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Chinese Loans 1861-1911

Korean Minjok Leadership Academy
International Program
Lim, Seung Hwan
Research Paper, December 2009

Table of Contents
I. Introduction : China before 1861
I.1 Domestic Politics
I.2 International Relations
I.3 Economy
I.4 Public Finance
II. Foreign Loans from 1861 to 1893 (before the 1st Sino-Japanese War)
II.1 Chapter Introduction
II.2 Military Loans
II.3 Railroad Construction
II.4 Yellow River Flood in 1887
II.5 Chapter Conclusion
III. Foreign Loans from 1894 to 1901 (from the 1st Sino ? Japanese War to the Boxer Rebellion)
III.1 1st Sino-Japanese War
III.2 Hundred Days' Reforms
III.3 Chapter Conclusion
IV. Foreign Loan from 1901 to 1911 (from the Boxer Rebellion to the Chinese Revolution)
IV.1 Chapter Introduction
IV.2 Boxer Rebellion
IV.3 Railroad Construction
IV.4 The Consortium in 1909
IV.5 Chapter Conclusion
V. Motivation for Foreign Countries to Give Loans to China
V.1 Financial Gain: Diversification
V.2 Diplomacy
VI. Influence of Foreign Loans on China
VI.1 Diplomacy
VI.2 Finance
VI.3 Industry and Infrastructure
VII. Conclusion
VIII. Timeline

I. Introduction : China before 1861

I.1 Domestic Politics
            From the mid 17th century to the late 18th century, Kanxi Emperor, Yongzheng Emperor and Qialong Emperor ruled China. It seemed that the Qing dynasty ruled China efficiently during this period; the Qing dynasty expanded its territory and stabilized the country under the emperors' strong leadership. However, this status was not due to efficient political system, but due to strong military power, and the military power was decreasing because of Qialong Emperor's excessive warfare in Nepal and Vietnam. Moreover, Manchurians Mandarins always feared whether Han intellectuals were making fun of the dynasty, and strongly censored writings of them. The scholars feared that they would be killed, so they mainly focused on interpreting old books. Thus, only a few people criticized the Qing dynasty in the end, and this phenomenon resulted in corruption of the government.
            From the late period of Qialong Emperor¡¯s rule, the problem of the Chinese government was evident. The emperor became sick of politics and tripped to the southern part of China with 10000 servants, a lavish expedition which depleted the budget of the Chinese government. As the Emperor did not care about politics, Heshen, a corrupted prime minster, controlled the country. People gave bribery to him and his family, and his personal fortune was 900, 000, 000 Tales of silver, "the total 12 years of treasury surplus of the Qing court" (1). Qialong Emperor began his reign with 33,950,000 Taels of silver in his treasury, and around 1775, it reached 73,900,000 despite nation-wide tax cut (2). However, the Qialong Emperor's warfare and expeditions cost 150,200,000 in total, and the huge expenses decreased the power of the Qing dynasty.
            As the government officials tried to be promoted to higher position by paying bribery to their superiors, common people suffered from illegal heavy taxes. This resulted in unceasing rebellions, which threatened not only the local governments but also the central government in the end. One of the most famous examples is Taiping rebellion from 1850 to 1864 (3). In the mid 19th century, the Qing dynasty was in trouble because of frequent rebellions and threat of Western powers. Mainland Chinese people, Han, came to think of Manchurians as inefficient rulers. Hong Xiuquan, a heterodox Christian, called himself a son of god, and combined this anti-Manchurian sentiment with his religion. The rebellion started in the southern part of China, far from Manchu. Common people, mainly farmers exploited by corrupt Mandarins, joined the rebellion. The rebels soon conquered southern part of China, and Hong Xiuquan declared himself as the emperor. However, as the Han landowners opposed the land reform Hong Xiuquan proposed, the rebellion was suppressed. Although finally defeated by the Qing dynasty, Taiping rebellion weakened the Qing dynasty and showed that it was facing severe problems.

