S05: Homegrown Industrialists

• Only 4% of China’s land area, but accounts for about 25% of national GDP.
• Highest R&D investment, with 20% of Chinese tertiary education students coming from the area.
• Strategic position and extensive transport network: Shanghai and Ningbo-Zhoushan ports (the world’s first and third largest, respectively), handling over 40% of Chinese exports.

• Prefecture-level city in southeastern Jiangsu province, China
• Located on the northern bank of the Yangtze River: Suzhou, Wuxi and Shanghai to the south across the river; and the East China Sea to the east.
• 3.7 residents in metropolitan area, 7.7 million residents in total (2020 census)

• 1900: Boxer Rebellion
• 1911: Fall of Qing; Founding of the Republic of China
• 1919: Treaty of Versailles; May Fourth Movement
• 1921: Founding of the Chinese Communist Party
• 1927: Chiang Kai-shek completes the Northern Expedition; purges the CCP

Questions:

• How did Chinese enterprises survive – and evolve with – the dynastic change?
• What happens when we foreground individual firms, rather than political events?

Before 1900:

• Small, owner-managed businesses: sole traders, partnerships, unincorporated companies were the backbone of enterprise.
• Limited inter-state commerce; corporate control resided mainly with the states.

After 1900:

• Large, publicly-traded corporations formed oligopolies
• Control shifted to federal institutions and market forces.

• Dasheng Cotton Mill, China’s first LLC: How did it grow amid a century of revolutions?
• How did Chinese enterprise culture evolve from the 19th century?
• Company law: How did it shape internal corporate governance? How to structure relationship between the state and the market?

• Signed between China and eleven Great Powers on September 11, 1901
• 450 million silver taels as indemnity; 668 million with interest
• Entire revenue structure, except land tax, placed under foreign control
• Further erosion of national sovereignty: Japan retained troops in north China

• Rise of modern, activist, and fiscally efficient state
• Bureaucracy streamlined: Six Boards replaced by cabinet ministries
• New ministries: Trade, Education, Interior, Posts and Communication, etc.
• New sales tax on consumer goods; provincial revenue contributions
• Nationalization of profitable industries, mines, shipping lines

• Translation of Western legal texts
• Synthesizing Western law and Chinese tradition
• End of collective responsibility and cruel punishments
• New institutional structure: Ministry of Justice, Imperial Supreme Court
• New laws: company law, criminal code, citizenship (nationality by bloodline), etc.

• Creating centralized modern army to supplant Eight Banners and remnants of Taiping regional militia
• 1903: Commission on Military Reorganization
• Creation of Beiyang Army – first national army and China’s strongest military force
• Rise of Yuan Shikai (1859-1916) and key warlords of early Republican era

• Abolished in 1905
• End of traditional pathway to official service for over a millennium
• Establishment of Western-curriculum schools in all localities
• Modern school diploma replaced exam degree as credential for official service and social mobility

• 1905-1906: Overseas tour and study of political systems
• 1907: Commission to Study Constitutional Government established
• 1908: “Principles of the Constitution”, elected assemblies on local (1908) and provincial (1909) levels
• 1910: Provisional National Assembly convened in Beijing

• Fin-de-siècle Qing: Not simply weak, corrupt, or “destined” to collapse
• New Policy reforms laid the foundation of modern Chinese states
• Rethinking the teleology of revolution: Was the collapse of Qing in 1911 “inevitable”?

In 1904, the newly created Ministry of Commerce (Shangbu) issued China’s first Company Law – it was the first modern law drafted by the Imperial Law Codification Commission.

• What was it like to run a business before 1904?
• Why did the Qing give the highest priority to a company law?

Pre-1904, Chinese law lacked regulation of private economic activity:

• Qing China had a penal code (Great Qing Code) but no commercial or civil code.
• Bribery was a notable economic activity addressed in the code.
• Commercial disputes were treated as “small matters” – minor infractions.

Instead, it left much commercial regulation to customs:

• The Qing Imperial Code supported the Confucian family system through statutes on marriage, succession, adoption, and elder care.
• Kinship-based property ties fostered economic collaboration and influenced the development of shareholding.

China had a robust contract culture:

• Contracts were common in Qing China for various aspects of life like marriage, land, and adoption.
• Chinese shareholding entities had qualities of legal personhood, allowing investment and transferable shares.
• Owner shielding (limited liability) and entity shielding (protecting the firm from shareholder creditors) also existed.

But it was not fully aligned with modern Western corporate law:

• The Qing code was primarily a penal code: it focuses on prohibited behaviors and punishments.
• Bribery was a notable economic activity addressed in the code.
• Commercial disputes were treated as “small matters” – minor infractions.

Three key motivations

• Creating Chinese companies to compete with foreign businesses in China.
• Attaining Western legal standards to abolish extraterritoriality and restore China’s sovereignty.
• Strengthening central government power: new ability to direct and control private economic development.

Unresolved questions:

• Which institutions are necessary for economic development? How can they be adapted to a Chinese context?
• Who would be the primary beneficiary of the new law – the Chinese state or private business?

• What does corporation mean?
• What makes an unincorporated company?

• In 1818, Daniel Webster defended Dartmouth College before the Supreme Court.
• Webster argued the college’s charter was a contract protected by the U.S. Constitution (Article 1, section 10: no state shall pass any law “impairing the obligation of contracts”)
• The Supreme Court agreed: Corporations have constitutional rights.

