yuan1938 1,153,846,100 6 1.15 General tax and tobacco tax Yuan

1939 126,161,600 6 0.61 National income Yuan1940 77,419,300 6 0.39 National income Yuan1940 77,419,300 6 0.39 National income Yuan1940 5 0.33 Filed rent Corn: 6,730,000 Dan;

Wheat: 590,000 Dan1941 5,291,000 6 0.321941 32,222,200 6 0.32 Britain loan1942 168,539,300 6 0.34 Special fund1942 9,831,400 National income1942 280,898,800 6 0.34 National income1945 204,778 61945 Grain: 10,000,000 Dan1946 6 0.00 Foreign exchange fund1947 15 0.00 National income1947 5 0.00 National income Jin Yuan Dollar1948 5 0.00 Gold: 2,000,000 Liang

Year

Amount (converted into

US$) Yield Converted

yield Securities Currency





they were seldom sufciently secured—foreign bondholders held debtsenior to domestic bondholders. Many domestic debts were secured withthe remainder of the customs revenues, which were controlled by foreignersand largely pledged to previous foreign debts. In the1920s, the governmentof the Chinese Republic had to reorganize its obligations and as a resulteffectively defaulted on domestic debt as well as foreign loans.

After the successor Nanjing Government took control of most of thecountry in the 1920s, it also resorted to domestic public debt issuance andlikewise had to restructure its debt, reducing the yield on the face value of its domestic loans from 7 and 8 per cent down to 6 per cent, an outcomeequivalent to partial default. The reorganization plan also extended thematurity of the debts to twice as long as originally designed. Shortly afterthe reorganization, the government issued bonds, and not surprisingly, theever-increasing size of public debts put the government into default againin 1935. The government issued 2,082 million yuan worth of bonds in 1936in connection with another reorganization, which represented the largestissuance in a single year up to that point.

After the Sino-Japanese war broke out in 1937, the government issuedvarious domestic bonds during the eight years of the war. During thisperiod, the government no longer targeted individual investors. Instead, itturned towards banks. Paradoxically, with the weakening of the centralgovernment, the banks in Shanghai—China’s money centre—became rela-tively strong. While the government defaulted frequently, Chinese banks inthis era had a sterling reputation.39To attract investment from Chinese livingoverseas, some debts were issued in foreign currencies outside China. Inaddition to regular debts, the government also issued debt denominated incommodities such as wheat and rice. Because the regular taxes and customrevenues decreased dramatically during the Sino-Japanese War, the publicdebts issued during that period were at even greater risk of default. Even-tually, ination solved the government’s problems at the expense of domes-tic bondholders. The ination of the 1940s decreased the real value of investments by 90 per cent. Finally, the ‘Currency Reform’ of 1948 issueda new currency at a rate of 3 million to 1 to original currencies, wiping outmost existing domestic debt.

In sum, Chinese government obligations over roughly 60 years aroundthe turn of the nineteenth century can be divided into a period of nancialstability followed by a period of volatility. Paradoxically the period of sta-bility in her loan payments was a very volatile period politically. China metobligations despite the sizable Japanese Indemnities and Boxer Indemnitiesfor more than a decade. This was not entirely due to choice—the stabilityin Chinese bond prices in the rst decade of the twentieth century is almostcertainly attributable to the foreign control of Chinese government reve-nues. It may be argued that the foreign control of revenues was good for

39 See, for example, Fortune magazine’s June 1932 feature, ‘Celestial modernism in the banks of China.’





foreign bondholders—at least in the short term—but perhaps bad for thenew Chinese Republic, which suffered from a lack of military funding,despite the rst Reorganization Loan. It is particularly interesting that thevery transparency and accountability of the Maritime Customs Revenuesthat guaranteed bondholder security also restricted the ability of the centralstate to access cash when needed. The cost of capital was low, but it maynot have been such a bargain.

The comparison to the loan uctuations in other Asian countries isinstructive. Figures 2 and 3 indicate that China was unusual in the periodbefore 1912 in the stability of her bond yields. For example, Russian debtyields uctuated dramatically, with lows in the 1890s and highs followingtheir defeat in the Russo-Japanese War. Japanese debt yields began higherthan China’s, but dropped dramatically after her settlement with China inthe 1890s. They rose again before the Russo-Japanese War and then droppedwith its successful conclusion. Even India—a full-edged colony of Britain—had more volatile bond yields than China in this period.40 The

40 Several factors contribute to volatility of Indian securities. Examination of the reports in the leadingnancial monthly of the day, The Investor’s Monthly Manual reveals that the political situation inEurope—for example war concerns in 1877 and the Afghan campaign in 1878—and its implications forBritish nances had an impact on the value of colonial securities. Local conditions, such as famine in1877, and issuance of new loans affected the value of Indian debt (The Investor’s Monthly Manual ,December 1877 and December 1878 issues).

Figure 3. Yields (relative to British gilt) of foreign public debt of China, Russia, Japan, and India

-5

0

5

10

15

20

25

1 8 8 0

1 8 8 2

1 8 8 5

1 8 8 7

1 8 9 0

1 8 9 2

1 8 9 5

1 8 9 7

1 9 0 0

1 9 0 6

1 9 1 0

1 9 1 2

1 9 1 5

1 9 1 7

1 9 2 0

1 9 2 2

1 9 2 5

1 9 2 7

1 9 3 0

1 9 3 2

1 9 3 5

1 9 3 7

1 9 4 0

Year

Y i e l d

China Russia Japan India





conclusion we draw from these comparative dynamics is that the distinctivecharacteristics of the Chinese loans—in particular their enhanced securityfeatures—may have played a role in insulating investors from risk. In thenext section, we focus on one of the most important types of Chinese loansduring the period—railway loans—and examine their role in Chinese polit-ical change.

IV RAILWAY LOANSLike his contemporary Yung Wing, Ma Jianzhong ( ) was anotherChinese scholar responsible for proposing that railway development benanced through the securities market. Like Wing, his proposals wereeventually adopted by the Chinese government. Ma obtained a baccalaureatein 1879 from École Libre des Sciences Politiques in Paris. In that year, aftera careful study of European economies, he wrote a compelling analysis of China’s need to use bonds to nance railway development in the samemanner as European nations. Noting that, despite their relative small geo-graphical size,

It seems that these countries can draw on a source as vast and copious as a well-spring or river. By what means do they bring about such a situation? They ensurerstly that they gain the people’s trust, secondly that they have a clear method of borrowing, and thirdly that they repay the loans within a xed time period.41

Much has been written about global railway nance around the turn of the

century. By most accounts the competition among the great powers tosecure railway concessions during this period through a combination of political diplomacy and the nancial might of their capital markets is, insome ways, the high point of the age of Imperialism. At least it was char-acterized as such by contemporary commentators such as Lenin, who usedthe division of China into spheres of inuence by foreign capitalists as theexample of Capitalist Imperialism par excellence .42

Although being under the nominal control of the Chinese Railway Com-mission, virtually all of China’s railways constructed after 1895 werenanced by foreign debt issues underwritten by European-led investment

banking syndicates, which obtained right of way, property concessions, andpromises of repayment from the Chinese Imperial government. Under thecontrol of the bankers who nanced the loans, Chinese railways wereconstructed, owned, and operated by managers designated by the nancialconsortium. Certainly the most contentious feature of these loans was theirprovision for extra-territorial rights, which in essence ‘means the substitu-tion of the court procedure of a creditor country for the business practicesof the debtor country’.43

41 Ma, ‘On the use of loans to build railroads’.42 Lenin, Imperialism .43 Adams, H. C. 1920, ‘International supervision over foreign investments’.





The Chinese Eastern Railway was a prime example of extra-territoriality.The Russo-Chinese bank issued a ve million tael loan in Russia in 1896to nance the construction of a railway across Manchuria, linking the Trans-Siberian Railway to Vladivostok. The railway and its right of way wereentirely administered and policed by Russian ofcials, who controlled thereceipts and disbursements. The line was, in effect, a little bit of Russianterritory within China’s borders, and it issued its own currency.44 Japanfollowed the same model with the loan for the 1917 South ManchurianRailway, which was secured upon the railway’s properties. The railwaybecame Japan’s rst territorial stake in China. A Belgian loan issue of 1897nanced the construction of the Lung-Tsing-U-Hai Railway and wassecured by the railway itself, with the property and rights of way owned bythe company.

Externally nanced, owned, operated, and policed railways representedan obvious threat to Chinese sovereignty, an issue widely debated by con-temporary observers. For example, economist A. P. Winston, writing in theQuarterly Journal of Economics in 1916, was sharply critical of the foreigncompanies ‘monopolizing’ the nancing, construction, and control of Chi-nese railways.45 In contrast to Britain, France, Russia, Belgium, and Japan,the United States—for the most part—pursued an ‘Open-Door’ policy withrespect to China, based on the principle of equal access by all nations toChinese markets and resources, and the preservation of Chinese nationalsovereignty as opposed to its fragmentation and colonization by worldpowers.46 As a consequence, America generally opposed contracts that sug-gested preferential access to rail concessions. One exception to this policy,and perhaps the most important and spectacular example of Chinese rail-ways concessions, is the Hukuang Loan.

The Hukuang Loan is important in Chinese history for many reasons.The story of the loan illustrates the struggle between provincial and nationalpowers in the late Qing period. It also illustrates how Chinese capitalistssought to fund development internally. Finally, it reveals the political con-sequences of foreign concessions—the Hukuang Loan has been interpretedby some historians as the spark that led to the 1911 revolution and the endof 3,000 years of dynastic rule.