I.2 International Relations
            Chinese decided the diplomatic policies based on the belief that they were the center of the world. Because China was able to sustain its economy independently with vast amount of agricultural production, it regarded foreign trade unnecessary. The Chinese empires involved in trade with their subjugated countries because they regarded it as a responsibility of the world's greatest power to uncivilized people.
            Until the 18th century, the Qing dynasty was the greatest country on earth regarding its huge territory, large population, and flourishing economy. Its hegemony was evident in the eastern hemisphere including Central, Southeast, and East Asia. Korea, Kingdom of Ryukyu and Vietnam were independent, but they identified themselves as servants of the Qing dynasty and rendered tribute. Moreover, rulers in those countries called themselves "king" (in Korean "Wang"), which was lower than "emperor" (in Korean "Hwang Je") in Asian culture. In return, the Chinese emperors legitimated the subjugated kings and allowed merchants of those countries to trade with China. However, the Qing Dynasty did not exploit subjugated countries; it felt proud of being a hegemon, so it helped tributary states by exporting valuable items such as tea, silver, and silk and helping them in wars such as the Japanese invasion of Korea in 1592. National pride rather than economic profit was the main motivation and goal of diplomacy policy of Qing dynasty.
            Europeans and Chinese first came into contact when the Portuguese merchant ships reached Canton (Guangzhou) in 1517. Portuguese seized and fortified Macau in 1557, and the Dutch East India Company established its foothold on Taiwan in 1624. Although European merchants often asked for free trade, the Ming dynasty opened one port, Canton, to them.
            The relationship between the Qing dynasty and the European countries was imbalanced because Europeans wanted Chinese products more than Chinese wanted European ones. Chinese people regarded European countries as its tributary states like its neighborhood and belittled European cultures as "barbaric". They thought Europeans vitally needed products such as tea and sea oak for survival. This unequal relationship was apparent in traditional Chinese law codes about Europeans. European merchants were unable to contact with common Chinese people, so they signed contracts with Chinese agents. Also, Europeans were prohibited from visiting any district of the city or hiring Chinese people. Nevertheless, Europeans still competed with each other to gain more advantages in China.
            The Conflict between Great Britain and the Qing dynasty began in 1793 when Britain sent a large diplomatic mission of 600 persons to establish equal diplomatic relationship with China. When McCartney, the British representative, met Emperor Qianlong, he rejected to kowtow and surprised mandarins who regarded this courtesy natural. As the Emperor permitted McCartney to bow in British style, this incident was concluded, but this was the first official cultural conflict between Europe and China. During the negotiation, McCartney tried to establish equal diplomatic relationship with China. However, the Chinese emperor still regarded Britain inferior and rejected its offer. He ordered his servants to show the British mission every part of China to show off its military and vast territory. However, McCartney observed the outdated Chinese industry and corrupt local administration, and concluded that Qing Empire was no longer the greatest power on Earth.
            Great Britain imported great amount of silk and tea from China, and paid great amount of silver in return. To compensate this trade deficit, Britain started to sell opium, cultivated in India, indirectly to China. Opium caused serious problems in China such as outflow of silver and drug addiction. Lin Zexu, the governor of Canton, banned opium trade and confiscated all opium from British merchants. This caused a minor conflict between Britain and Qing dynasty, which was intensified when Britain protected its marine who killed a Chinese without the agreement of Qing dynasty. The Qing dynasty asked Britain to take him back, but the British governor said that he would not accept British people executed by the Chinese government. Emperor Daoguang became furious and ordered to expatriate all British and to ban trade with Britain. This order severely damaged Great Britain because its economy was heavily dependent on trade. British parliament finally declared war against China (First Opium War, 1839). Chinese people believed they are "the strongest country in the world" and thought that Britain would fight desperately. However, British modern warships easily defeated Chinese Junks and the Chinese navy was defeated in Canton, Ningbo, and Chinghai. When British finally attacked Nanjing, an important city in controlling the Great Canal, China signed the Treaty of Nanjing (1842). This treaty forced China to establish official and equal diplomatic relationship with Great Britain, open 5 ports, lease Hong Kong to Great Britain, and admit Britain's extraterritoriality.
            After the first opium war and the Treaty of Nanjing, Western powers started to belittle China and found excuses for war. In 1856, Qing officials arrested the crews of Arrow, who were suspected of piracy and smuggling. British officials in Guangdong asked to return the ship and release crews because the ship was registered in Hong Kong. Moreover, they argued that Chinese soldiers mocked the British ensign. Finally, the war between Qing dynasty and Great Britain and its allies, such as Russia, United States and the Second French Empire broke out (Second Opium War). Qing dynasty had to deal with Taiping rebellion, so it could not resist the western army. Finally, Qing dynasty and Western allies signed series of unequal treaties: Treaty of Tianjin (1858), Treaty in Aigun (1858), Treaty of Beijing (1860). In consequence, Qing dynasty lost the left bank of Amur River to Russia, established diplomatic relationship with France, United States and Russia, opened ten more ports, allowed foreign vessels to navigate freely on Yangtze River, and paid great amount of indemnity.

