1,000,000 taels (Lai 1991). The total of these government loans was 2. 2 times the maximum paid-up share capital during this period In the CMc and other joint-stock cases under the "government supervision and merchant management model in late Qing, government supervision"meant that officials appointed and replaced key managers and dictated operational and financial policies sometimes on a daily basis. In the case of the CMC alone, for example, there were more than 400 instructions on file by LI Hongzhang on the daily operations of the company. With the official support, the CMC was able to become profitable by the early 1880s, which then led to the call by other Qing officials to nationalize the CMC. It was LI Hongzhang who protected the private shareholders'interest and prevented the state from taking control of the CMC. In this sense, the officials' involvement in early joint-stock experiments did provide both shareholder and property protection, so that the state and others would not easily expropriate corporate and other properties. Absent of an independent judiciary, privat property, corporate or not, would otherwise be at the mercy of the state and powerful officials Figure 1: Number of new chinese stocks issued from 1873 to the present Re-starting stock market in 1990 180 Founding of PRC put an end to 160 stock market 140 100 F End of Qing Dynasty-1911 40 infill 图家 Data sources: Goetzmann, Ukhov and Zhu(2001) for the late Qing, Zhu(2005)for the 1940s, and CSrC website for post-1990 Overall, the first decade after the founding of the CMC brought 15 joint-stock companies to the market(see Figure 1 for the evolution of new joint-stock companies), from mining, manufacturing and transportation industries. Their stock shares were traded on the streets and teahouses in Shanghai. With the lack of disclosure and accounting rules and the esulting absence of useful information about the corporations, the investors had no basis to 11
1,000,000 taels (Lai 1991). The total of these government loans was 2.2 times the maximum paid-up share capital during this period. In the CMC and other joint-stock cases under the “government supervision and merchant management” model in late Qing, “government supervision” meant that officials appointed and replaced key managers and dictated operational and financial policies sometimes on a daily basis. In the case of the CMC alone, for example, there were more than 400 instructions on file by LI Hongzhang on the daily operations of the company. With the official support, the CMC was able to become profitable by the early 1880’s, which then led to the call by other Qing officials to nationalize the CMC. It was LI Hongzhang who protected the private shareholders’ interest and prevented the state from taking control of the CMC. In this sense, the officials’ involvement in early joint-stock experiments did provide both shareholder and property protection, so that the state and others would not easily expropriate corporate and other properties. Absent of an independent judiciary, private property, corporate or not, would otherwise be at the mercy of the state and powerful officials. 5 Yale School of Management Figure 1: Number of New Chinese Stocks Issued from 1873 to the present End of Qing Dynasty Founding of PRC put an end to stock market Data sources: Goetzmann, Ukhov and Zhu (2001) for the late Qing, Zhu (2005) for the 1940’s, and CSRC website for post-1990. 0 20 40 60 80 100 120 140 160 180 200 220 1874 1881 1885 1889 1893 1897 1901 1945 1992 1996 2000 2004 End of Qing Dynasty - 1911 Founding of PRC put an end to stock market Re-starting stock market in 1990 Overall, the first decade after the founding of the CMC brought 15 joint-stock companies to the market (see Figure 1 for the evolution of new joint-stock companies), from mining, manufacturing and transportation industries. Their stock shares were traded on the streets and teahouses in Shanghai. With the lack of disclosure and accounting rules and the resulting absence of useful information about the corporations, the investors had no basis to 11
distinguish between good and bad companies. Consequently, the stocks provided a natural environment for speculation. As commented by the Sheng Bao newspaper on September 2, 1882, Investors in China today just buy stocks without even asking whether the issuing company is good or bad, profitable or not. Whenever a new stock is issued, they rush to buy a few shares, 10s of shares or even hundreds of shares as if they would otherwise miss the opportunity to purchase the shares. . when there is a stock that some people were not able to purchase and now the stock is suddenly going up, you will then hear them say if I had purchased the stock earlier, I would have made so and so much money,, hating themselves for missing the opportunity"(Li 2002, p. 22) The speculative fever led to the first Chinese stock market bubble in 1882. In that year, many stock prices went up by more than 100%(Li 2002). At the height of the bubble, the irst stock trading company, Shanghai Pingzhun Stock Company, was founded in September 1882. This moved trading in Chinese stocks from the streets and teahouses to a central location with some basic rules for settlement and cash requirements. It was considered to be the first Chinese stock exchange of a sort The 1882 boom was followed by a crash in 1883. The average stock price decline was more than 70% for the 1883-84 period( Goetzmann, Ukhov and Zhu 2001). Such blue-chip names as the CMC, Kaiping Coal Mines, and Pingquan Copper Company all had their stock prices cut by over 80% from their 1882 high to the end of 1883. That crash was so severe that many native banks that provided margin lending to stock speculators went bankrupt, leading to a major financial crisis in Shanghai and other port cities Following the crash of 1883, the Chinese stock market and the modern corporation movement went through a relatively slow period, though the westernization process was still on. First, after the crash, stock shares" became a not-So-favorite name for people to be reminded of. There was a shortage of appetite for stocks. Second, the strongest official supporting the movement, Li Hongzhang, was increasingly criticized for his favoritism towards the joint-stock companies, weakening his political position. The protection he provided to the new enterprises became gradually compromised. Finally, the increasing Li(2002), Appendix Table