Hukuang is a region in south-central China, which includes the provincesof Hunan, Hubei, and part of Szechuan. In 1905, a consortium of Hukuanggentry, ofcials, and businessmen, with the blessing and participation of theprovincial governor, Chang Chih-Tung ( ), obtained a concession todevelop a domestically nanced railway line through Hukuang. It came afterthe successful provincial lobbying for compensated cancellation of the devel-opment rights of J. P. Morgan’s American China Development Company,

44 Dreyer, China at war , p. 29.45 Winston, ‘Chinese nance under the Republic’.46 Scholes and Scholes, Foreign policies of the Taft administration a , contains a detailed description of the US–China policy.





which actually fronted for a Belgian rail-development rm seeking to con-struct a line from Canton to Hankow. The line was a key route throughHukuang, linking a commercial port to the cross-roads of Chinese rail linesin the interior, and the cancellation of the foreign concession opened thedoor for domestic development.After the cancellation of the American concession, the Hukuang gentrytook an active role in gaining concessions. For example, the Canton– Hankow line was divided between two domestic concessionaires, one inKwangtung (Guangdong) and the other in Hunan. The experience of theKwangtung company illustrates some of the problems of corporate gover-nance experienced in the emerging Chinese legal framework. The rm wasamong the most successful of Chinese companies at capital subscription.All 44 million taels of the required capital were raised, much of this fromwealthy overseas Chinese investors. However, the domestic source of invest-ment was important as well. An initial price of one tael per share attractedwidespread popular domestic interest. An account in the North China Herald is particularly graphic in its description of investor enthusiasm for buyingrailway shares:

Not only are the monied classes rushing to buy shares, but the poorest of thepoor and even those who are supposed of have no cash to spare and hardlyenough to keep body and soul together are buying up one or more shares.47

Many of the shares were sold to the public through provincial charitableinstitutions, which often failed to register them in the name of the subscrib-

ers and instead retained the voting rights for themselves. With the help of these same organizations, and over the violent protests of the shareholders,the president of the Canton Chamber of Commerce took control of thecompany and precipitated further proxy contests and the ultimate interven-tion by provincial authorities. An audit of the company books in 1909revealed massive embezzlement. The management had falsied the booksby inating expenses, and had been purchasing equipment at high pricesthrough suspicious transactions.48

The movement after the turn of the century towards domestic nancingis often interpreted as a grassroots nationalistic response to the threat of

external nancing and control of Chinese infrastructure by foreign concerns.However, this characterization may be too simplistic. The gentry in Chinaat this time was an educated social elite who served a political role as localintermediaries between the imperial government and the populace, andexerted considerable local control and inuence over commercial affairs.Sun observed that early in the history of Chinese railway development:

Chinese railways often suffered from forces in the environment that tended toobstruct their normal operations. These obstructions came from different

47 Quoted in Lee, En-han , China’s quest for railway autonomy , p. 104.48 Account taken from Lee, Ibid., p. 104.





quarters. It was sometimes the local gentry in the early years of railway history:over 3,000 taels were paid in 1906 to a number of local inuential personagesalong the route of the P’ing hsiang-Hsiangt’an line, for example, as salary for‘protecting the road,’ in permission to lay the track through their districts.49

In his study of the Changsha Rice Riot of 1910, Rosenbaum nds thatthe gentry played a key role in using xenophobic sentiment about foreignrailroad development to turn the populace against the Manchu government.Indeed, Chang Chih-t’ung ( ) had turned down a proposal by a localmerchant guild to fund a proposed rail line in Hunan in favour of a gentry-dominated, quasi-governmental rm. According to Rosenbaum it suffereda similar fate to the Kwangdong company:

The operations in 1907–1908 were an unmitigated disaster. Virtually no powerwas assigned to shareholders, a number of whom apparently were merchants. In

late 1907 large numbers of private shares were withdrawn. Those excluded froma voice in management continued to protest, although it is not clear whethertheir main target was the incompetent gentry management or the government’srefusal to reorganize the company into a purely private venture.50

In sum, the experience of the domestic rail companies that obtained theconcessions in place of the American China Development Company wasunfortunate. The formation of domestic companies for rail development hadthe potential as a catalyst for personal investing in domestic ventures. Theactive participation of overseas Chinese in these ventures suggests that thedomestic rms might even have had the potential for attracting international

capital of a sort. It was all the more unfortunate that, despite the laudablegoals of self-nanced railway development, and the willingness of Chinesespeculators great and small to invest their savings in such ventures, thefundamental structure of corporate governance was not yet in place inChina. A combination of poor corporate governance and an entrenchedgentry that operated under a system of prestige and inuence made itdifcult to compete with foreign companies incorporated abroad undergovernance systems clearly understood by well-diversied investors.

Ultimately, despite nationalistic sentiments and powerful local interestgroups, Chang brokered sole British nancing for the railway—a move that

threatened to tip the delicate balance of foreign inuence in the Yangtzeregion.51 To combat British advantage, Germany, France, and nally theUS, demanded participation in the loan, the construction, and the controlof the railway. The nal result was a £6 million sterling loan shared by thefour powers, with the rights to develop separate sections of track carefullynegotiated among the participants. In a move that doubtless infuriated thegentry, Chang then closed the deal by persuading the Qing government tonationalize all domestic railway development on the grounds that delays

49 Sun, ‘Pattern of railway development’.50 Rosenbaum, ‘Gentry power’.51 Scholes and Scholes, Foreign policies of the Taft Administration , p. 127.





caused by the undercapitalization of domestic developers were impedingprogress. The expropriation of domestic shareholder rights was thuscomplete.

The 5 per cent, 50-year Hukuang Railway Sinking Fund Gold Loan wassigned in 1911 with the Imperial seal of the Minister of Posts and Commu-nications. The bond also bears the details of the security for the loan.Besides the net revenues of the railroad, the loan pledged as security: (1)the Hubei general likin of $2 million taels per year; (2) the Hubei additionalsalt tax for river defence of 400,000 taels per year; (3) a new, additional salttax established in 1908 (during the period of loan negotiation) of 300 taelsper year; (4) the Hubei collection of Hukuang inter-provincial taxes onimported rice of 250 taels per year; (5) Hunan general likin revenues of 2 million taels per year; and (6) the Hunan salt commissioner’s treasuryallotment of regular salt likin of 250,000 taels per year. Presumably, thiscollateral was vital to pay bondholders during the railroad constructionperiod. While the people of Hukuang were getting a modern railroad, theywere paying for it with the original salt taxes, new salt taxes, rice taxes, andtaxes on inter-provincial transfers, which presumably would increase withthe extension of the rail system. In addition, the development rights wereeffectively expropriated from local business interests and handed toforeigners by the provincial governor, acting in concert with the Imperialgovernment.

Kuhlmann found a particularly interesting account of the consequencesof the Hukuang loan. Quoting Chang Kia Ngau’s China’s struggle for

railroad development , he said:When the new policy of nationalization was made known the people raised astorm of opposition. Popular indignation was once more aroused to an extra-ordinary extent. It was especially intense in Szechuan, where strikes took placein the markets and schools. The provincial legislature was thrown into turmoilby the arrest of its speaker and deputy speaker. The people of the provincialcapital Chengdu marched en masse to the ofcial residence of the viceroy, andsentries red into the crowd, killing scores of people. This enraged the peoplestill more, and they refused to pay any more taxes and levies. By the middle of

July many thousands of persons surrounded and attacked the city of Chengdu,

being supported by the neighboring townships and villages. The coincidence of the outbreak of the revolution in Wuchang, opposite Hankow on the YangtseRiver [in Hubei Province]—greatly heartened the people of Szechuan. To sup-press the movement, the Imperial Government sent its well-equipped soldiersunder the command of General Tun-Fang ( ) to Szechuan, but the generalwas assassinated on his way, and the Viceroy of Szechuan met with the samefate. On September 10, 1911, the people of Szechuan declared themselvesindependent of the old regime and in sympathy with the revolutionary cause.On October 16, Prince Regent Chun proclaimed on behalf of the boy emperorhis abdication from the throne.52

52 Quoted in Kuhlmann, China’s foreign debt , p. 73.





While this account conates a number of riots and unrest in the periodjust before the revolution, a careful study of one of the most important riotsover Chinese railroad rights during this period—the Changsha Rice Riot of 1910—clearly implicates the local gentry as fomenters of resistance againstthe Qing government.53 With the Qing government siding with foreigninvestors in nancing Chinese development, the rights recovery movementturned against the Manchu rulers as well as foreign commercial interests.

The Hukuang Railway Loan was the last external debt of the ChineseImperial government, and it defaulted in the 1920s. China as a nationcontinued to borrow for railway development until late into the 1930s—railloans appear in 1934, 1935, 1936, and 1937. The only signicant gaps inrailroad bond issuance in the database are 1926 and 1927 (coinciding withthe northern military campaign of Chiang Kai-shek ( ) to unifyChina), and the rst four years of the Great Depression. With these excep-tions, Chinese railway nancing and development by foreign investors con-tinued in the face of civil war and eventually foreign occupation.

V DIVERSIFICATION

The International Context

Taüber’s 1911 survey of the world’s stock markets provides a useful over-view of the world of international investing before the First World War. Hedescribes bourses in more than 30 countries around the world available tothe German investor.54 Lowenfeld, an English author, in his 1909 book,Investment: an exact science , lists 40 countries with stock markets open toBritish investors.55 In fact, for British investors of this era, many of thesemarkets were available by trading on the London Stock Exchange itself— either by purchasing stocks and shares in foreign rms listed in London, orby purchasing the securities of British rms with concessions to operateoverseas.56 Lowenfeld’s analysis is particularly interesting, because itproposes an international diversication strategy based on ‘The Geograph-ical Distribution of Capital’. With numerous graphs showing the un-correlated movement of securities from various countries, he argues thatsuperior investment performance is obtained by spreading capital in equal

53 Rosembaum, ‘Gentry power’.54 These include Germany, Austria, Switzerland, the Netherlands, Norway, Sweden, Denmark,

Russia, Serbia, Greece, Romania, Turkey, Italy, Spain, Portugal, Belgium, France, Great Britain,Ireland, New York, Haiti, Dominican Republic, Ecuador, Brazil, Peru, Argentina, Uruguay, Chile,Columbia, Venezuela, Japan, South Africa, Natal, Egypt, and Australia. Taüber, Die Börsen der Welt .