I.3 Economy
            In the early 17th century, Chinese economy was devastated because of the war and population decrease. Population was less than 150 million, and Eastern China was too crowded. These problems were solved as new crops such as potato and corn enabled farmers to reclaim border regions, especially western China, and cultivation of grain was spread to southern China. Improved breed of rice increased agricultural production by allowing double cropping. Commerce also flourished. Delta region in Yangtze River was commercialized to the center of trade in Southern China and Southeast Asia. Grain, cotton, silk and tea were cultivated trades. These progresses were possible because of a high level of domestic and political stability and efficient policies such as encouraging reclamation of western land by tax favor, improving irrigation facility and promoting commerce.
            During the 18th century, economic prosperity and population increase were maintained and even facilitated because of influx of silver to Chinese domestic market, which resulted in the increase of money supply. Trade with Europe increased by 5 times between 1720s and 1760s, and 8 times until the end of the 18th century. Export of pottery, silk and tea to Europe increased, but China rarely imported products. This imbalanced trade increased the influx of silver and caused steady inflation which activated commerce. Between 1620 and 1820, the amount of silver increased 0.9 % while the price of grain increased 0.7 % (4). Low inflation despite increase in money supply demonstrates that a small scale of increase of productivity existed in this period. Economic growth in 18th century enabled the population to increase by about 300 million.
            However, prosperity in 18th century disguised the imminent saturation of the Chinese economy which would result in depression. Excessive farming greatly harmed the environment: forests were destroyed and farming land became barren because excretions of livestock that were used as fertilizer polluted them. These environmental disruptions gradually decreased productivity of agriculture. Also, booming commerce was dependent on influx of silver from Europe, so if the amount of silver in Chinese domestic market would decrease, Chinese commerce would stagnate.
            Until the beginning of the 19th century, Chinese economy remained in favorable conditions, but it became worse in the mid 19th century. Ruined farmland and crowded border regions could not afford population increases anymore. The population growth rate dropped from about 0.7 % to 0.3 % during the mid 19th century, proving that agricultural production could no longer support the burgeoning population. Opium trade depleted silver in China. About from a quarter to a half of silver flown in from 1700 to 1820 flew out (5). Moreover, Chinese people started to store silver coins instead of using them in market. These changes caused 40 percent of deflation from 1820 to 1850 (6), increasing in the value of silver coin. Farmers had to pay tax by silver, so they had to sell more products. Government could not reduce tax or finance public works to reinvigorate the economy because it had to fight back rebellions throughout China. The government could not deal with the prevalent corruption appropriately. As a result, Qing dynasty lost credibility among common people.

I.4 Public Finance
            Before the mid 19th century, the Qing dynasty ruled one of the largest territories in the world and had a potential to collect large amounts of revenue. However, the central government collected tax from local governments only to support court and barely conducted nation-wide projects such as building ports, improving infrastructures or adopting western technologies, because these functions were not responsibility of the traditional Chinese government. Land tax, which occupied 80 percent of budget (7), increased only when new land was cultivated. The budget of the central government was only 3 percent of gross domestic product (8). Thus, when the central government decided to protect the domestic financial market from foreign bankers or manage price level, it lacked the capacity to do so.
            The local governments became financially independent from the central government as the Qing dynasty suffered from internal havoc. The emperor lost the power to control every local government in his territory, and each local power strengthened itself. For example, when rebellions such as the Taiping Rebellion (1850-1864) occurred, the central government did not have enough military power to suppress them and depended much on local powers such as Li Hong Zhang.
            However, as China started to trade actively with western countries, its revenue increased because of tariff. The increase in trade with Western countries through open ports increased the Chinese government budget. Five percent tariff on foreign goods increased the Chinese government's budget which had been limited by its own nature. Another important source of income was likin, "an internal transit tax first levied in 1858 on grain carried along the Grand Canal and gradually applied by almost all provinces on almost all commodities" (9) Many open ports included inland ports near river, so budget raised by likin was quite large and supported regional military development. Despite objection of treaty ports powers, this tax also doubled imperial revenue in 1880s and 1890s compared to that in mid-century.