1 U.S.Code § 1 states that:

“In determining the meaning of any Act of Congress, unless the context indicates otherwise— the words “person” and “whoever” include corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.”

Examples: East India Company

• Royal monopolies or crown chartered; no free incorporation
• No perpetual existence: renewal subject to crown.

Modern company:

• Separate Legal Personality creates the entity.
• Limited Liability encourages people to invest in that entity without undue risk.
• Transferable Shares make that investment liquid and attractive.
• Delegated Management makes operating a large entity with many owners efficient.
• Investor Ownership defines the purpose of the entity and for whose ultimate benefit it is run.

US:

• The corporate form began to proliferate in the 1790s.
• Before 1861, state governments incorporated over 22,000 businesses across various industries.

UK:

• 1844 Registration Act: allowed anyone to register a corporation.
• 1856 Joint Stock Company Act: ended the need for parliamentary incorporation, severing the statutory link between firms and social purpose.

Creating a trust

• 1882: Standard Oil innovated the Standard Oil Trust.
• Each corporation of the alliance exchanged stock certificates for Trust certificates to operate as one entity.
• Separation of ownership from management: Nine trustees, led by Rockefeller, supervised investments and managed the collective companies.

Significance

• First Big industrial Business, as distinct from the railroads and telegraph.
• First trust: Exercising of management control through the owning of certificates rather than real assets.

A step forward…

• The Sherman Act: passed on July 2, 1890, to control the rise of trusts and was enforced by the Federal Courts: monopolization or attempts to monopolize trade among states or with foreign nations criminalized.
• Between 1890-1893, there were 6,153 strikes.

… And back:

• July 26, 1893 (“Black Wednesday”), marked the start of the first industrial depression (1893-1897).
• Overproduction was countered by consolidating production in fewer firms to control output and raise prices.
• Marginalism: To achieve low prices required large-scale operations with high sales volumes – high to generate margin to cover all fixed costs.
• However, horizontal and vertical mergers led to business combinations, which the Sherman Act was intended to prevent.

• Government relations
• Corporate governance
• Family influence
• Capital
• Social status
• Market: cotton industry

• In Europe and the US, railroads contributed substantially to the emergence of managerial capitalism and the rise of big business.
• In China, industrialization did not take off until the early 20th century and without substantial railroad development due to a lack of capital markets.
• Instead, the textile industry, cotton and silk, became the motor of industrialization.
• Chinese big business developed as a hybrid with characteristics of family and corporate firms.

• What did Zhang Jian get right – or wrong – in dealing with the government?
• How did Dasheng compare with other Chinese firms we have studied, such as the China Steam Navigation Company under the “government supervision, private entrepreneurship” model?

Excellent government relationship throughout:

• monopoly
• representation in local government affiliated institutions;
• cooperation with changing local regimes

Zhang Jian’s control over local public sphere

• access to local financial sources
• Chamber of Commerce for legal disputes (and petitioning of central gov)
• control over newspapers and Dasheng-related business info
• Exploitation of weak position of minority shareholders
  

Modern factory management

• autocratic, efficient, productivity-oriented
• company culture: welfare
• imported technology
• vertical integration of company: land reclamation, transportation, services

Incorporation (at least in form)

• improved access to capital from foreign banks in Shanghai
• from Chinese perspective, registration only for compliance
• no place to sue, no enforcement of violations: no audit until 1924!
• Shanghai office structured as holding company for central financial/managerial control
• no separation of ownership and control; succession from within the wider family network

• China’s underdeveloped share market hindered the registration of limited liability firms.
• State pressure for tax revenue and warfare further discouraged integrated company forms.
• Republican-era entrepreneurs favored organizing like-minded investors for specific deals.
• A 1933 survey of Chinese factories revealed that partnerships remained the most common form of ownership.

• How did Dasheng survive the Mao era (1949-1976)?
• How much had the characteristics of Chinese enterprises, their institutional development, and their business practices changed in the transition from the late nineteenth to the twenty-first century?

• Dasheng exemplifies the tradition most of China’s State-Owned Enterprises grew out of in the 1950s.
• Corporate governance issues are related to the nature of the Chinese firm and legal framework emerging after 1895; it was not just the product of socialism.

• Public enterprises display characteristics of the traditional Chinese family firm and modern Western corporations.
• It’s not just about networks: institutionalized personal power in combination with social/political networks.

You are considering investing in a Chinese public company today.

• What information would you try to get?
• What would be your greatest concern?
• Will more privatization of Chinese SOEs bring better corporate governance?

• Who is the major shareholder? Identity? Political Connections?
• Who sits on the board of directors? Who presents the CCP? Who has local or central government ties?
• Was the CEO selected by government referral or choice? What did he/she do before? How are auditors selected?
• Larger Issues: Would I be able to sue?
• What would financial statements and reports reveal/not reveal?
• Relationship with Chinese state-owned banks?
• Is the company in a strategically “sensitive” sector?

• Chinese business institutions are rational responses to internal and external challenges – not simple products of “Chinese” or “East Asian” cultures.
• China’s diversity and historical trajectory demand varied perspectives in evaluating business: political, economic, legal, and cultural contexts are key.
• Factors like government relations, local vs. central agendas, networks, and values are important.