55 Great Britain, India, Canada, Australia, Tasmania, New Zealand, Singapore (Straits Settlements),Belgium, Denmark, Germany, Holland, Norway, Russia, Sweden, Switzerland, Austria, Bulgaria,France, Greece, Italy, Hungary, Portugal, Romania, Spain, Serbia, Turkey, Japan (Tokyo and Yoko-hama), China (Shanghai and Hong Kong), Cape Colony, Natal, Transvaal, Egypt, New York, Mexico,Argentine, Brazil, Chile, Peru, and Uruguay. Lowenfeld, Investment .

56 A detailed description of the development of the investment opportunity set of British investors inthe rst half of the nineteenth century is contained in Platt, ‘British portfolio investment’.





proportion across a number of geographical sectors and carefully re-balancing back to these proportions on a regular basis:

It is signicant to see how entirely all the rest of the Geographically Distributed

stocks differ in their price movements from the British stock. It is this individu-ality of movement on the part of each security, included in a well-distributedInvestment List, which ensures the rst great essential of successful investment,namely, Capital Stability.57

This geographical diversication strategy was apparently a popular one withBritish and other European investors around the turn of the century. Europewas the world’s major exporter of capital to the world until the end of theFirst World War I, when the lending role of the United States and Japangrew in prominence.58

Edelstein ranked Great Britain, France, and Germany as the leading

creditor nations in terms of capital outows for most ve-year periods from1881 to 1913, with Russia, Norway, Australia, South Africa, and the UnitedStates also occasionally being net capital exporters in this period.59 Applyingthe capital asset pricing model (CAPM) to indices of pre-First World Warforeign and domestic investment returns experienced by UK investors,Edelstein demonstrates that the realized return to foreign investments wascommensurate with the systematic risks to which they were exposed.60

Edelstein’s results suggest that investors in Great Britain were effectivelypricing both domestic and overseas assets as if they held geographicallydiversied portfolios. Two recent studies have extended Edelstein’s research

and taken up the question of whether the aggregate portfolio weights of domestic versus international securities listed on the London Exchange inthe late nineteenth and early twentieth centuries were in any sense ‘optimal’for investors. Chabot and Kurtz61 and Goetzmann and Ukhov 62 use amodern portfolio approach to study the capital weights implied by pre-FirstWorld War British investors seeking to construct portfolios with the highestexpected return for a given risk level. The implied weights from applicationof quantitative models match fairly well the relative magnitude of foreignversus domestic listings on the exchange.

In each of these studies, asset prices and quantities reect an equilib-

rium consistent with the ability and desire to reduce risk through interna-tional investing. On the other hand, they are silent on the implications of one set of investors being diversied and another set of investors beingundiversied.

57 Lowenfeld, Investment , p. 49.58 Lewis’ study of international capital ows, Foreign investment problems , suggests that by 1938, the

US, UK, Holland, Belgium, Sweden, Italy, and Japan were the only capital exporting countries.59 Edelstein, Overseas investment , p. 271.60 Lewis, Foreign investment problems .61 Chabot and Kurz, ‘That’s where the money was’.62 Goetzmann and Ukhov, ‘ “British” investment overseas’.





In appendix II we argue that, when one group of investors is diversiedand another is not, it will imply a difference in required rates of return oncapital. In particular, a country with an underdeveloped capital market thatdoes not afford sufcient investor diversication, and limits external invest-ment, is likely to have high required rates of return on capital. We nd that,in this setting, diversied investors entering this market have a comparativeadvantage—their required rate of return on the same investment project ispotentially much lower than that of a domestic competitor. Put simply, ina head-to-head competition between foreign and Chinese capitalists forcommercial projects, foreigners could pay more.

This point is not self-evident from current asset pricing models such asCAPM, nor is it true for all ranges of foreign and domestic capital and riskpreferences. It requires the specication of an economic model that containsthe unconstrained, borderless CAPM as a special case. We develop thismodel formally in appendix II. Our analysis indicates that when one set of investors is able to diversify their portfolios through international invest-ments and another set is constrained to hold assets in only one country, thecost of capital is potentially affected. The degree to which the cost of capitalis lower for the foreign investors is dependent upon the degree to whichreturns to domestic investments are correlated to non-domestic invest-ments, as well as the relative volatility of the domestic versus the interna-tional index.63 In the China case, under the assumption that domesticinvestors have no means to international diversication, the degree to whichthe domestic cost of capital is higher than the international cost of capitalfor the same project depends crucially on whether the returns to the projectare highly correlated to other China-related projects. This would predict,for example, that returns to investment in railroads in China are morecorrelated to returns to investment in other Chinese enterprises, as opposedto rail investments in other countries. This in fact is an empirical questionto address.

There is some historical evidence that the required rates of return onforeign-nanced capital projects during this era were less than the rates of return to externally nanced infrastructure projects. Pomeranz citesevidence that the ‘prime rate’ charged to the government and leading

merchants by Tianjin banks and pawnshops in the late eighteenth centurywas between 10 and 12 per cent.64 Broader surveys of Chinese interest ratesin the early twentieth-century document annualized median interest rateson agricultural loans of 30 per cent, and for business ventures, requiredloan rates of 7–8 per cent plus a share in equity prots.65 Lee notes thatcapital opportunities outside of the traditional investment in real estate and

63 Related papers on the effects of liberalization on the domestic cost of capital include Stulz,‘Globalization of equity markets and the cost of capital’, and Trzcinka and Ukhov, ‘Financial globaliza-tion and risk sharing’.

64 Pomeranz, Great divergence , p. 178.65 Huenemann, Dragon and the iron horse , pp. 128–9.





pawn shops also yielded higher returns—Chinese capitalists were activelyinvesting in export-oriented industries such as textile and food processing.Lending to the government and buying railroad bonds and shares werecomparatively unattractive places for capital.66 Unfortunately, there is nosystematic survey of rates of return on investments in China at this time,because there was no large-scale public capital market. What is clear isthat it was hard to attract domestic investment. The Chinese were notmajor investors in government loans or domestic development projects inthe late nineteenth and early twentieth centuries—a simple economic expla-nation for this is that there were superior risk-adjusted alternative uses of capital.

The dramatic export of capital from Europe, and the active practice of international portfolio diversication must surely have had a signicanteffect on the markets into which Europe’s capital owed. Stulz argues thatthe modern trend towards globalization has reduced the global cost of capital through the diversication effect. Motivated by similar interests,67

Bekaert68 and Beckaert and Lundblad69 carefully examine the shifts in costof capital and market risks in emerging markets as they integrate into theworld capital market. The general conclusions reached by these and otherresearchers studying world capital market liberalizations is that the cost of capital drops as outside investors are given access to local investmentprojects. There are obviously positive features of this drop in the cost of capital—capital projects previously unattractive because of low rates of return become attractive. Lower interest rates can be an extraordinary boomto the economy. Hou and Huenemann both document the dramatic expan-sion of the Chinese economy resulting from foreign investment in the latenineteenth century. 70 However, the other side of the coin is that, in thecompetition for control of domestic assets, the undiversied local investoris at a relative disadvantage.

Competition between domestic and international investors is the themeof Rajan and Zingales.71 They point out that, despite the obvious efcienciesof international nancing, domestic investors may strongly resist competi-tion. The motive for such resistance is, presumably, the additional benetsof inuence attached to rights of control enjoyed by local management.

When these rights are challenged without compensation, and the powers of local interests are not governed by strict rule of law, the consequences arepotentially explosive. Our model suggests that differential domestic andforeign discount rates for projects, because of the differences in portfolio

66 Lee, China’s quest for railway autonomy , p. 133.67 Stulz, ‘Globalization of equity markets’.68 Bekaert, ‘Time varying world market integration’.69 Bekaert, G. and Lundblad, C., ‘Does nancial liberalization spur growth’, NBER working paper,

2000.70 Hou, Foreign investment ; Huenemann, Dragon and the iron horse .71 Rajan, R. and Zingales, L., ‘The great reversals: the politics of nancial development in the 20thcentury’, NBER, working paper 8178 (2001).





diversication between international and domestic investors, may well haveexacerbated these conicts, and contributed, in part, to strains that led tothe political change in China in the twentieth century.

Corporate Governance and Investor Protection

The second factor in the trajectory of Chinese nancial history is the relativeineffectiveness of legal protection and governance structures for enterprisein China, compared to the extraordinary protections negotiated by foreigninvestors. By the late nineteenth century, many European nations haddeveloped laws and norms for the denition and governance of businessenterprise, as well as legal protection of the rights of security holders—bothholders of corporate obligations and holders of sovereign debt. In Asia,

Japan moved quickly to adopt nancial markets and structures patternedafter European models, but major steps in this direction were not taken inChina until the early twentieth century. Even then, stake-holders of variouskinds—from local gentry to provincial government ofcials—wielded con-siderable power and inuence over commercial enterprise. Virtually all themajor rail and mining rms operating in China before the twentieth centurywere incorporated in Europe, not China. These foreign concessionairesextracted guarantees from the Chinese Imperial Government, such as directcontrol over collection of revenues, the right of property seizure in case of default, the right to source their own materials, and exclusivity againstdomestic or foreign competition. In some cases, concessions included near-complete autonomy from Chinese law and taxation, and freedom from localcompetition—even the right in some cases to issue a separate currency.While such deals may have lowered the risk to foreign investors, their effectwas to elevate the protection enjoyed by foreign rms above Chinese rms.