II. Foreign Loan from 1861 to 1893 (before the 1st Sino-Japanese War)

II.1 Chapter Introduction
            It is uncertain about the exact date when the Chinese government first borrowed money from other world powers. However, different dates from various sources stay around 1860, when China just started its modernization after the humiliating defeats in the First and the Second Opium War. Because there was no major war against major world powers from 1861 to 1893 except the Sino-French War (1884-1885), the Chinese government controlled most of its territory and collected huge amounts of tax which enabled it to maintain a healthy national finance and seldom ask for foreign loans. In many cases, European countries and the United States asked China to borrow their money to increase their economic influence in China. Also, the government did not spend much on indemnity to other countries. Actually, after the defeat in the Sino French War, the Chinese government ceded Vietnam to France rather than paying indemnity. Thus, most of loans issued to China were used for modernizing military facilities and constructing railroad.

II.2 Military Loans
            After several losses in wars against western countries, Qing dynasty realized the need to modernize its military facilities. Moreover, rebellions within the territory gave further incentive to strengthen its military with western weaponry.
            One of the major reasons for foreign loan was to modernize Chinese military, especially its navy. In 1861, Prince Gong built "Zongli Yamen", which dealt with diplomacy affairs with western countries and supported the Self-Strengthening movement. Before "Zongli Yamen" there was no Chinese government office dealing with foreign affairs; local governors had dealt with it by themselves. However, Zongli Yamen was a specialized diplomacy department and led the adoption of western technology. The Self-Strengthening movement mainly focused on reforming military facilities and Chinese industry, rather than its social structure or government system. Prince Gong and Li Hong Zhang, who were in charge of this movement, used foreign loans, advisors and technologies to adopt western weapons and build modern arsenals. They financially supported local governors trying to build arsenals and dockyards in Shanghai, Nanking, Tianjin, Ningbo, and Foochow with foreign advisors such as Leonce Verny and Prosper Giquel. In consequence, China came to have the 7th largest modern navy in the world at the peak of Self-Strengthening movement. (10) This project proved to be extremely expensive and inefficient. Because guns and canons produced in China were far inferior to those produced abroad, the government had to import foreign weapons even after it built several arsenals. Moreover, the government imported every resource and important components for modern weaponry from Europe. Actually, until 1878, China imported coal from Great Britain for it navy although it started to build its own navy from 1868. The government also paid for expensive foreign advisors and technicians. These costs were so large that the Chinese government borrowed 100,000 Dollars in 1864 and the same sum in 1884. (11)
            From 1861 to 1893, the Chinese government also made war loans 15 times from Hong Kong, London, Berlin and Frankfurt. (12) Because there was no war with major powers except the Sino-French War, which only lasted from 1884 to 1885, it seems that these frequent war loans were to fight for large-scale rebellions in the country such as the Dungan Revolt (1862-1877) and the Panthay Rebellion (1856-1873) and to buy foreign arms to suppress these rebellions.

II.3 Railroad Construction
            Despite the large cost and national sentiment against railroads, demand for them grew after the mid 19th century. Commercial centers such as Tianjin and Shanghai developed very fast and needed modern transportation system. The government also had to feed the growing population in urban centers such as Beijing efficiently. As the Europeans countries such as Britain, France, and Russia threatened China, it needed railroads for national defense. Moreover, the Grand Canal, which served as a main Chinese transportation artery, became very old and was often threatened by rebellions and foreign invasions.
            For western countries such as Britain, France, Germany and the United States, China¡¯s railroad construction was a lucrative project and they tried to lure China to borrow money from them. They sent their engineers to technically support China and diplomats to persuade Chinese government officials.
            However, China built its railroad mainly by itself. It still maintained control over its large territory and the ability to collect huge amounts of tax from its subjects. Chinese government annually granted Li Hong Zhang, the director of the railroads, the budget of 2,000,000 Taels (13) for railroad construction without practically any financial aid from abroad. He paid for most of the materials imported with cash and rejected any help from foreigners except few engineers. Some people even claim China borrowed money only once from foreigners in this time period. (14)
            The cost of Chinese railway construction project is estimated to have been about 80,000,000 Taels (15), and the time to construct it several years. In the mid and late 19th century, China was the only country in the world which could practice such huge project by itself. Thus, Chinese government's ambitious railroad plan reflected its financial strength and pride as the wealthiest nation in the world.