distinguish between good and bad companies. Consequently, the stocks provided a natural environment for speculation. As commented by the ShengBao newspaper on September 2, 1882, “Investors in China today just buy stocks without even asking whether the issuing company is good or bad, profitable or not. Whenever a new stock is issued, they rush to buy a few shares, 10s of shares or even hundreds of shares as if they would otherwise miss the opportunity to purchase the shares. … when there is a stock that some people were not able to purchase and now the stock is suddenly going up, you will then hear them say ‘if I had purchased the stock earlier, I would have made so and so much money’, hating themselves for missing the opportunity” (Li 2002, p. 22). The speculative fever led to the first Chinese stock market bubble in 1882. In that year, many stock prices went up by more than 100% (Li 2002). At the height of the bubble, the first stock trading company, Shanghai Pingzhun Stock Company, was founded in September 1882. This moved trading in Chinese stocks from the streets and teahouses to a central location with some basic rules for settlement and cash requirements. It was considered to be the first Chinese stock exchange of a sort. The 1882 boom was followed by a crash in 1883. The average stock price decline was more than 70% for the 1883-84 period (Goetzmann, Ukhov and Zhu 2001). Such blue-chip names as the CMC, Kaiping Coal Mines, and Pingquan Copper Company all had their stock prices cut by over 80% from their 1882 high to the end of 1883.8 That crash was so severe that many native banks that provided margin lending to stock speculators went bankrupt, leading to a major financial crisis in Shanghai and other port cities. Following the crash of 1883, the Chinese stock market and the modern corporation movement went through a relatively slow period, though the westernization process was still on. First, after the crash, “stock shares” became a not-so-favorite name for people to be reminded of. There was a shortage of appetite for stocks. Second, the strongest official supporting the movement, Li Hongzhang, was increasingly criticized for his favoritism towards the joint-stock companies, weakening his political position. The protection he provided to the new enterprises became gradually compromised. Finally, the increasing 8 Li (2002), Appendix Table 1. 12
defense needs of China reversed the government's policy from giving financial support to extracting resources from the corporations. The semi-official nature of the modern enterprises turned itself from an advantage to a major liability, which served to slow down the growth of the new industries. Top managers in these joint-stock companies were mostly of official background, often accustomed to corruption. The"government supervision and merchant management enterprise model, which was a result of adapting the western corporate form to the Chinese social-legal-political context, no longer worked The next major stage of development was right after China lost in the 1894-95 Sino Japanese naval war. That loss was a major blow to Chinas national pride, starting a new ound of soul searching and national debate on Chinas future. This time the government had no more resources to sponsor new joint-stock corporations, as it could not even have enough funding to satisfy its defense needs or pay for the war indemnity. The Qing court was too busy worrying about its own future than minding the business firms. For the first time, the government allowed private initiatives to lead new industrial ventures. Pure private joint stock companies started to appear, with shares offered to merchants. During this period,a new business form also emerged: joint ownership between the state and merchants GuanShan HeBan)in which the state took a direct equity stake instead of making loans. This joint-stock form was adopted first in 1898 with the Hubu Bank(later renamed to the great Qing Bank in 1908)and later, between 1903-1907, with several railway companies. Figure 1 shows that 29 new corporations were formed in 1895, followed by 28 in each of 1898 and 1899. The development momentum was halted after the boxer Rebellion of 1899-1900 In the soul-searching intellectual debate after the Sino-Japanese naval war and especially after the Boxer Rebellion, a key question was asked: why couldnt China develop joint-stock corporations and a stock market to provide an abundant supply of capital for new industry projects and military modernization? It was finally recognized at the time that there had to be a supportive legal infrastructure, including a company law and a bankruptcy law putting substance into "limited liability". A key reformer official and govenor-general of Lianghu, Zhang Zhidong, wrote during the time that a business cannot be big if it does not dopt the corporation form; There cannot be many corporations if there is no commercial law In China, even after a stock issuer has committed fraud, there is rarely any penalty or
