Tuesday, April 6, 2010

The Bonds That Sparked the Chinese Revolution - Part Three

Loans to the Imperial Chinese Government would not have been attractive to investors without strong guarantees. As security for its many foreign loans, the Manchu government pledged the proceeds of a vast array of revenues and taxes, so that by the time of its collapse nearly its entire revenue stream had been diverted to foreign banks. The most lucrative and dependable source of security was China’s considerable maritime customs revenue. This began to be attached beginning in 1866, and remained the preferred security for decades; it was the sole source of the massive war indemnities of 1895–1901, by which time virtually all maritime customs revenue was pledged to service foreign debt. New sources of security now had to be found, and subsequent foreign loans tapped the proceeds of various domestic taxes, most often salt and rice taxes and the “lekin,” a tax on internal transit of goods. With each loan the government incrementally lost control of its own finances.

Construction of the Hukuang railway was expected to break this mold. Hukuang (“lake plain”) is a region in south-central China including the provinces of Hunan, Hupei, and portions of Szechuan. The Hukuang Railway was to have two branches: one from Hankow south to the port of Canton, the other from Hankow west to Chengtu in Szechwan. Construction rights for the Canton-Hankow branch had been awarded to J. P. Morgan’s American China Development Company, but beginning in 1903 events took a radically different turn. The “Railway Regulations” of the Qing Government enacted that year granted domestic companies the right to operate railroads, and in 1904 the Ministry of Commerce promulgated reforms designed to facilitate development of domestic corporations. In 1905, with the active encouragement of the provincial governor of Hunan and Hupei, a consortium of Hukuang gentry, officials and businessmen first lobbied successfully for compensated cancellation of the construction rights of the American China Development Co., then obtained contracts to build the road. The Kwangtung Company of the Canton-Hankow Railway had an auspicious beginning; its entire capitalization of 44 million taels (some $60 million) was subscribed by Chinese investors rich and poor, making it the most successfully capitalized of all Chinese companies, by a very large margin. Most of the funds came from wealthy Chinese living abroad, but there was enthusiastic support from the populace as well. Shares were initially priced at only a single tael, and the North China Herald reported that
  • Not only are the monied classes rushing to buy shares, but the poorest of the poor and even those who are supposed of no cash to spare and hardly enough to keep body and soul together are buying up one or more shares (Lee, 1977).
The contract for the Hankow-Chengtu branch was entrusted to the Hupeh Company of the Szechuan-Hankow Railway.

The Kwangtung Company, though, was plagued by mismanagement and massive embezzlement. Its sister company, the Hupeh Company, raised only about 3% of its projected capitalization of 20 million taels. Years passed with no tracks laid or rolling stock purchased, and on May 9, 1911, the Qing government, bowing to diplomatic and political pressure, summarily nationalized all domestic railway development, and on May 20 re-awarded the contract to the aforementioned consortium of banks in London, Berlin, Paris and New York, which sponsored a £6 million bond issue to finance construction. The Imperial Government pledged as security the revenues of the railroad and the proceeds from six different taxes on salt, rice, and lekin, all of which are enumerated on the bonds themselves.

Item# 5055b: China 1913, Brown £20 5%, German Bank Issue or French Indochina Issue. 42-43 Coupons. Price upon request.

For more information visit our web site, http://www.glabarre.com, or call George LaBarre at 1-800-717-9529.

George H. LaBarre Galleries - Collectible Stocks and Bonds

From: "The Bonds That Sparked the Chinese Revolution" by Michael Mahler.

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