II.4 Yellow River Flood in 1887
            In 1888, Chinese government acquired a loan to recover damages caused by the Yellow River Flood in 1887. Yellow River had been prone to flooding for thousands of years, and the farmers living near the river had built dikes to contain rising water, caused by silt accumulation on the riverbed. In 1887, days of heavy rain cause the riverbed to overcome the dikes and caused a huge flood. 13000 square kilometers of low-lying plain in Northern China were soon covered with water. This deluge killed 900,000 - 2,000,000 people, destroyed homes of two million people, and devastated agriculture settlement and commercial centers.
            Because of this, recorded as one of the worst floods in Chinese history, Qing dynasty lacked the capacity to deal with this calamity and finally borrowed money abroad.

II.5 Chapter Conclusion
            Although, the Chinese government started to borrow money from European powers, most of the loans were asked by local governors. Thus, the total amount of the loan was not very large and the financial status of the central government remained healthy. Also, national sentiment against foreigners was still strong and many Chinese people opposed to recieving loans from Western countries. Most importantly, China still maintained control of most of its territory despite revolts and war with European countries, and remained its capacity to raise money by tax. Using these favorable conditions, the Chinese government implemented expensive reforms such as building railroads by itself.
            In conclusion, it can be inferred that the financial status of Chinese government was fine, and it still had a chance for successful modernization because most of its loans were used to build arsenals, dockyards, and railroads. However, this favorable condition did not last long. In 1894, the first Sino-Japanese war broke out, and China had to pay a great amount of indemnity to Japan for the defeat. After this event, China lost series of major wars against foreign powers and borrowed money for heavy indemnity. This change worsened the public finance and modernization process of China after 1893.

III. Foreign Loan from 1894 to 1911 (from the 1st Sino ? Japanese War to the Boxer Rebellion)

III.1 1st Sino-Japanese War
            In 1890s, the conflict between China and Japan intensified. In 1882, when the Gapsin coup, called Kim Ok-kyun affair, occurred in Korea, they revealed interest in Korean peninsula and conflicted over it. Finally, Japan, which had prepared a war by constructing a railroad connecting Busan, the nearest port to Japan, and Seoul, the capital of Korea, forced Korea to end the diplomatic relationship with China and started the war by attacking Chinese troops in Korea. (1894)
            Chinese people had regarded Japan as one of China¡¯s tributary states, so they believed Chinese navy and army, reformed during the Self-Strengthening movement, would easily defeat Japanese military. However, Chinese army was defeated in Korea and its navy was also destroyed in the Yellow sea. Finally, the United States of America mended the war, and China signed the humiliating Treaty of Shimonoseki in 1895.
            In the treaty, China had to give up tribute from Korea and admit its independence. It also ceded sovereignty of the Penghu group, Taiwan Island, and the eastern part of Liaodong Peninsula to Japan in perpetuity. Japan forced China to open four ports and grant most-favored nation treatment. The impact of the treaty was huge. Western powers ascertained China¡¯s powerlessness. Three countries, Russia, France and German, especially demanded Japan to withdraw from Liaodong Peninsula because they wanted to restrain Japan¡¯s influence. Furthermore, Russia wanted Port Arthur. After Japan's withdrawal, Russia built a railroad connecting Port Arthur and Harbin, a project which Chinese government protested. In these series of interventions, the Chinese government excerpted very little influence, and Chinese people's support for the government decreased.
            One of the most important damages China had to bear was the huge amount of indemnity. In the Treaty of Shimonoseki, China paid indemnity of 200 million silver Kuping Taels (7.45 million kilogram of silver) (16) to Japan. Moreover, after Japan gave up Liaodong Peninsula, it had to pay 30 million silver Kuping Taels (1.12 million kilograms of silver) for compensation. 8 million kilograms of silver China paid was two and a half times the Chinese government revenue (17) and 6.4 times Japanese government revenue. (18) This great amount of indemnity devastated Qing dynasty's revenue, and it borrowed money from foreigners to pay this debt. Before 1894, Chinese government mainly borrowed money for railroad or armory. However, in 1895 alone, Chinese government made four loans from London and Frankfurt with 6 % of interest to pay indemnity to Japan (19). Also, from 1899 to 1900, it borrowed 47.8 million Pound Sterling to pay Japan indemnity. Both loan and the interest deeply damaged the balanced finance of the Chinese government and decreased revenue for constructive use such as railroad construction.

