Li Hong Zhang and the other Reformist leaders

308Together with moderately reform-minded officials and political authorities such as Zeng Guo Fan (1811-1872) and Zuo Zong Tang (1812-1885), and Li Hong Zhang.

They demanded that the Chinese government should spend more efforts to improve its military equipment and technology in order to defend herself against the Western powers and their invasions in China. However, these government officials were not proponents of launching an industrial revolution or a modern economy in China. On the contrary, they wanted to restore the traditional economy, including agriculture and commerce, and were not planning on “Enhancing the strength and wealth of the country at the cost of its traditional institutions”³⁰⁹

That is why the initial establishment of industrial enterprises at the time has to be interpreted as a step towards regaining military strength and national pride without contesting the status quo of government and society, rather than as a step towards planned economic development. In order to secure control over this policy, any industrial enterprise founded before 1895 required not only sanction or permission but even active supervision and sponsorship from the government and its agents, the official bureaucrats. Famous and notable examples of this promotion of industrial enterprises under government sponsorship in the 1860s and 1870s included the Jiangnan Arsenal and the China Merchants‟ Steamship Navigation Company, both in

308 In this part of the study, the author has used the study of, William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, pp.1-28.

309 Mary Clabaugh Wright, Last Stand of Chinese Conservatism: The T'ung-Chih Restoration, Stanford Univ Press, June 1957, p. 153.

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Shanghai, as well as the Kaiping Coal Mines near the harbour city Tianjin. Curiously, the China Merchants‟ Steamship Navigation Company evolved from a business proposal by Yung Wing, a Yale College graduate, who, like Ma Jian Zhong drew upon his experience overseas to propose innovations in Chinese enterprise.

Feuerwerker notes that the idea of beating the West at its own game, which is, adopting Western-style corporate business practices to government-controlled enterprise, was present in Wing‟s initial conception. Quoting Wing‟s autobiography,

“No foreigner was to be allowed to be a stockholder in the company. It was to be a purely Chinese Company managed and worked by Chinese exclusively.”³¹⁰

All three enterprises self-evidently demonstrate the immediate goals of the Self-Strengthening Movement: the Jiangnan Arsenal was to improve China‟s military strength by manufacturing modern arms, the steamship company was to facilitate the grain transport for the government as well as make China less dependent upon foreign-owned transportation companies, while the mines were supposed to provide the power for national transportation facilities and limited private consumption.This strategy was certainly not an ambitious program aimed at nation-wide industrialization through private initiatives. In order to stress their close relationship with the government‟s agenda, these new industrial enterprises carried the character ju for governmental bureau in their names instead of the characters for factory (chang) or industrial company (gongsi) which would have indicated a private business concern. While each of these firms was funded in part by the issuance of shares to Chinese merchants, they were not floated on a public capital market in the manner we understand today, nor indeed were they funded through a public issue in the manner

310 Quoted in Albert Feuerwerker, China’s Early Industrialization, Cambridge: Harvard University Press, 1958, p. 97.

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used by foreign-registered corporations in Shanghai at the time. Although a public share market for domestic Chinese companies existed in fits and starts from the 1880‟s, the domestic Chinese capital market in the late 19thcentury did not attract enough public investment to fund large-scale operations such as mines, railways, and factories.³¹¹ Despite this competitive financial disadvantage, these new enterprises, initiated by Chinese government officials, operated on a much larger scale than traditional private manufacturing and transportation businesses and thus faced tremendous new challenges with changes in regard to financial and personnel management and technology.

One way to overcome the predicament of lack of public markets would have been to establish the new enterprises as government monopolies similar to the economic strategy of the Meiji government in Japan during the 1870s and 1880s.

However, given its strained financial situation, the Qing government could not provide sufficient funds available for such investment. In addition, the machinery, the technological and managerial procedures of the new enterprises required expertise which government officials with their administrative background could not provide.³¹²

In order to solve these problems, the new industrial enterprises established in the 1870s and 1880s took the form of government-sponsored enterprises, known as guandu shangban (government supervision and merchant management) enterprises.

The bureaucratic term for this type of enterprise had its origin in the traditional set-up of the government‟s salt monopoly where merchants had provided capital and management while government officials had been in control of production and trade

311 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 6.

312 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 6.

