S10: Capital Flight

• Rong and Tang families: How did they become one of China’s leading cotton manufacturers?
• How did Chinese family enterprises survive the Communist Revolution?
• Family connections and overseas network: What role do Chinese diaspora play in China’s economic development?

• What kind of company did the Rong brothers run?
• What’s their business model?
• How did the family business evolve from the late 19th to the early 20th century?

Wuxi

• Core in the Yangzi river delta
• Grand Canal
• Traditional silk and cotton industry

Shanghai

• Platform to build the business: knowledge, professional expertise, protection of foreign settlement
  

Rong Zongjing

• Founder of Shenxin cotton mills in Shanghai in 1915
• Largest cotton factory and most successful entrepreneur in ROC

Rong Desheng

• Brother of Rong Zongjing
• Seven sons; only fourth son, Rong Yiren, staying behind in China

Native-place ties:

• Family remittance from Shanghai funded initial enterprise
• Intermarriage for connections
• Conscious expansion of networks beyond the family

Family hierarchy:

• Training of sons
• Vertical integration
• Enforcement of patriarchic structures
• Conflict resolution within the network

Business in Wuxi (pre-1915)

• Silk cocoon
• Two flour mills
• One cotton mill

Expansion in Shanghai

• Loss of family investors: Rong Zongjing’s plan for Shanghai expansion was rejected by family members
• He and his brother Rong Desheng borrowed from Japanese-owned banks to build new mills in Shanghai
• Booming due to WWI demands, low silver price
• Moved headquarter to Shanghai in 1920

From family investment to fallout:

• Family remittance crucial to initial business operations in Wuxi
• Fallout led to Rong Zongjing and Rong Desheng to set up new cotton businesses in Shanghai
• Maintained ties with Wuxi: family associates as managers or supervisors, Wuxi locals as general staff

Family business until 1945:

• Rong Yiren and his sons sent abroad for education
• LLC status to protect against Japanese confiscation, but later de-registered to curb outsider influence

• Between 1945 and 1956, 900K to 1.15 million people migrated from mainland China to Taiwan
• Nationalist government and military personnel, as well as civilians who followed them.
• 1/2 - 2/3 of the migrants were civilians who arrived in 1949.
• “Waishengren / mainlanders” from various provinces throughout China vs native Taiwanese population (Hokkien or Hakka dialect speakers).

• 1915: Founding in Shanghai as unlimited liability company
• 1919: Second mill in Shanghai
• 1921: Headquarter moved from Wuxi to Shanghai
• 1927: Rong Zongjing arrested; forced purchase of Nationalist bonds
• 1945: Company divided into sections; end of centralized Rong family business
• 1956: Nationalization under PRC

• 1945-1950: around 400,000 to 700,000 migrants
• The influx of migrants continued at lower rates: 40,000 migrants annually during the 1950s and around 10,000 annually during the 1960s.
• This migration wave created the longest sustained stream of migrants in the aftermath of the civil war.

• Part of long-established elites from Wuxi (18 generations)
• Sstudied in the U.S. (Lowell Textile School, then MIT)
• Applied American management to expand his textile and other enterprises
• Married Kinmay (educated in England and a McTyeire School teacher)
• Prioritized foreign education and U.S. ties for their children.

• In spring 1937, the Tangs left Wuxi and set up a new mill in the French concession.
• Wuxi mills were later bombed/seized, but the Shanghai mill initially profited during the war’s shortages.
• When Japan seized the concessions in 1941, Tang paid to regain properties and joined the Cotton Control Commission.
• After WWII, Tang prepared exit strategies (real estate in Taiwan, moving machinery/staff to Hong Kong in 1946–47).
• Sent children to the U.S. in 1947–48.

• Jack, son of Tang, studied at MIT and Harvard Business School, became a U.S. citizen, worked briefly in the U.S., then returned to Hong Kong in 1955 to join the family firm.
• The family firm, South Sea Textiles, became Hong Kong’s largest textile manufacturer by 1970.
• The Tangs’ mobility, pragmatism, and American-educated networks were key to their successful transplantation and postwar revival.

• In the 1950s, British colonial gov in Malaya fought against the Malayan Communist Party (MCP), primarily comprised of ethnic Chinese
• The authorities forcibly resettled around half a million Chinese into “New Villages”, and deported tens of thousands of Chinese farmers suspected of supporting the MCP.
• After independence, Education Act in 1961 excluded the Chinese language from secondary schools

• 1959: Military took measures to break the economic dominance of ethnic Chinese.
• After a failed coup in 1965, the military launched a crackdown on suspected Communists and killed thousands of Chinese.
• Tens of thousands of ethnic Chinese fled to China, with around 100,000 following in 1960

• Between 1949 and 1961, approximately 450,000 to 600,000 Chinese migrants, mainly from Malaysia and Indonesia, migrated to China.
• Initial resettlement in ancestral homes in Fujian and Guangdong provinces, then purchase of houses in suburban gated communities called “Overseas Chinese New Villages.”

• 1987: China’s investment banking industry started.
• 1995: Morgan Stanley and China Construction Bank formed CICC, which became a market leader.
• 2011: Morgan Stanley and JPMorgan were approved to acquire minority shares in local securities companies.

• 2006: Sons and Daughters Program initiated
• 2009: JPMorgan lost a deal after Deutsche Bank hired the SOE chairman’s daughter.
• JPMorgan then increased its hiring of Chinese princelings and tracked the resulting business deals in a spreadsheet.

2007: Railway Princess

• Hired the daughter of a senior official from the Ministry of Railways of China.
• 2007: In December, secured underwriting of CRG’s IPO.
• 2010: Hired to plan an IPO for Beijing-Shanghai High-Speed Railway, which was later suspended.

2010: Finance Prince

• Hired the son of Tang Shuangning, chairman of state-owned Everbright, a financial services company.
• Secured several financial advisory jobs for Everbright.

• 2013: The US Securities and Exchange Commission found JPMorgan’s “Sons and Daughters Program” a systematic bribery scheme that hired the children of Chinese government officials who were typically unqualified for the positions.
• Investigation expanded to other banks, including Morgan Stanley, Citigroup, Goldman Sachs, Credit Suisse and Deutsche Bank.
• 2016: JPMorgan agreed to pay $264m penalty for hiring princelings.

• What were the historical precedents for JPMorgan’s princeling hiring practices in China?
• What advantages and disadvantages followed the practice of princeling hiring?
• What should JPMorgan do after the pausing of Foreign Corrupt Practices Act enforcement?

While Beijing’s political influence deepens, Hong Kong remains economically separate:

• It is a separate customs territory, with its own regulatory and legal framework.
• It remains an independent member of the WTO and a free port.

But this status no longer recognized by the US:

• 2020: Revoked HK’s special status – as a separate territory when considering import quota, tariffs, and certificates of origin – in response to the National Security Law; “Made in Hong Kong” now “Made in China”
• 2025: “Hong Kong Economic and Trade Office Certification Act,” HR 2661