III.2 Hundred Days' Reforms
            Humiliating defeat in the First Sino-Japanese war shocked Chinese people and ended the Self-strengthening movement, which proved to be useless. Many young scholars thought China needed to change not only its military and industry but also its fundamental political and social structures. Young Guangxu Emperor agreed with this and ordered the reform to Kang Youwei and his students. (June 1898)
            Kang and his students suggested several reform programs. They tried to modernized the traditional exam system, eliminate sinecures in the government, create a modern education system, change the government to constitutional monarchy, and apply principles of capitalism to Chinese economy. This radical course of reform aroused a great opposition from conservative politicians led by Empress Dowager Cixi. Finally, coup de tat led by Yuan Shikai and Empress Dowager Cixi terminated the reform.
            The impact of the reform itself was not very huge because it only lasted about 100 days. However, despite its short life, the fall of the reform made modernization of China slow-paced and the Chinese government lost an important chance to recover financial and political damage caused by the Treaty of Shimonoseki. The damage caused by this loss of chance became evident in China's humiliation in the Boxer Rebellion in 1900.

III.3 Chapter Conclusion
            Before the First Sino-Japanese war, China could use most of its revenue and loan to develop its weaponry and infrastructure such as railroads. Despite few obstacles such as unequal treaties and conservatism in the court, China developed itself because of its vast revenue and leaders of modernization such as Prince Gong and Li Hong Zhang. Westerners still admitted China's great potential and Chinese government also decreased its foreign debt.
            The defeat in the first Sino-Japanese war impeded China's modernization process and harmed its financial independence with great amount of indemnity. Moreover, the fall of Self-Strengthening Movement and Hundred Day's Reform increased the power of conservative politicians such as Empress Dowager Cixi and Yuan Shikai in the court. These series of events finally resulted in the China's loss in Boxer Rebellion, which dramatically increased the influence of foreign power in China in 20th century.

IV. Foreign Loans from 1901 to 1911 (from Boxer Rebellion to Chinese Revolution)

IV.1 Chapter Introduction
            From 1901, the Chinese government enthusiastically started to modernize infrastructures such as railroad, cable, bridge and so on. However, the central government paid much indemnity after the Boxer Rebellion so that it ran out of budget for these projects. The Chinese government tried to cause competition among international banks. However, as the consortium among Britain, France, Germany and The United States organized, China could not meet its goal.

IV.2 Boxer Rebellion
            The Society of Righteous and Harmonious Fists, known as "Boxers" to westerners, was first founded in Shandong. Boxers opposed to the imperialist expansion in China, growth of cosmopolitan area, and missionaries. They believed that they could be immune to swords and bullets by diet, martial arts, and prayers. Because Guanxu Emperor was eager to reform old traditions of China, the government suppressed Boxers.
            The conflict between Boxers and westerners began in Shandong over extraterritoriality and the property of church. The liberal government advocated missionaries by exempting them from many laws and issuing an edict which granted official rank to each order in the Roman Catholic Church. As a result, the local Chinese people led by Boxers became more hostile to westerners. However, after the Hundred Days' Reform failed, Dowager Cixi put the reformist Guanxu Emperor into house arrest, and supported Boxers to decrease the western influence in China. In June 1900, Boxers and Chinese Imperial army attacked foreign compounds in Tianjin and Beijing, and Dowager Cixi declared a war against all western countries in June 21 1900 (20). At first, Boxers massacred Christians in China and burnt foreign embassies. Staffs of foreign legations escaped to a fortified compound. However, as soon as the reinforcement from France, Britain, Germany, Italy, Japan, and Austria arrived, Boxers and Chinese imperial army were defeated.
            After its humiliating defeat, the Chinese government paid an indemnity of 67 million pounds (21), which greatly weakened the Chinese government¡¯s finance. This made the central government more dependent on the taxes from local governments, and the influence of the central government decreased. The rebellion also influenced the policy of imperialistic countries about China. Although they crushed Boxers, these countries realized that Chinese people would strongly resist to any attempt of colonization. Thus, the western countries and Japan decided to admit the rule of Dowager Cixi, but get profit from China by means other than colonization, such as banking. This change increased the role of western and Japanese bankers in the early 20th century China.