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quotas. Under the new scheme for large-scale industrial enterprises, private investors, mostly merchants, were expected to put up the capital and to manage their investment under the supervision of government officials. This arrangement meant that apart from some financial sponsorship through government loans, the merchants bore all the financial risks of the enterprise which often became joint-stock operation. In addition, they were required to work under the thumb of supervising government officials who often followed their own, not necessarily government-directed business agenda and who introduced bribes, corruption, and inflexible management into these enterprises. Albert Feuerwerker and Guo Hui Zhang have shown in detail the manifold problems these industrial government enterprises encountered due to the peculiar financial and managerial arrangements. Not surprisingly, the financial profit for the private investors in these guandu shangban enterprises in the 1870s and 1880s was rather limited. ³¹³

For example, as Lai Chi Kong has shown, the China Merchants‟ Steamship Navigation Company has attempted for a short while to consolidate the government-business cooperation with its new joint-stock structure between 1872 and 1884, but continued under dominant government influence in the following years.In the privatization process after 1895, the supervising director of the company appointed by the government, Sheng Xuan Huai (1849-1916), became an appointee of the board of directors. As Feuerwerker has shown, it was more a change in name than in fact, as Sheng Xuan Huai, while supervising director, had already acquired substantial shares in the company.³¹⁴

313 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 7.

314 Albert Feuerwerker, China’s Early Industrialization, Cambridge: Harvard University Press, 1958. p.

64-161.

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During this period of timid state-directed industrial efforts, Li Hong Zhang became in his position as government official and personal supervisor/sponsor the most powerful patron and leader of guandu shangban enterprises. The China Merchants‟ Steamship Navigation Company, the Kaiping Mines, and the Shanghai Cotton Cloth Mill were all under his official sponsorship which actually translated his political power in the government into the opportunity to establish his own sphere of economic influence and to control these enterprises in a quasi-monopoly situation.

This is not to say that Li Hong Zhang‟s patronage had a totally negative impact on these enterprises. As Chi Kong Lai has shown for the China Merchants Company, in the beginning Li‟s sponsorship actually secured sufficient financial support and autonomy for the merchant managers.³¹⁵ Only when Li Hong Zhang was finally unable to prevent the government from assuming more direct control of the management, did the company encounter problems. Extraction, mismanagement, and misuse of funds accompanied the government‟s growing intervention in the enterprise, leading to decreasing merchant investment. In general, lack of auditing procedures and absence of distinction between private and company funds characterized these government-sponsored enterprises as much as any family business at the time.

In order to attract private investment from merchants who had become less and less willing to risk their money in government-sponsored enterprises in the 1880s, the government devised a compromise and promoted a more attractive kind of cooperation for merchants in the form of guanshang heban (official and merchant joint management) enterprises. According to this new arrangement, merchants were to be more in control of the capital invested and of the management. However, this move

315 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 8. They used the reference of Chi-kong Lai‟s book, Li Hung-chang and Modern Enterprise, p. 238.

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by the government towards more flexibility and private financial as well as managerial involvement never really materialized and did not trigger the desired outpouring of investment funds. In fact, the dissatisfaction of the merchants grew during the early 1890s and was even acknowledged by government officials.³¹⁶

Certainly, the now more restrained presence of the government in guanshang heban enterprises still offered private investors some advantage in regard to official protection against inconvenient national as well as foreign competition. Nevertheless, creating an encouraging investment climate for private activity in the industrial sector would first require the more drastic step of abolishing the general protectionist mechanism against private enterprises in China, namely, the government policy which did not allow Chinese nationals independently to open private industrial enterprises anywhere in the empire.

The turning point came in 1895 when we witness a new phase of industrial entrepreneurship in China.

From that year on, enterprises in light industry and in the consumer goods industry were founded in greater numbers with a significant shift from government sponsored enterprises to enterprises with private involvement in ownership and management. For example, a boom in establishing cotton mills with full Chinese ownership took place after 1895. Between 1890 and 1894 only a total of five cotton spinning mills had been successfully established (all but one with government involvement), while by 1916 thirty new mills were in operation, all of them under private merchant management .The statistics of weaving mills is even

316 Wellington K. K. Chan, The Cambridge History of China, Chapter 8: Government, merchants and industry to 1911, Cambridge: Cambridge University Press, 01 May 2009, pp. 34-435.

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more impressive. While only one factory in private management was operating in 1897, by 1916 81 private weaving mills were in business.³¹⁷

In another important sector, 35 mining enterprises were founded between 1895 and 1911 as private enterprises in contrast to nine mining enterprises in total government ownership, ten other enterprises under joint government-merchant management and only two as government supervision-merchant management operations. As the government withdrew from direct involvement in the enterprises remaining under joint management, new forms of private business operations developed, now supported by structural aspects of incorporation, limited liability, and legal accreditation. The incentives for increased industrial activity and the changing ownership conditions did not originate in deliberate government reforms out of concern for a weak national economy; rather, they resulted from events in connection with China‟s foreign policy.³¹⁸

The Treaty of Shimonoseki at the end of the Sino-Japanese war in 1895 for the first time granted foreigners permission to engage in manufacturing operations in Chinese treaty ports. As Shao Xun Zheng has pointed out, since permission had been given to foreigners for building factories in China, it was impossible for the government to prevent its own nationals from engaging in industry any longer.

