Nanjing and Suzhou. This marked the second major speculative bubble in China's stock market history When founded. most of these exchanges did not have much to trade on as the number of available securities was small relative to the number of exchanges this made the new exchanges starting their services by first trading the stock of the exchange itself. Some of them were simply single-stock exchanges(Zhang 2001). It was indeed a period of truly free Trust companies represented another favorite business of the time. In Shanghai more than 12 trust companies were attracting capital and savings from individuals and institutions, by the end of 1921. These companies would often team up with the securities exchanges to manipulate targeted stocks, adding to speculative fever. Native banks were standing ready to lend to speculators on margin. 1921 was a year of stock market bubble in Shanghai Why are stock markets perfectly vulnerable to excessive speculation and bubbles? The key lies in the fact that a stock represents a financial contract whose value depends on an uncertain future. The intangibility and uncertainty about the issuer's future presents ample space for manipulation and irrational exuberance. It can equally likely lead to extre pessimism. Thus, excessive financial speculation and bubbles can be especially common and extensive in the absence of protective legal and informational institutions for the informationally disadvantaged outside investors. The Republican period China offered one such social-legal environment Towards the end of 1921. native banks and other financial institutions that were extended in margin lending became increasingly more nervous and began to make margin calls. This caused sharp declines in stock prices, which in turn led to the bankruptcy of multiple banks, trust companies and securities exchanges. By the end of 1922, there were fewer than 10 securities exchanges and a couple of trust companies left all across Chi ending a golden period in Chinas stock market history During the remaining years of the 1920s, securities trading was concentrated in government bonds and far less on stocks while corporate bonds were issued for the first time. Zhang(2001)
Nanjing and Suzhou.11 This marked the second major speculative bubble in China’s stock market history. When founded, most of these exchanges did not have much to trade on as the number of available securities was small relative to the number of exchanges. This made the new exchanges starting their services by first trading the stock of the exchange itself. Some of them were simply single-stock exchanges (Zhang 2001). It was indeed a period of truly free markets. Trust companies represented another favorite business of the time. In Shanghai more than 12 trust companies were attracting capital and savings from individuals and institutions, by the end of 1921. These companies would often team up with the securities exchanges to manipulate targeted stocks, adding to speculative fever. Native banks were standing ready to lend to speculators on margin. 1921 was a year of stock market bubble in Shanghai. Why are stock markets perfectly vulnerable to excessive speculation and bubbles? The key lies in the fact that a stock represents a financial contract whose value depends on an uncertain future. The intangibility and uncertainty about the issuer’s future presents ample space for manipulation and irrational exuberance. It can equally likely lead to extreme pessimism. Thus, excessive financial speculation and bubbles can be especially common and extensive in the absence of protective legal and informational institutions for the informationally disadvantaged outside investors. The Republican period China offered one such social-legal environment. Towards the end of 1921, native banks and other financial institutions that were extended in margin lending became increasingly more nervous and began to make margin calls. This caused sharp declines in stock prices, which in turn led to the bankruptcy of multiple banks, trust companies and securities exchanges. By the end of 1922, there were fewer than 10 securities exchanges and a couple of trust companies left all across China, ending a golden period in China’s stock market history. During the remaining years of the 1920’s, securities trading was concentrated in government bonds and far less on stocks while corporate bonds were issued for the first time. 11 Zhang (2001). 16
In this sense, the bursting of the 1921 stock bubble paved a way for the bond market to develop in China. For this line of financial market history in China, see Zhu(2006) in this Despite the above, the 1912-28 period was a golden age for Chinas securities market development. According to an estimate by Xu and Chen(1995), during this period, more than 1984 modern industrial and mining enterprises were established each with a capital base of more than 10,000 yuan, with a total investment of 45.89 million yuan; 31 1 modern joint stock banks were founded, with a total share capital of 119.43 million. These developments together lifted China's industrial structure to a new level in terms of both scale and scope covering manufacturing, textile, mining, transportation and financial services. Precisely because of the weak or non-functioning Roc government during this period, free enterprise was the dominating theme of business practice. Strong self-regulating professional organizations emerged, such as the Shanghai Native Bankers Association, the Shanghai Securities Broker/Dealers Association, and various other industry associations. These professional organizations served as important functional substitutes for non-existing government institutions in the areas of contract enforcement, market conduct and property rights. As a result, a sizable network of financial intermediation emerged with fund-raising capabilities extending beyond geographical boundaries(Zhang 2001 ). It was perhaps the most dynamic development period in modern Chinese history In 1927, the roc government moved its headquarters to Nanjing and consolidated much of its power there. For the first few years, fighting was still continuing to rein in the few remaining provincial warlords. By this time, while the stock market was still recovering from the burst bubble of 1921, the republican government was in severe financial difficulty and was forced to issue bonds to finance the on-going war efforts. In 1931, the Japanese troops moved into China and started their long occupation of the Manchurian provinces. The Japanese invasion and occupation pushed the roc to further increase its defense spending escalating the governments financial burden to another level. More governments bonds were then issued. Between 1927-36 the ROC issued 2.6 billion yuan government bonds in China and $60 million sovereign bonds outside China(Zhang 2001 ). As a result, the 1930s was marked by bond trading, not by stock market development
In this sense, the bursting of the 1921 stock bubble paved a way for the bond market to develop in China. For this line of financial market history in China, see Zhu (2006) in this volume. Despite the above, the 1912-28 period was a golden age for China’s securities market development. According to an estimate by Xu and Chen (1995), during this period, more than 1984 modern industrial and mining enterprises were established each with a capital base of more than 10,000 yuan, with a total investment of 45.89 million yuan; 311 modern jointstock banks were founded, with a total share capital of 119.43 million. These developments together lifted China’s industrial structure to a new level in terms of both scale and scope, covering manufacturing, textile, mining, transportation and financial services. Precisely because of the weak or non-functioning ROC government during this period, free enterprise was the dominating theme of business practice. Strong self-regulating professional organizations emerged, such as the Shanghai Native Bankers Association, the Shanghai Securities Broker/Dealers Association, and various other industry associations. These professional organizations served as important functional substitutes for non-existing government institutions in the areas of contract enforcement, market conduct and property rights. As a result, a sizable network of financial intermediation emerged with fund-raising capabilities extending beyond geographical boundaries (Zhang 2001). It was perhaps the most dynamic development period in modern Chinese history. In 1927, the ROC government moved its headquarters to Nanjing and consolidated much of its power there. For the first few years, fighting was still continuing to rein in the few remaining provincial warlords. By this time, while the stock market was still recovering from the burst bubble of 1921, the Republican government was in severe financial difficulty and was forced to issue bonds to finance the on-going war efforts. In 1931, the Japanese troops moved into China and started their long occupation of the Manchurian provinces. The Japanese invasion and occupation pushed the ROC to further increase its defense spending, escalating the government’s financial burden to another level. More governments bonds were then issued. Between 1927-36 the ROC issued 2.6 billion yuan government bonds in China and $60 million sovereign bonds outside China (Zhang 2001). As a result, the 1930’s was marked by bond trading, not by stock market development. 17