IV.3 Railroad Construction
            After the Boxer Rebellion, the Chinese government felt a great threat to foreign powers and decided to keep unity of the country by building railroads. The government was so enthusiastic about constructing railroads so that 360 km of railway was built in China until 1895 in total, but 9620 km of railways was built in China at the end of 1911 (22). Foreigners also liked Chinese railroad construction projects, because their businesses could be extended to inland China. The Chinese government tried to build railroad under Li Hong Zhang's leadership during the Self-Strengthening movement. However, the circumstances changed much. The Qing dynasty was defeated by foreign powers in the Sino-French War, the Sino-Japanese War, and the Boxer Rebellion, so it was much more venerable to foreign influence. Moreover, because the heavy indemnity depleted the Chinese government¡¯s budget, the project came to be dependent on foreign bankers.
            From the financial perspective, the Chinese railways project was harming. The Qing dynasty was already paying 42 or 43 Taels, about half of the central government¡¯s receipt and larger then than entire imperial revenues had been a century before, to other countries for indemnity (23). However, the government borrowed money from London, Berlin, Tokyo and Paris for railroads about 20 times from 1900 to 1911. This increased debt of the Chinese central government made it more dependent on the local government and foreign countries. The financial problem of the Qing dynasty was so serious that even foreign countries, which borrowed money to it, declared default of their loans to prevent turbulence. Moreover, huge spending on railroads made spending on building other facilities, such as armory or cable, more difficult.

IV.4 The Consortium in 1909
            The consortium among Britain, France, The United States and Germany arose out of the negotiation for financing of Hukuang railways from 1909 to 1911. When the Chinese government decided to build the railways, it had to borrow money abroad because of the huge indemnity of the Boxer Rebellion. Seeking to decrease European influence in the Chinese public finance, the government asked The United Stated to make a loan. This caused the opposition of Russia and Japan, which had sought the right to construct a railroad in Manchuria by lending money to the Chinese government. The United States pacified this diplomatic conflict by involving European countries such as Britain, France, and Germany.
            The consortium was a very unstable organization because the benefits of the four powers were often in conflict. The initial purpose of the consortium was related with financing the Chinese railroad construction. However, as the Chinese government borrowed money for building other infrastructure, each of the countries attempted to make loan to China as much as possible. For example, when the French banker, Cottu, negotiated a loan for building a bridge, three other countries doubted whether the French government had intervened. When they protested to this, France argued that the consortium could not be extended to loans for industrial purpose other than railroad construction.
            The consortium showed that international banks should cooperate to avoid recklessly borrowing money with unsatisfactory term. Moreover, the loan financing railroad construction occupied a very large part of China¡¯s foreign loan, so the impact of the consortium was significant. However, from the Chinese perspective, this cooperation of western countries was an international collusion. The initial purpose of asking The United States for money was to decrease European influence in the country. However, as The United States and major European powers collaborated, the Chinese government eventually borrowed money under unsatisfactory terms.

IV.5 The Consortium in 1909
            Just before the Chinese Revolution of 1911, the financial status of the central government was so hopeless that even imperialistic countries canceled their loans. The Qing dynasty tried to ameliorate the circumstances through a currency reform. However, the attempt failed because of the revolution.

V Motivation for Foreign Countries to Give Loan to China

V.1 Financial Gain : Diversification
            In the late 19th century and early 20th century, Chinese capital markets in Shanghai or Hong Kong were much smaller than those in London or Berlin. Thus, European bankers could fund nationwide projects of the Chinese government, which the Chinese bankers could barely support and got profit from. For example, when the Chinese government planned to build railroad across its territory but spent most of its budget to pay indemnity, it borrowed money mainly from London, Berlin, Paris, and New York. The western bankers gained a lot of interest because the amount of loan was very large.
            The motivation for western bankers to give loan to China was also related to diversification. If a banker invests money only in one country and the country goes bankrupt, he loses all of his money. Thus, diversification of portfolio was a popular investment strategy for many bankers. In the late 19th century, European bankers invested their money outside of Europe such as South America, Africa, Southeast Asia, and Turkey to minimize risk. They could save their money because even if one of those countries fell into havoc, their money in other counties would be safe. The population and territory of China was larger compared to those of other countries, and many large-scale projects, such as constructing railroads, building armories and setting up cables across the country, were ongoing. Thus, the bankers successfully diversified their portfolio by investing in China.