China was not the only country that relied on foreign capital for industrialdevelopment during this era. There are obvious parallels to nancing inNorth Africa, South America, and even the United States before the FirstWorld War by European investors, and in many of these circumstances,foreign investors obtained signicant concessions. An interesting example— right in Europe itself—is the case of Spain. Simpson points out that Spain

turned to foreign investment in the second half of the nineteenth centuryfor nancing of large sectors of the economy.72 Spain itself had an activedomestic capital market for shares by 1850, but it increasingly relied onforeign markets through the late nineteenth and early twentieth centuriesfor infrastructure development as well as for the development of nancialinstitutions, mining operations, and colonial development. Some specicexamples of external company nancing are instructive.

The Spanish-incorporated Compañia Anonima de los Ferro-Carrile ÁPonferrada ó del Noroeste de España oated ve-year bonds on the Madrid

72 Simpson, ‘Economic development in Spain’.





and Paris markets in 1862. The Compañia Anonima de los Ferro-CarrilesSevilla-Jerz-Cadiz was nanced by a simultaneous share issue in 1867 inMadrid and Paris. The 1869 Parisian loan issue by the Companie Privilégiéedes Ports, Debarcadère Maritime et Terrains de Cadix bore certain similar-ities to later Chinese railway loans in that the French company secured anexclusive concession from the Spanish government for the municipal jetty,sea wall, and 7,000 metres of shore property for development. The loan wasretired through the periodic sale of land from the concession and theretirement of bonds drawn by lottery. The bonds were explicitly secured bythe Spanish territorial concession. The effectiveness of these and relatedconcessions is debatable.73 Despite land and development rights conces-sions, there is little evidence that the crown extended the same kind of legalrights of extra-territoriality to foreign investors that the Chinese Imperialgovernment did in the late nineteenth century. In their detailed study of foreign investment in Spain, Harvey and Taylor conclude that mining inSpain was a risky business in which most rms failed and only one in veventures was protable.74 Investors in Spanish mining had to bear the riskof their ventures without a pledge of additional security or a claim on taxrevenues as was, for example, the case of Hukuang Railways bond in China.

The protections for foreign investors in Chinese government bonds wereeven more extraordinary than protections extended to shareholders in pri-vate enterprises. Beginning in the mid-nineteenth century, the Chinesemaritime customs revenues were collected and controlled by the British.Payments on foreign debt could thus be taken directly from customs reve-nues before going to the treasury—effectively giving foreign bondholderssenior claim to China’s primary source of revenue. While this undoubtedlylowered the Chinese Government’s cost of capital by reducing the proba-bility of default, it also limited the scal options of the Chinese state, andput her purse-strings in the hands of a foreign power. Protection grantedto foreign investor interests emerged from the economic pressure and aspi-ration to lower the cost of capital. The protection was also constantlyreinforced through diplomatic channels.75

Foreign control of the Chinese maritime customs, and the commercialconcessions extended to foreigners may have served at rst to control

foreign investor risks, but they had obvious political repercussions. Indeed,they were regarded then, as now, as dangerous, intermediate steps towardsthe foreign colonialization of China.76 Foreign control of China’s transpor-tation system and trade revenues put the Imperial government at the mercyof political attempts to press territorial advantage. The great powers: Britain,

73 Simpson, Ibid., p. 352. See also Harrison, ‘Economic history of Spain’, p. 83.74 Harvey and Taylor, ‘Mineral wealth and economic development’, p. 199.75 A detailed study of actions of the British Foreign Ofce on behalf of British commercial and

nancial interests in China is contained in McLean, ‘Commerce, nance, and British diplomatic supportin China’. For a comparative perspective and a discussion of Turkey and the Persian Empire, seeMcLean, ‘Finance and “informal empire” ’.76 See, for example, Winston, ‘Chinese nance under the Republic’.





France, Germany, Russia, and Japan all had imperialistic designs on Chi-nese territory. While investor benets may have been the original motivationfor commercial and governmental concessions, following the Sino-JapaneseWar in 1895, the great powers vied with each other to nance Chinese raildevelopment—regardless of whether there was demand by investors for theloans. China was chronically in debt in the early twentieth century as aresult of indemnities settled on her by these same powers—a condition thatgave foreign nations more leverage in negotiations to expand their spheresof territorial inuence. The pressure of foreign powers on the Chinesegovernment together with the institutional imbalances between Chinesenancial markets and those of the developed world was an explosive com-bination. They nally led to the foreign ownership of productive capital, toforeign capitalists playing in China by their own rules, and to the pretextfor weakening of the state’s control over her own territory. In a series of cross-sectional studies of the world’s capital markets, LaPorta, López-de-Silanes, Shleifer, and Vishny (1997, 1999, 2000) show that protection of investor rights is a necessary condition for attracting capital. They arguethat the legal environment is one of the most important determinants of thesuccess of corporate capitalism in a country.77 Empirical evidence by theseauthors and others who have built upon their work shows that legal originis an important determinant of the protection of shareholder rights, whichin turn helps determine the size and functioning of the capital market,which ultimately determines the efciency of the allocation of capital toenterprise.78

What, then, determines the origin of the country’s legal system? Colo-nialism is obviously a major factor. Colonialism, for all of its known faults,can be thought of as an export mechanism for the legal framework from onecountry to the other. LaPorta et al. show that even when the governmentitself is no longer a colonial one, the legal framework may continue to pro-vide differential benets to private enterprise within the country.79 Pushingthis evidence a bit further, one can interpret a colonial world as one form of political-economic equilibrium in which investor-friendly legal systemsacross the world allow for increased efciency in capital allocation and theemergence of private enterprise. Of course, there is another side to this coin

when the issue of national sovereignty supercedes economic motives.

VI CONCLUSIONSometimes, nance plays a central role in the political development of nation states, both as an agent for the state’s formation and as an agent forthe state’s destruction. The story of China’s rst major encounter with the

77 LaPorta et al., López-de-Silanes, Shleifer, and Vishnay, ‘Legal determinants’, ‘Corporate owner-ship’, and ‘Investor protection’.

78 Wurgler, ‘Financial markets’.79 LaPorta et al., ‘Legal determinants’, ‘Corporate ownership’, and ‘Investor protection’.





launching international mutual funds that are accessible to Chinese savers.Although this means that some Chinese capital will be exported, it alsomeans that the domestic investor opportunity set will be equal to that of foreign savers, and as a consequence, Chinese investors will demand thesame rates of return as foreigners, and the marginal investors in Chineseventures will not necessarily be foreign.

The enthusiasm for share capitalism in China in the late nineteenth andearly twentieth centuries was tempered by the failures of corporate gover-nance. These failures were nothing special to China. Governance is a par-ticularly challenging problem for many countries in the world now as it washistorically. One interpretation of the unequal rights and concessions asso-ciated with foreign nance is that they were a means to control the risksassociated with emerging market investing. But the experience of China acentury ago suggests that investors needed protection against expropriationjust as much as foreigners needed it. Chinese capital markets today aredeveloping rapidly as Chinese nancial regulators are modernizing the legalframework for investment. One approach that might prevent the unequaltreatment of foreign and domestic interests is to concentrate efforts toprotect minority shareholder rights for domestic shares, and to test theinstitutional structures for such things as contests for corporate control,public accounting, and disclosure and insider trading laws in the context of the domestic share market.

There are also important lessons for the international investment com-munity interested in supporting China’s capital market development.Although much of the early political abuse of the international nancialsystem has been corrected with the development of international lendinginstitutions such as the World Bank, there is still the potential, in thesedynamic times, for asymmetric competition between domestic and interna-tional nancing. While it may be tempting to suggest that the most efcient,low cost means of nancing Chinese economic development is throughforeign rather than domestic markets, the international community shouldrealize the serious problems that arise from domestic stakeholders who areexcluded from participation in the prots of such nancing. Currently, thedual-listing structure of the Chinese equity market is an effective means to

mobilize and in some sense to nurture domestic commitment to Chinesecapital markets. The international community should do what it can tosupport future efforts to protect this re-emergence of Chinese investing.This may mean accepting a gradual process of experimentation with marketregulation and share dissemination, as well as a gradual reduction in thedifferences between foreign and domestic shares.

It has become fashionable for both the left and the right to criticize thecurrent global nancial system—either because it distorts risk-takingincentives by governments expecting a bail-out, or because it nancesprojects that environmental and political groups nd objectionable. These

critics should consider the alternative. One hundred years ago, China’s rst





encounter with globalization created political conditions that led ultimatelyto a rejection of the international nancial system. As the world nowapproaches the degree of global market integration that it enjoyed at theend of the nineteenth century, the disparity in international capital marketdevelopment creates potential problems similar to those faced in the past.International nancial architects should be wary of suggestions that a newequilibrium can be quickly and easily achieved without consideration of thehuman and political consequences.

Besides the immediate interpretations of Chinese nancial history, wedraw one additional implication from our current study. Chinese capitalmarkets ultimately disappeared because of internal rather than externalforces. A simplistic view of this is that, in China, the Leninist interpretationof capitalistic imperialism eventually won out. Although current empiri-cal research shows that legal protection of external shareholder rights— particularly in the face of strong stakeholder inuences—may ultimately bebest for economic development, there are large gaps in the empirical record.China and Russia both withdrew from the world capital markets as a resultof Marxist revolutions. Thus, a longer historical view reveals these gaps tobe endogenous. The repudiation and elimination of both internal and exter-nal nancial claims may have resulted at least as much from the success of legal imperialism as from its failure. That is, the expansion and articulationof property rights of external owners that is so important to the success of corporate enterprise also sometimes alienates local stakeholders from theproductive sector.