defense needs of China reversed the government’s policy from giving financial support to extracting resources from the corporations. The semi-official nature of the modern enterprises turned itself from an advantage to a major liability, which served to slow down the growth of the new industries. Top managers in these joint-stock companies were mostly of official background, often accustomed to corruption. The “government supervision and merchant management” enterprise model, which was a result of adapting the western corporate form to the Chinese social-legal-political context, no longer worked. The next major stage of development was right after China lost in the 1894-95 SinoJapanese naval war. That loss was a major blow to China’s national pride, starting a new round of soul searching and national debate on China’s future. This time the government had no more resources to sponsor new joint-stock corporations, as it could not even have enough funding to satisfy its defense needs or pay for the war indemnity. The Qing court was too busy worrying about its own future than minding the business firms. For the first time, the government allowed private initiatives to lead new industrial ventures. Pure private jointstock companies started to appear, with shares offered to merchants. During this period, a new business form also emerged: joint ownership between the state and merchants (GuanShan HeBan) in which the state took a direct equity stake instead of making loans. This joint-stock form was adopted first in 1898 with the Hubu Bank (later renamed to the Great Qing Bank in 1908) and later, between 1903-1907, with several railway companies. Figure 1 shows that 29 new corporations were formed in 1895, followed by 28 in each of 1898 and 1899. The development momentum was halted after the Boxer Rebellion of 1899-1900. In the soul-searching intellectual debate after the Sino-Japanese naval war and especially after the Boxer Rebellion, a key question was asked: why couldn’t China develop joint-stock corporations and a stock market to provide an abundant supply of capital for new industry projects and military modernization? It was finally recognized at the time that there had to be a supportive legal infrastructure, including a company law and a bankruptcy law putting substance into “limited liability”. A key reformer official and govenor-general of Lianghu, Zhang Zhidong, wrote during the time that “A business cannot be big if it does not adopt the corporation form; There cannot be many corporations if there is no commercial law. In China, even after a stock issuer has committed fraud, there is rarely any penalty or 13
accountability. Thus, it is no surprise that Chinese corporations find it so difficult to raise capital. In the West, not only there are good commercial and corporate laws, but also citizens official or otherwise, each follow the laws, which is why their corporations can easily raise much capital. (Li 2002, p. I As a result of the debate and the Qing courts determination to reform, China introduced its first ever"Company Law"in 1904. Subsequently, between 1904-10 a total of 197 limited-liability corporations were registered across China, with their shares floated. As found by Feuerwerker (1958), Goetzmann and Koll(2004)and Kirby (1995), that law had quite a mixed impact on Chinese business practice as not many businessmen rushed to acquire the formal protection provided by the new law. Instead, the law was looked upon with more suspicion than relief. Nonetheless, it was a first attempt in the right direction, in a country that had no formal legal profession or a formal legal doctrine based on the separation of power and on the notion of rights By the end of the Qing dynasty in 1911, China had had more than 40 years of experimentation with joint-stock corporations and a stock market. More than 480 stocks had been issued for public trading, with many more businesses indirectly benefiting from the stock market. These modern corporations represented a cross section of industries from manufacturing, electrical power, mining, textile, railway, steamship transportation,to banking and financial services. This period of trial and errors made the country's elite ecognize the necessity for a government structure that separates the officialdom from the judiciary and from business. In the words of another scholar-official and governor-general of Liangjiang, Zhen Guanyin, "The essence of corporate and commercial laws is to protect business and commerce from the threat of political power". o At the beginning of the 20 century, China started to accept the notion of government powers checked and balanced by a constitutional structure 2. Stock Market during the republican Period 9Li(2002), Appendix Table 3 10Li(2002),p
accountability. Thus, it is no surprise that Chinese corporations find it so difficult to raise capital. In the West, not only there are good commercial and corporate laws, but also citizens, official or otherwise, each follow the laws, which is why their corporations can easily raise much capital.” (Li 2002, p. 101). As a result of the debate and the Qing court’s determination to reform, China introduced its first ever “Company Law” in 1904. Subsequently, between 1904-10 a total of 197 limited-liability corporations were registered across China, with their shares floated.9 As found by Feuerwerker (1958), Goetzmann and Koll (2004) and Kirby (1995), that law had quite a mixed impact on Chinese business practice as not many businessmen rushed to acquire the formal protection provided by the new law. Instead, the law was looked upon with more suspicion than relief. Nonetheless, it was a first attempt in the right direction, in a country that had no formal legal profession or a formal legal doctrine based on the separation of power and on the notion of rights. By the end of the Qing dynasty in 1911, China had had more than 40 years of experimentation with joint-stock corporations and a stock market. More than 480 stocks had been issued for public trading, with many more businesses indirectly benefiting from the stock market. These modern corporations represented a cross section of industries from manufacturing, electrical power, mining, textile, railway, steamship transportation, to banking and financial services. This period of trial and errors made the country’s elite recognize the necessity for a government structure that separates the officialdom from the judiciary and from business. In the words of another scholar-official and governor-general of Liangjiang, Zhen Guanyin, “The essence of corporate and commercial laws is to protect business and commerce from the threat of political power”.10 At the beginning of the 20th century, China started to accept the notion of government powers checked and balanced by a constitutional structure. 