However, Shao stresses that the fall of Li Hong Zhang from power in 1895 was also a vital factor. Li Hong Zhang‟s personal patronage of such enterprises as the Kaiping Mines, the Shanghai Arsenal, and the China Merchants Steamship

317 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 10. For pdf format please see: http://icf.som.yale.edu/pdf/hist_conference/Will_Goetzmann.pdf

318 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p 1–20 .For pdf format please see: http://icf.som.yale.edu/pdf/hist_conference/Will_Goetzmann.pdf

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Navigation Company had been a crucial reason for their success. Li Hong Zhang was powerful not only in Beijing near his power base in Zhili province, but also in Shanghai. There he exerted his influence in the appointment of the Shanghai circuit intendant (daotai), the most senior official in Shanghai‟s administration, and worked successfully for his operations by networking through fellow provincials, colleagues, and fellow examination graduates. Through these formal and informal relationships Li Hongzhang was able to gain support from Shanghai and Jiangsu officials as well as from merchants and gentry members who either were attracted by Li‟s financial awards or by their own vested interests in the enterprises. In short, as long as Li Hong Zhang was in power, the operations under his supervision were protected through his patronage and thus also through their exceptional monopoly status.³¹⁹

Despite the fall of Li Hong Zhang and his monopolistic restrictions and the opening of the industrial realm to private initiatives, it took more than a decade before China was to experience substantial industrialization in regard to the number of factories and their output, and it was not until the post-1900 Qing reforms that the imperial court openly encouraged private business and industrial enterprise.

Establishing factories for light industry production, transportation or banking businesses required considerable private capital investment from merchants or businessmen. Even without interference from the government and influential officials, the risk of investing private capital in major industrial operations such as cotton spinning mills or silk filatures was still considerable in the early twentieth century.

Without an open and accessible capital market for domestic shares, the raising of capital was still one of the major problems in founding private enterprises, with the

319 William Goetzmann, Yale University and Elisabeth Köll, Case Western Reserve University, The History of Corporate Ownership in China, First Draft, 19 September, 2002, p. 10-12.

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exception of family businesses which recruited their capital from kinship and native-place networks.

There were, however, instances during this post-1900 period when the potential for full development of a Chinese share market appeared. Lee En Han documents the evolution of the Chinese Railway Rights Recovery Movement from 1904 to 1911, a period in which a number of domestic Chinese rail companies were chartered and capitalized in the wake of nationalistic zeal to recover the rail concessions made to foreign development firms.³²⁰ Nineteen major provincial railway companies were formed with Chinese capital raised through a combination of public share issuance, domestic, and overseas Chinese merchant investment and provincial government sponsorship. In some cases, these firms were given development rights that were stripped from foreign entities. Virtually all of these ventures foundered in the late Qing or early Republican period; some for political reasons associated with the suspension of their charters by the Imperial government, others from lack of capital, mismanagement and problems. The process of their failure itself is interesting.

Lee En Han documents aggressive proxy contests challenging managerial expropriation.

The Dasheng enterprises reveal the strengths and weaknesses of industrial enterprises founded in the wake of 1895 and the transition that came about with the privatization process. Dasheng was originally conceived as a regional enterprise in the form of a guanshang heban operation; it was officially initiated by Zhang Zhi Dong who would lend his support as the patron in the beginning. However, in contrast to the previous system under Li Hong Zhang, Zhang Zhi Dong who represented the guan or

320 Han, Lee-En, China’s Quest for Railway Autonomy: 1904-1911, Singapore: Singapore University Press, 1977.

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official side in the enterprise, did not represent the government as a corporate body but acted as an individual official. In this position he offered patronage and ineffective official protection for the enterprise, but not much else.³²¹

One could say that the watering down of government patronage to individual official patronage eventually led to the complete disappearance of involvement by individual officials in the enterprise. Zhang Zhi Dong was unable to offer Dasheng vital financial support, and without financial leverage his official influence faded from the picture. The originally government- sponsored enterprise thus became soon a privatized operation under the strong impact of the founder‟s family without ever developing into a family business. Registered officially as a shareholding company with limited liability in 1907, Dasheng then grew into a major industrial complex with considerable financial success and a substantial life-span.³²²

4.2.7 Pekin Syndicate, the Rothschild Archive, Li Hong Zhang and the Role of