China has enjoyed impressive economic growth in the past two decadesand is now contributing to a large proportion of global economic growth.Having successfully introduced foreign direct investment, established itsown domestic stock market, and become a member of the World TradeOrganization, it would seem to be well on its way to integration into theglobal marketplace for goods and capital. Nevertheless, the two issuesaddressed in this article, the equal protection of property rights betweendomestic and foreign investors, and the under-diversication of domesticinvestors, still echo the Chinese situation of a century ago. Given thepotential for further integration versus the threat of reversal of recent gains,

the lessons of history at this crucial juncture may be doubly important.Yale UniversityIndiana UniversityUniversity of California, Davis

Date submitted 26 February 2004Revised version submitted 1 April 2005

Accepted 24 February 2006

DOI: 10.1111/j.1468-0289.2007.00376.x





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b o n d

3 , 3 3 3 , 0 0 0

8

t a e l

w a r

m a r i t i m e c u s t o m s

H o n g

K o n g

L o n d o n

1 8 7 8

l o a n

2 , 3 3 3 , 3 0 0

1 0

t a e l

w a r

1 8 7 8

b o n d

1 , 6 6 7 , 0 0 0

5 . 5

t a e l

n o n e

B e r l i n

1 8 7 9

b o n d

7

t a e l

n o n e

H o n g

K o n g

1 8 8 1

l o a n

2 , 6 6 7 , 7 0 0

8

t a e l

w a r

1 8 8 3

l o a n

6 6 7 , 7 0 0

t a e l

w a r

1 8 8 3

l o a n

6 6 7 , 7 0 0

t a e l

w a r

1 8 8 4

l o a n

6 6 7 , 0 0 0

8

t a e l

w a r

1 8 8 4

l o a n

6 6 7 , 0 0 0

8

t a e l

w a r

1 8 8 4

l o a n

s t e r l i n g

a r m o r y

1 8 8 5

l o a n

2 , 6 6 7 , 7 0 0

t a e l

w a r

1 8 8 5

b o n d

6 , 5 4 3 , 0 0 0

7

s t e r l i n g

w a r


H o n g

K o n g

L o n d o n

1 8 8 5

l o a n

6 , 5 2 2 , 0 0 0

6

s t e r l i n g

r a i l


L o n d o n

1 8 8 5

b o n d

3 , 4 0 9 , 0 0 0

6

s t e r l i n g

n o n e


H o n g

K o n g

L o n d o n

1 8 8 6

l o a n

2 , 0 0 0 , 0 0 0

t a e l

w a r





1 8 8 6

b o n d

7 6 , 0 0 0

7

t a e l

n o n e

S h a n g h a i

1 8 8 7

l o a n

5 . 5

D M

n o n e

C h i h l i c u s t o m s

F r a n k f o r t B e r l i n

1 8 8 8

l o a n

7

t a e l

Y e l l o w

R i v e r

1 8 9 3

l o a n

t a e l

n o n e

1 8 9 4

b o n d

7 2 6 , 0 0 0

7

t a e l

w a r


S h a n g h a i H o n g

K o n g

A m s t e r d a m

H a m

b u r g

1 8 9 5

b o n d

4 , 3 4 7 , 0 0 0

6

s t e r l i n g

i n d e m n i t y


L o n d o n

1 8 9 5

b o n d

1 3 , 0 4 3 , 4 7 0

6

s t e r l i n g

i n d e m n i t y


L o n d o n

1 8 9 5

b o n d

4 , 3 4 7 , 0 0 0

6

s t e r l i n g

i n d e m n i t y


F r a n k f o r t B e r l i n

H a m

b u r g

1 8 9 5

b o n d

4 , 3 4 7 , 0 0 0

6

s t e r l i n g

i n d e m n i t y


L o n d o n

1 8 9 5

b o n d

6 8 , 7 8 2 , 0 0 0

4

g o l d

n o n e


P a r i s S t . P e t e r s b u r g

G e n e v a B r u s s e l s

A m s t e r d a m

F r a n k f o r t

1 8 9 6

b o n d

6 9 , 5 6 5 , 0 0 0

5

g o l d

i n d e m n i t y


L o n d o n

B e r l i n

1 8 9 6

b o n d

3 , 3 3 3 , 0 0 0

6

t a e l

r a i l

C h i n e s e E a s t e r n

R a i l w a y

S h a n g h a i L o n d o n

1 8 9 7

b o n d

1 9 , 5 6 5 , 2 1 7

4

s t e r l i n g

r a i l

L u n g -

T s i n g -

U - H

a i R a i l w a y

a n d l a n d

B r u s s e l s

1 8 9 8

b o n d

8 , 0 0 0 , 0 0 0

5

f r a n c

r a i l

C h e n g - T a i R a i l w a y

P a r i s

1 8 9 8

b o n d

6 9 , 5 6 5 , 0 0 0

4 . 5

g o l d

i n d e m n i t y

m a r i t i m e c u s t o m s , s a l t / l i k i n

r e v e n u e s , c u s t o m s

b o n d s

L o n d o n

B e r l i n

1 8 9 9

b o n d

1 0 , 0 0 0 , 0 0 0

5

s t e r l i n g

r a i l

C h i n e s e N o r t h e r n

R a i l w a y

L o n d o n

1 8 9 9

b o n d

2 2 , 5 0 0 , 0 0 0

5

f r a n c

r a i l

P e k i n g - H a n k o w r a i l r e v e n u e s

P a r i s G e n e v a

B r u s s e l s

A m s t e r d a m

1 9 0 0

b o n d

3 , 0 0 0 , 0 0 0

5

d o l l a r

r a i l

N e w

Y o r k

1 9 0 0

b o n d

1 , 1 2 1 , 7 3 9

5

s t e r l i n g

c a b l e

g o v e r n m e n t g u a r a n t e e

L o n d o n

1 9 0 1

l o a n

5

s t e r l i n g

c a b l e

1 9 0 1

b o n d

3 0 0 , 0 0 0 , 0 0 0

4

s t e r l i n g

i n d e m n i t y

m a r i t i m e c u s t o m

S h a n g h a i

1 9 0 3

b o n d

8 , 0 0 0 , 0 0 0

5

f r a n c

r a i l

r a i l w a y a n d

d i r e c t o b l i g a t i o n o f

g o v e r n m e n t

P a r i s

1 9 0 4

l o a n

1 4 , 7 7 2 , 7 0 0

5

s t e r l i n g

r a i l

e x i s t i n g a n d

f u t u r e r a i l w a y

L o n d o n

1 9 0 4

c e r t i c a t e s

2 0 , 4 5 4 , 5 0 0

s t e r l i n g

r a i l

1 9 0 4

b o n d

s t e r l i n g

r a i l

1 9 0 4

b o n d

d o l l a r

w a r

1 9 0 5

b o n d

y e n

w a r

1 9 0 5

l o a n

4 , 4 4 4 , 0 0 0

5

s t e r l i n g

i n d e m n i t y

m a r i t i m e c u s t o m s a n d p r o v i n c i a l

r e v e n u e s

L o n d o n

B e r l i n

1 9 0 5

4 , 8 8 8 , 8 0 0

s t e r l i n g

r a i l

o p i u m r e v e n u e s a n d

i n t e r n a l

r e v e n u e b o n d s

L o n d o n

1 9 0 5

l o a n

8 , 2 0 0 , 0 0 0

5

f r a n c

r a i l

r a i l w a y

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e








1 9 0 5

l o a n

5

s t e r l i n g

r a i l

e x i s t i n g r a i l w a y a n d

i t s r e v e n u e

L o n d o n

1 9 0 6

b o n d

d o l l a r

w a r

1 9 0 6

l o a n

4

s t e r l i n g

r a i l

1 9 0 7

l o a n

4 0 0 , 0 0 0

y e n

r a i l

1 9 0 7

b o n d

6 , 5 2 1 , 7 0 0

5

s t e r l i n g

r a i l

r a i l w a y

L o n d o n

1 9 0 7

4 , 7 8 2 , 6 0 0

4 . 5

s t e r l i n g

r a i l

C a n t o n -

H a n k o w r a i l w a y a n d

i t s

r e v e n u e s

1 9 0 8

b o n d

6 , 5 2 1 , 0 0 0

5

s t e r l i n g

r a i l

d i r e c t o b l i g a t i o n o f g o v e r n m e n t ,

r a i l w a y

1 9 0 8

1 , 0 7 5 , 0 0 0

5

y e n

r a i l

K i r i n - C h a n g c h u n

- r a i l w a y

T o k y o

1 9 0 8

b o n d

2 3 , 5 8 5 , 0 0 0

5

s t e r l i n g

r a i l

r a i l w a y

L o n d o n

B e r l i n

1 9 0 9

c e r t .