2. Stock Market during the Republican Period 9 Li (2002), Appendix Table 3. 10 Li (2002), p. 100. 14
The founding of the Republic of China(ROC)in 1911 put an end to the legal-political reforms, including the introduction of a constitutional system, pursued by the Qing after about 1901. The Republican government sought to adopt a power structure based on the principle of checks and balances among functional branches and with independent institutions such as the executive(XinZhen yuan), the legislative (LiFayuan) and the judiciary (FaYuan). It marked a new beginning in Chinas modernization process. However, the reality fter 1911 was that the president and his office were in Beijing while the parliament and the judiciary branch were in Nanjing. In the mean time, the provinces were each ruled by one or more warlords. Until the end of the northern Expedition to rein in all the warlords and the establishment of Nanjing as the nation's capital in 1927, China was in a lace faire state Public goods such as contract enforcement and property protection were up to the private organizations to provide. In some ways, the weak government was not much of a threat to private properties and businesses, so private enterprises were given ample room to grow and prosper. By 1911, stock trading had converged to one central location ---the beneficent Fragrance Tea House(Hui Fang CaLou), on Fuzhou Road in Shanghai. Several stock broker/dealer companies were functioning as settlement service providers. In 1914, the Shanghai Securities Dealers Association was founded, making its headquarter as a central location for stock trading. It set guidelines and rules such as trading hours and commission rates, and the association introduced membership standards and disciplines. at the end of that year, the ROC government put forward Chinas first" Securities Exchange Law(Zhenquan Jiao YiSuo Fa). On June 5, 1918, the first formal Chinese securities exchange, the Peking Stock Exchange, was started in Beijing. In September 1919, the Shanghai Securities and Commodities Exchange was founded. In November 1920 the Shanghai Securities and Commodities Exchange was renamed the Shanghai Chinese Stock Exchange(as opposed to the Shanghai Stock Exchange organized and managed by foreign businessmen and for foreign registered corporations ) That was immediately followed by a wave of new securities exchanges set up in and outside Shanghai. By the end of 1921, there were more than 140 securities exchanges in Shanghai, and 52 exchanges together in Hankou, Tianjin, Guangzhou
The founding of the Republic of China (ROC) in 1911 put an end to the legal-political reforms, including the introduction of a constitutional system, pursued by the Qing after about 1901. The Republican government sought to adopt a power structure based on the principle of checks and balances among functional branches and with independent institutions such as the executive (XinZhenYuan), the legislative (LiFaYuan) and the judiciary (FaYuan). It marked a new beginning in China’s modernization process. However, the reality after 1911 was that the president and his office were in Beijing while the parliament and the judiciary branch were in Nanjing. In the mean time, the provinces were each ruled by one or more warlords. Until the end of the Northern Expedition to rein in all the warlords and the establishment of Nanjing as the nation’s capital in 1927, China was in a laze faire state. Public goods such as contract enforcement and property protection were up to the private organizations to provide. In some ways, the weak government was not much of a threat to private properties and businesses, so private enterprises were given ample room to grow and prosper. By 1911, stock trading had converged to one central location --- the Beneficent Fragrance Tea House (HuiFang CaLou), on Fuzhou Road in Shanghai. Several stock broker/dealer companies were functioning as settlement service providers. In 1914, the Shanghai Securities Dealers Association was founded, making its headquarter as a central location for stock trading. It set guidelines and rules such as trading hours and commission rates, and the association introduced membership standards and disciplines. At the end of that year, the ROC government put forward China’s first “Securities Exchange Law” (ZhenQuan JiaoYiSuo Fa). On June 5, 1918, the first formal Chinese securities exchange, the Peking Stock Exchange, was started in Beijing. In September 1919, the Shanghai Securities and Commodities Exchange was founded. In November 1920 the Shanghai Securities and Commodities Exchange was renamed the Shanghai Chinese Stock Exchange (as opposed to the Shanghai Stock Exchange organized and managed by foreign businessmen and for foreign registered corporations). That was immediately followed by a wave of new securities exchanges set up in and outside Shanghai. By the end of 1921, there were more than 140 securities exchanges in Shanghai, and 52 exchanges together in Hankou, Tianjin, Guangzhou, 15