C h i n e s e

g o l d d o l l a r

w a r

1 9 0 9

l o a n

2 2 , 7 2 7 , 2 7 0

5 ( 4 . 5 )

s t e r l i n g

r a i l

1 9 0 9

l o a n

5 ( 7 )

s t e r l i n g

r e p a y

d e b t s

p r o v i n c i a l l i k i n r e v e n u e s ,

d i r e c t

o b l i g a t i o n o f g o v e r n m e n t

1 9 0 9

l o a n

1 6 0 , 0 0 0

5

y e n

r a i l

H s i n -

F e n g R a i l w a y

T o k y o

1 9 1 0

l o a n

7

t a e l

l o c a l

g u a r a n t e e o f t h e c e n t r a l g o v e r n m e n t

1 9 1 0

l o a n

7

t a e l

l o c a l

K i a n g n a n s a l t r e v e n u e s

1 9 1 0

l o a n

1 2 , 7 6 6 , 0 0 0

5

s t e r l i n g

r a i l

r a i l w a y a n d p r o v

i n c i a l r e v e n u e

L o n d o n

B e r l i n

1 9 1 0

l o a n

2 , 8 8 8 , 5 1 0

5

s t e r l i n g

r a i l

1 9 1 1

l o a n

5 , 0 0 0 , 0 0 0

5

y e n

n o n e

P e k i n g - H a n k o w r a i l w a y r e v e n u e

1 9 1 1

l o a n

5 , 0 0 0 , 0 0 0

5

y e n

r a i l

r a i l w a y a n d r e v e n u e o f K

i a n g s u

P r o v i n c e

1 9 1 1

l o a n

7

t a e l

l o c a l

t h i r d c h a r g e o n t

h e i c h a n g s a l t

r e v e n u e s


P a r i s

B e r l i n

N e w

Y o r k

1 9 1 1

l o a n

7

t a e l

l o c a l

r s t c h a r g e o n l i k

i n r e v e n u e s o f

K w a n g -

T u n g

1 9 1 1

l o a n

2 , 8 8 5 , 0 0 0

5

s t e r l i n g

a r m o r y

s a l t t a x e s ,

d i r e c t o b l i g a t i o n o f

g o v e r n m e n t

1 9 1 1

l o a n

3 9 , 2 1 6 , 0 0 0

5

s t e r l i n g

r a i l

r e v e n u e o n g e n e r a l r e v e n u e

f o r m

H u n a n a n d

H u p e h

P r o v i n c e

1 9 1 2

l o a n

1 , 5 0 0 , 0 0 0

8

y e n

r a i l

r e v e n u e s a n d s t o c k o f K

i a n g s i

r a i l w a y

T o k y o

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e




A P P E N D I X I : C o n t i n u e d





1 9 1 2

l o a n

1 , 0 0 0 , 0 0 0

8

y e n

1 9 1 2

l o a n

1 0 , 7 1 4 , 0 0 0

s t e r l i n g

r e p a y

d e b t s

1 9 1 2

l o a n

1 , 6 0 7 , 1 0 0

6

s t e r l i n g

r a i l

1 9 1 2

l o a n

7

D M

l o c a l

s i l k a n d

l i k i n r e v e n u e s

1 9 1 2

b o n d

8

D M

l o c a l

c e n t r a l g o v e r n m e n t g u a r a n t e e

1 9 1 2

b o n d

8

t a e l

T r e a s u r y

t a x e s o f a g r i c u l t u r a l p r o d u c t s a n d

s u p p l e m e n t a r y c u s t o m s r e v e n u e s

1 9 1 2

b o n d

6

t a e l

T r e a s u r y

S h a n g h a i

1 9 1 2

l o a n

3 5 , 0 8 7 , 7 0 0

5

s t e r l i n g

r e p a y

d e b t s

s u r p l u s o f s a l t g a

b e l l e a n d o t h e r

g o v e r n m e n t s o u r c e s

L o n d o n

1 9 1 2

l o a n

5

D M

a r m o r y


1 9 1 3

l o a n

1 5 , 6 8 6 , 0 0 0

5

s t e r l i n g

r a i l

L u n g -

T s i n g -

U - H

a i R a i l w a y

P a r i s B r u s s e

l s

1 9 1 3

l o a n

1 , 7 6 5 , 0 0 0

5

s t e r l i n g

n o n e

t a x o n t r a n s f e r o f p r o p e r t y a n d t i t l e

d e e d s

B r u s s e l s

1 9 1 3

l o a n

1 7 , 6 5 5 , 0 0 0

5 ( 6 )

s t e r l i n g

r a i l

1 9 1 3

l o a n

1 9 , 6 0 8 , 0 0 0

5 . 5

s t e r l i n g

r a i l

1 9 1 3

l o a n

3 , 0 1 9 , 6 0 0

6

s t e r l i n g

r a i l

1 9 1 3

l o a n

9 8 , 0 3 9 , 2 0 0

5

s t e r l i n g

r e p a y

d e b t s

L o n d o n

P a r i s S t .

P e t e r s b u r g

B r u s s e l s

T o k y o

1 9 1 3

l o a n

4 , 7 0 6 , 0 0 0

6

s t e r l i n g

r e p a y

d e b t s

L o n d o n

1 9 1 3

l o a n

7 , 8 4 3 , 1 0 0

6

s t e r l i n g

n o n e

L o n d o n

1 9 1 4

l o a n

1 , 9 6 0 , 7 8 4

6

s t e r l i n g

n o n e

1 9 1 4

l o a n

2 8 , 8 6 4 , 0 0 0

5

f r a n c

g o v e r n m e n t

e x p e n s e s / r a i l w a y

i n d u s t r i a l e n t e r p r i s e s

i t w a s

i s s u e d

f o r , m u n i c i p a l t a x e s

P a r i s

1 9 1 4

l o a n

4 1 , 6 6 7 , 0 0 0

5

s t e r l i n g

r a i l

s e c u r e d u p o n a s e c o n d m o r t g a g e o n

t h e C h i a o k i a - T a y u a n -

f u r a i l w a y

L o n d o n

1 9 1 4

l o a n

1 , 5 6 2 , 0 0 0

6

s t e r l i n g

r e p a y

d e b t s

s u r p l u s p r o t s o f t h e

P e k i n g -

M u k d e n r a i l w a y


1 9 1 4

l o a n

1 9 , 2 3 0

5

f r a n c

r a i l

1 9 1 4

b o n d

8

m

T r e a s u r y

1 9 1 4

b o n d

3 , 7 4 5 , 4 5 5

5

s t e r l i n g

r a i l

1 9 1 5

l o a n

2 , 4 8 8 , 0 0 0

6

y e n

n o n e

m i n i n g c o n c e s s i o n s

i n H u n a n a n d

A n h w e i

1 9 1 5

b o n d

2 , 4 8 8 , 0 0 0

y e n

r a i l

r s t c h a r g e o n r a

i l w a y

1 9 1 5

b o n d

y e n

w a r

1 9 1 5

l o a n

7 ( 8 , 1 0 ) f r a n c

r e p a y

d e b t s

1 9 1 6

b o n d

1 , 1 5 0 , 0 0 0

8

d o l l a r

r a i l

1 9 1 6

b o n d

5 , 5 0 0 , 0 0 0

8

d o l l a r

T r e a s u r y

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e








1 9 1 6

l o a n

8

t a e l

1 9 1 6

l o a n

5 , 8 7 1 , 4 0 0

8

s t e r l i n g

r e p a y

d e b t s

1 9 1 6

l o a n

3 0 1 , 6 0 0

y e n

l o c a l

T o k y o

1 9 1 6

l o a n

1 , 0 1 0 , 0 0 0

y e n

i n d u s t r y

T o k y o

1 9 1 6

l o a n

3 0 1 , 6 0 0

y e n

i n d u s t r y

T o k y o

1 9 1 7

l o a n

5 0 5 , 0 0 0

y e n

i n d u s t r y

T o k y o

1 9 1 7

b o n d

1 , 0 1 0 , 0 0 0

6 . 5

y e n

l o c a l

T o k y o

1 9 1 7

c e r t i c a t e s ( ? )

2 , 5 6 4 , 0 0 0

7 . 5

y e n

r e p a y

d e b t s

b a n k s h a r e s a n d t r e a s u r y

b o n d s

T o k y o

1 9 1 7

l o a n

6 6 7 , 0 0 0

y e n

l o c a l / i n d u s t r y

f a c t o r y a n d

l o c a l g o v e r n m e n t

g u a r a n t e e

T o k y o

1 9 1 7

l o a n

7 6 9 , 0 0 0

y e n

l o c a l

p r o v i n c i a l s a l t t a x e s

1 9 1 7

l o a n

1 , 1 7 9 , 0 0 0

y e n

r a i l

1 9 1 7

l o a n

7

r e p a y

d e b t s

B a n k o f B

h i n a n o t e s

T o k y o

1 9 1 7

b o n d

2 , 1 2 2 , 6 4 0

7

f r a n c

T r e a s u r y

1 9 1 7

b o n d

5 2 , 1 7 3

t a e l s

1 9 1 7

l o a n

2 7 2 , 7 0 0

6

s t e r l i n g

n o n e

p e k i n g o c t r o i

1 9 1 7

l o a n

1 , 0 9 0 , 9 0 0

6

s t e r l i n g

n o n e

p e k i n g o c t r o i

1 9 1 7

l o a n

7

y e n

r e p a y

d e b t s

s u r p l u s s a l t r e v e n u e s

1 9 1 7

l o a n

7 6 9 , 2 3 0

y e n

l o c a l

1 9 1 7

l o a n

1 0 , 2 5 6 , 0 0 0

7 . 5

y e n

n o n e

T r e a s u r y

b o n d s

1 9 1 7

3 , 3 3 3 , 0 0 0

6 ( 5 )

y e n

r a i l

p r o p e r t i e s o f r a i l w a y a n d


1 9 1 7

l o a n

4 1 , 0 2 5

y e n


1 9 1 7

l o a n

1 2 8 , 2 0 0

y e n

l o c a l

1 9 1 7

l o a n

2 5 , 6 0 0

y e n


1 9 1 7

l o a n

2 5 , 6 0 0

y e n

i n d u s t r y

1 9 1 8

l o a n

6 6 , 2 0 0

9

s t e r l i n g

e d u c a t i o n

1 9 1 8

l o a n

1 0

t a e l s

n o n e

1 9 1 8

l o a n

1 , 0 5 2 , 0 0 0

8

y e n

p u r c h a s e

1 9 1 8

b o n d

7 5 5 , 5 0 0

8

s t e r l i n g

t e l e c o m m u n i c a t i o n

n o n e

1 9 1 8

l o a n

2 , 6 6 7 , 6 0 0

8

s t e r l i n g

a r m y

e q u i p m e n t

d i r e c t o b l i g a t i o n o f t h e g o v e r n m e n t

L o n d o n

1 9 1 8

l o a n

4 4 4 , 4 0 0

8

s t e r l i n g


g o v e r n m e n t t r e a s u r y

1 9 1 8

l o a n

5 2 6 , 0 0 0

y e n

m i l i t a r y

K a i l a n m

i n i n g A d m

.

T o k y o

1 9 1 8

l o a n

5 , 2 6 1 , 0 0 0

7

y e n

r e p a y

d e b t s


T o k y o

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e









1 9 1 8

l o a n

1 , 0 5 2 , 0 0 0

7

y e n

l o c a l

r i g h t s t o c o o p e r a t e

i n l o c a l

i r o n - m

i n i n g

T o k y o

1 9 1 8

l o a n

5 2 6 , 0 0 0

y e n

g o v e r n m e n t


T o k y o

1 9 1 8

l o a n

5 2 6 , 0 0 0

y e n

l o c a l

s u n d r y t a x e s o f F u k i e n

T o k y o

1 9 1 8

l o a n

5 2 6 , 0 0 0

y e n

i n d u s t r y

T o k y o

1 9 1 8

l o a n

7 , 3 6 8 , 0 0 0

7

y e n

g o v e r n m e n t

T o k y o

1 9 1 8

l o a n

1 , 0 5 2 , 0 0 0

7

y e n

r a i l

r e v e n u e s o f t h e r a i l w a y

T o k y o

1 9 1 8

l o a n

5 2 , 6 0 0

y e n

r a i l

T o k y o

1 9 1 8

l o a n

1 , 5 7 8 , 9 0 0

y e n


T o k y o

1 9 1 8

l o a n

1 0 , 5 2 1 , 0 0 0

7 . 5 – 9

y e n


a l l t e l e g r a p h p r o p e r t i e s n o t

p r e v i o u s p l e d g e d

T o k y o

1 9 1 8

l o a n

5 2 6 , 0 0 0

y e n

l o c a l

T o k y o

1 9 1 8

l o a n

1 0 , 5 2 1 , 0 0 0

5

y e n

r a i l

T o k y o

1 9 1 8

l o a n

1 , 5 7 8 , 9 0 0

y e n

r a i l

c o l l i e r i e s i n F e n g t i e n o w n e d

b y

p r o v . G o v .

1 9 1 8

l o a n

1 , 5 7 8 , 9 0 0

y e n

i n d u s t r y

1 9 1 8

l o a n

5 , 2 6 1 , 0 0 0

y e n

r e p a y

d e b t s

1 9 1 8

l o a n

2 , 3 8 2 , 2 0 0

8

s t e r l i n g


e x c l u s i v e r i g h t s t o c o m m u n i c a t e

w i t h s y s t e m s o u t s i d e

C h i n a

1 9 1 8

l o a n

5 , 2 6 1 , 0 0 0

7 . 5

y e n

r a i l

1 9 1 8

l o a n

1 5 , 7 8 9 , 0 0 0

7 . 5

y e n

l o c a l

K i r i n a n d

H e i l o n g k i a n g g o l d m

i n e s

a n d g o v e r n m e n t

f o r e s t s

1 9 1 8

l o a n

1 0 , 5 2 1 , 0 0 0

8

y e n

r a i l

t r e a s u r y b o n d s

1 9 1 8

l o a n

1 0 , 5 2 1 , 0 0 0

8

y e n

r a i l

1 9 1 8

l o a n

5 , 2 6 1 , 0 0 0

7

y e n

1 9 1 8

l o a n

5 , 2 6 1 , 0 0 0

7

y e n

1 9 1 8

b o n d

8

C h i n e s e

d o l l a r

i n d u s t r y

1 9 1 8

l o a n

1 , 2 0 6 , 0 0 0

1 0

y e n

1 9 1 8

l o a n

1 , 5 3 8 , 0 0 0

7

y e n

r a i l

P e k i n g - S u i y u a n r a i l w a y

1 9 1 8

l o a n

5 , 1 2 8 , 3 0 0

8

y e n


p r e s e n t a n d

f u t u r e g o v . t e l .

A d m

. R e v .

1 9 1 9

l o a n

9 0 1 , 0 0 0

6

s t e r l i n g

t i t l e d e e d s t a x e s

1 9 1 9

l o a n

2 5 8 , 5 0 0

y e n

n o n e

1 9 1 9

l o a n

8 9 1 , 9 0 0

8

s t e r l i n g

n o n e

1 9 1 9

l o a n

5 7 2 , 0 0 0

1 0

t a e l s

n o n e

1 9 1 9

l o a n

7 5 2 , 0 0 0

9

f r a n c

n o n e

1 9 1 9

l o a n

7 6 , 0 0 0

9

f r a n c

n o n e

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e








1 9 1 9

l o a n

8 , 1 2 2 , 0 0 0

8

s t e r l i n g

t r a n s p o r t a t i o n

L o n d o n

1 9 1 9

b o n d

7 9 6 , 3 0 0

5

f r a n c

T r e a s u r y

1 9 1 9

l o a n

4 4 8 , 0 0 0

1 0 . 8

t a e l s

n o n e

1 9 1 9

l o a n

2 7 , 7 0 0

9

f r a n c

n o n e

1 9 1 9

b o n d

3 , 7 0 3 , 0 0 0

7

f r a n c

T r e a s u r y

1 9 1 9

b o n d

2 5 , 0 0 0 , 0 0 0

6

d o l l a r

T r e a s u r y

w i n e a n d t o b a c c o

r e v e n u e s

N e w

Y o r k

1 9 1 9

l o a n

5 , 7 2 7 , 0 0 0

7 . 5

s t e r l i n g

r a i l

e a r n i n g s f r o m T a o k o w - T

c h i n g w h a

r a i l w a y

1 9 1 9

b o n d

5 , 5 0 0 , 0 0 0

5 . 5

d o l l a r

T r e a s u r y

w i n e a n d t o b a c c o

r e v e n u e s

N e w

Y o r k C h i c a g o

1 9 2 0

l o a n

1 2

C h i n e s e

d o l l a r

r e p a y

d e b t s

1 9 2 0

b o n d

2 , 5 9 3 , 0 0 0

5

f r a n c

n o n e

1 9 2 0

b o n d

1 , 0 7 5 , 5 0 0

9

f r a n c

n o n e

1 9 2 0

l o a n

3 6 , 5 9 0

9

s t e r l i n g

e d u c a t i o n

1 9 2 0

l o a n

1 0 4 , 0 7 0

8

f r a n c

l o c a l

1 9 2 0

l o a n

4 1 0 , 0 0 0

1 0 . 2

y e n

n o n e

l o a n

1 5 , 3 8 4

y e n

n o n e

1 9 2 0

l o a n

7 0 , 0 0 0

d o l l a r

e d u c a t i o n

1 9 2 0

l o a n

6 0 , 0 0 0

6

d o l l a r

e d u c a t i o n

1 9 2 0

l o a n

8

B e l g i a n

f r a n c

H a i k o w

h a r b o u r

L T U H r a i l w a y l i n e

B r u s s e l s

1 9 2 0

l o a n

5 4 5 , 4 0 0

5

s t e r l i n g

r a i l

1 9 2 0

l o a n

3 , 0 7 6 , 0 0 0

9

y e n


t e l e g r a p h i n s t a l l a t i o n s , e q u i p m e n t ,

p r o p e r t i e s a n d r e v e n u e s

T o k y o

1 9 2 0

l o a n

8

r a i l

A m s t e r d a m

1 9 2 0

l o a n

1 , 3 2 8 , 0 0 0

9

y e n

n o n e

1 9 2 1

l o a n

1 2

t a e l s

T r e a s u r y

1 9 2 1

b o n d

7 0 1 , 0 0 0

8

y e n

T r e a s u r y

1 9 2 1

l o a n

1 , 7 1 8 , 8 0 0

y e n

n o n e

1 9 2 1

l o a n

1 0

s t e r l i n g

n o n e

1 9 2 1

l o a n

4 5 , 1 0 0

1 0

f r a n c

e d u c a t i o n

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e









1 9 2 1

l o a n

8

B e l g i a n

f r a n c

r a i l

B r u s s e l s

1 9 2 1

l o a n

2 5 , 0 0 0

1 4

y e n

e d u c a t i o n

T o k y o

1 9 2 1

l o a n

2 8 , 8 5 0

1 0

y e n

e d u c a t i o n

T o k y o

1 9 2 1

l o a n

9 3 8 , 9 8 3

8

d o l l a r

n o n e

1 9 2 1

l o a n

2 4 0 , 0 0 0

y e n

r a i l

1 9 2 1

l o a n

1 , 4 4 2 , 0 0 0

y e n

r a i l

1 9 2 2

b o n d

1 4 , 2 3 4 , 0 0 0

8

y e n

r e p a y

d e b t s

s a l t - s u r p l u s r e v e n u e s

1 9 2 2

l o a n

5 4 1 , 0 0 0

1 5

y e n

f o r e s t r y a n d

m i n i n g

1 9 2 2

l o a n

3 , 7 2 0 , 0 0 0

8

s t e r l i n g

r a i l

p r o j e c t e d r a i l w a y

f r o m P a o t o w t o

N i n g s h i a a n d f r o m

P e k i n g t o

P a o t o w

L o n d o n

1 9 2 2

b o n d

6 , 8 3 1 , 0 0 0

6

y e n

T r e a s u r y

c u s t o m s a n d s a l t r e v e n u e s a f t e r a l l

p r i o r c l a i m s

1 9 2 3

l o a n

7 , 1 2 1 , 0 0 0

8

B e l g i u m

f r a n c s

r a i l


B r u s s e l s

1 9 2 3

l o a n

6 , 8 7 0 , 0 0 0

8

r a i l


A m s t e r d a m

1 9 2 3

b o n d

1 9 , 4 1 7 , 0 0 0

6

y e n

T r e a s u r y

r a i l w a y a n d g o v e r n m e n t g u a r a n t e e

1 9 2 3

l o a n

8

t a e l s

r a i l

r a i l w a y

1 9 2 5

b o n d

4 3 , 8 9 3 , 9 0 0

5

d o l l a r

i n d e m n i t y

m a r i t i m e c u s t o m e r s r e v e n u e s a n d

n a t i v e C h i n e s e c u s t o m r e v e n u e s


P a r i s

N e w

Y o r k

1 9 2 5

l o a n

4 , 3 4 0 , 0 0 0

8

f r a n c

r a i l


P a r i s N e w Y o r k

1 9 2 5

l o a n

2 1 , 6 0 0

8

s t e r l i n g

r a i l

C h i n a ’ s s h a r e d p r o t s

i n S h a n g h a i -

N a n k i n g r a i l w a y

1 9 2 5

l o a n

3 3 , 0 1 0 , 0 0 0

8

s t e r l i n g

r e o r g a n i z e

b o n d s

t a x e s o n t r a n s f e r o

f p r o p e r t y a n d t i t l e

d e e d s a n d

P e k i n g o c t r o i

1 9 2 8

b o n d

5 , 0 0 0 , 0 0 0

6

g o l d

i n d e m n i t y

m a r i t i m e c u s t o m s r e v e n u e s

B r u s s e l s

1 9 2 8

b o n d

8

r a i l

1 9 2 9

b o n d

7 5 7 , 3 0 0

8

s t e r l i n g

r a i l

r o l l i n g s t o c k p u r c

h a s e d

1 9 3 0

b o n d

2 0 , 0 0 0 , 0 0 0

2

d o l l a r

r e p a y

d e b t s

1 9 3 3

l o a n

1 7 , 1 0 5 , 3 8 6

5

d o l l a r

p u r c h a s e

1 9 3 3

b o n d

1 0 0 , 0 0 0 , 0 0 0

5 . 5

d o l l a r

t r e a s u r y

1 9 3 3

b o n d

4 , 4 0 0 , 0 0 0

9 . 6

d o l l a r

i n d e m n i t y


1 9 3 3

l L o a n

5 , 0 0 0 , 0 0 0

6

s t e r l i n g

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e








1 9 3 4

l L o a n

4 , 0 0 0 , 0 0 0

6

t a e l s

r a i l

1 9 3 4

b o n d

7 , 3 5 2 , 0 0 0

6

s t e r l i n g

r a i l

s e c u r e d o n a p o r t i o n o f t h e o r i g i n a l

b o x e r i n d e m n i t y

L o n d o n

1 9 3 4

l L o a n

5 , 3 3 3 , 0 0 0

5 . 5

t a e l s

r a i l

1 9 3 5

l L o a n

1 , 1 7 2 , 0 0 0

6

s t e r l i n g

b r i d g e

1 9 3 5

b o n d

5 , 2 9 4 , 0 0 0

y e n

r a i l

T o k y o

1 9 3 6

l o a n

7 5 0 , 0 0 0

s t e r l i n g

i n d u s t r y

1 9 3 6

l o a n

5 , 5 0 0 , 0 0 0

6

s t e r l i n g

r a i l

d i r e c t o b l i g a t i o n o f t h e g o v e r n m e n t

a n d a l s o s e c u r e

d o n r a i l w a y / b r i d g e

r e v e n u e s

S h a n g h a i

1 9 3 6

2 , 0 0 0 , 0 0 0

6

d o l l a r

C a n t o n c u s t o m s

1 9 3 6

1 3 , 5 0 0 , 0 0 0

6

s t e r l i n g

C a n t o n

l o c a l t a x a n d r a i l w a y

i n c o m e

1 9 3 7

l o a n

r a i l

1 9 3 7

b o n d

4 , 9 0 0 , 0 0 0

4

d o l l a r

r e o r g a n i z e

b o n d s

d i r e c t c h a r g e o n e n t i r e s a l t r e v e n u e s

1 9 3 7

l o a n

1 5 , 0 0 0 , 0 0 0

5

s t e r l i n g

r a i l

s u r p l u s s a l t r e v e n u e s n o t y e t p l e d g e d

1 9 3 7

l o a n

1 8 , 5 0 0 , 0 0 0

5

s t e r l i n g

r a i l

r a i l

1 9 3 7

l o a n

4 , 0 0 0 , 0 0 0

6

s t e r l i n g

r a i l

1 9 3 7

l o a n

6

c g u

r a i l

1 9 3 7

l o a n

1 , 9 2 0 , 0 0 0

6

s t e r l i n g

r a i l

1 9 3 7

l L o a n

5 0 , 0 0 0 , 0 0 0

6

d o l l a r

s a l t t a x

1 9 3 7

l L o a n

5 0 , 0 0 0 , 0 0 0

6

s t e r l i n g

s a l t t a x

1 9 3 8

l L o a n

7

f r a n c s

r a i l

K w a n g t u n g m

i n i n g t a x e s

1 9 3 9

l L o a n

4 0 , 0 0 0 , 0 0 0

5

s t e r l i n g

n a t i o n a l i n c o m e

1 9 3 9

l L o a n

4 5 , 9 8 0 , 0 0 0

5

d o l l a r

n a t i o n a l i n c o m e

1 9 4 0

l L o a n

1 0 , 0 0 0 , 0 0 0

5

d o l l a r

h i g h w a y

i n c o m e

1 9 4 1

l o a n

9 9 , 8 0 0 , 0 0 0

4

d o l l a r

1 9 4 5

l L o a n

4 0 0 , 0 0 0 , 0 0 0

4

d o l l a r

1 9 4 6

l L o a n

3 0 0 , 0 0 0 , 0 0 0

2 0

d o l l a r

1 9 8 2

l L o a n

4 0 , 8 1 6 , 0 0 0

8 . 7

y e n

N o n e

T o k y o

D a t e

T y p e

U S $ a m o u n t


Y i e l d

C u r r e n c y

P u r p o s e









APPENDIX II: Analysis of the cost of capital with foreign anddomestic investors

Consider the following stylized example. Suppose there are two separate capital

markets, market 1 and market 2 in which investors holding shares in market 1cannot hold shares in market 2 and vice versa. Take market 1 to be China andmarket 2 to be the European capital markets of the turn of the century. Nowconsider a new project,n , which pays a random cash ow and needs nancing. Theproject owner must decide which market will give the best terms. In effect, he willchoose the market with the lowest cost of capital for the project which is theexpected rate of return E [Rn 1] or E [Rn 2]. Let us assume that the capital asset pricingmodel (CAPM) holds in each separate market, that the coefcient of risk aversionfor the representative investor in each market is equal, that each project is atomisticin its respective market, and that the riskless rate of return,R f , is the same in eachmarket. Using standard notation for betas, correlations, variances, and covariances,

and lettingθ

be the coefcient of risk aversion, the conditions determining therelative costs of capital in each market are then straightforward.

Equation (1)

For the owner to be indifferent between sources of nancing, the covariances of the cash ows of project n with respect to the segmented market portfolios mustbe equal. However, suppose there is an inequality? Equation 1 suggests that therequired rate of return on the project in market 1 will be larger than in market 2when the covariance of the project with respect to the market index 1 is greater.For China, it is natural to assume that domestic development projects have a highercovariance with a domestic, market-weighted portfolio of Chinese companies thanwith a market-weighted portfolio of the rest of the world’s companies, excludingChina. This suggests that the cost of capital in the domestic market—if fully

segmented—will be higher.This interpretation should be tempered, however, with the understanding thatthe requirements for a pricing model like the CAPM to hold—particularly theliquidity requirements—are probably unrealistic for China in the last century. Inaddition, it is not clear whether a railway project in China would have a highercovariance with other economic activity in China, or with a world index, which isheavily weighted to railway companies. This is an empirical matter for furtherresearch. Lastly, Shanghai at the turn of the century had banks and equity markets.Did these allow Chinese investors to diversify their portfolios internationally— effectively making our assumption of segmentation incorrect? Again, this is a matterfor further research.

Equation 1 characterizes conditions in terms of covariances, but this effect canbe decomposed into correlations and standard deviations, which allows us to

E R R E R R

R R R R

R R R R

n f n f

n m f n m f

nm f

nm f

n n

n n

1 2

1 1 2 2

1

12 1

2

22 2

1

12 1

2 2

22 2

2

1 2

−[ ]= −[ ]−[ ]= −[ ]

−[ ]= −[ ]

=

=

b b

s s

s s

s s

qs s s

qs

s s




consider the relative importance of diversication. Under what conditions will wend the cost of capital to be smaller for market 2 than for market 1? Assumingcorrelations to be positive:

Equation (2)

Equation 2 suggests that even in the case where the ρ n1 = ρ n2, if the standarddeviation of the world wealth portfolio (excluding China) were lower than thestandard deviation of the Chinese market index, then the owner would nd externalnancing more attractive. As Stulz (‘Globalization of equity markets’) points out,and as contemporary commentators on international investing have noted, the riskof a global investor’s portfolio was reduced through geographical diversication.80

In a world where one group of investors is diversied and another group is not, thediversied investors are simply willing to pay more for the same asset. This holdswhen the added asset is more highly correlated to the domestic investor’s portfolio,and also when the volatility of the domestic portfolio is higher. If this were true inChina 100 years ago, we would expect to nd reluctance by Chinese investors toinvest capital in domestic projects on the same terms provided to foreign investors.Of course, this analysis may simply presuppose too much about the relative devel-opment of Chinese capital markets.

s s r s s r s s r r

s s

n n

n n n n

n

n

1 2

1 1 2 2

1

2

2

1

>

>

>

China and World Finance History

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