V.2 Diplomacy
            Most of European banks which gave loan to the Chinese central government were run by their governments or closely related with them. Thus, an important aim of the loan was to achieve each government¡¯s political goals in China.
            This aim of imperialistic countries was closely related with railroad construction. Western countries and Japan wanted to build railroads in the area of their interest to increase influence. For example, Russia funded railroad construction in Manchuria, which shared border with Russia. Thus, they tried to lend money when the Chinese government decided to build their railroads in the area and often complained to other countries for giving loan. The conflict before the consortium in 1909 was about this matter in most cases, and that is why the consortium only cared about loans for railroad construction.
            The other aim of the loan was to restrain other powers in China. In 1858, Nikolay Muravyov, a representative of the Russian government, forced the Chinese government to reverse the Treaty of Nerchinsk (1689) and transfer the land between the Stanovoy Mountains and Amur River from China. In 1860, 1864, 1881 and 1883, Russian government got a total of 1,610,000 square kilometer of land near its border from China (25). Russia also tried to occupy Port Arthur by forcing Japan to giving up Liaodong Peninsula it won after the Sino-Japanese war. Great Britain wanted to decrease Russia's power in the eastern hemisphere because the Russian government was aggressively expanding its navy, a military expansion which threatened British hegemony in the sea. Thus, Britain gave a military loan to China to help it expand its military and prevent Russia from further increasing its influence.

VI Influence of Foreign Loans on China

VI.1 Finances
            The Qing dynasty was forced by Great Britain to open its door after the First Opium war, so it lacked diplomatic ability. The anti-western atmosphere and vast population limited the influx of foreign capital to some extent at first. However, after China lost the Sino-Japanese war, the central government paid a huge amount of indemnity, larger than its annual budget, and started to borrow huge amounts of money from London, Berlin, Tokyo and New York. This weakened the central government, making it dependent on other countries and local governments. The decreased power of the central government made society more chaotic, and just before the revolution, foreign countries defaulted their loans to prevent any severe crisis.
            However, as Chinese people interacted with foreign bankers, Chinese financial market went through development especially in open ports and ceased territories. Before the First opium war, when the Canton System was valid, banking was less cooperatively organized, and there were many problems in remittance. However, as trade between China and Europe facilitated, China implemented a more efficient European style banking system.
            The most famous example is Hong Kong Shanghai Banking Cooperation, widely known as HSBC. As Britain acquired Hong Kong in the Treaty of Nanjing, trade between China and Europe was activated and demand for financial support in China increased. Thomas Sutherland, a Scottish working for the Peninsular and Oriental Steam Navigation Company, founded HSBC to respond to this demand. Although Europeans played a crucial role in building it, HSBC was heavily related to Hong Kong and mainland China. Unlike the Bank of India registered in London, HSBC was registered in Hong Kong. It also issued many loans for China for building infrastructure and paying indemnity to other countries.

VI.2 Diplomacy
            Before its humiliating defeat in Sino-Japanese War, foreign loan worked favorably from Chinese viewpoint. The revenue of the central government enlarged as tariff from foreign trade increased, so it could grow capacity to practice nation-wide projects by itself. Western countries asked China to borrow money from them with favorable conditions. When France gave loan to China for railroad construction, it also offered technicians and facilities necessary to build railroads.
            However, as China was defeated in Sino-Japanese war and its budget was depleted because of heavy indemnity, the Chinese government borrowed huge amount of money and its position became downgraded. The rapid railroad construction across the Chinese territory further increased the amount of foreign loan. As the Chinese government became run out of money and had to ask for loan more frequently, western countries no longer lent their money in favorable terms; they supervised how the Chinese government uses it budget and mortgaged its value-added tax such as salt tax. Because foreign countries interfered with government spending, the Qing dynasty could be more dependent on creditor powers.
            As the Chinese government became more knowledged about international relationship, it tried to find solution to decrease its dependence on foreign bankers. It tried to arouse competition by borrowing money from other countries, such as the United States. However, as western powers formed a consortium, a sort of an international collusion, in 1909, the Chinese government failed to become financially independent. Finally, just before the revolution, the position of the Chinese government fell so much that it asked other countries to cancel their loans to China.

VI.3 Industry
            The direct influence of foreign loan on the industrialization of China was rather small because most of the loans were invested in armory in the 19th century and in railroad construction in the 20th century. Especially, after the Boxer Rebellion, the Chinese government invested too much of its budget in railroad construction so that some Chinese people criticized that the railroad construction hindered industrialization in China.
            However, considering the indirect influence of railroad construction, the impact of foreign loan on Chinese industrialization was large. Railroad construction enabled transportation of raw materials across the Chinese territory, which helped the development of other industrial sections. For example, railroads decreased the cost of coal transportation to one-fifth level of land transportation (26). This decrease in the price of coal helped the Chinese industry to transform from home-based handicrafts to a mechanical manufacturing industry. Moreover, as producing raw materials became more lucrative, the investment on raw material industry also increased. The following table shows how foreign investment on coal industry increase annually.

Year Yen Invested (27)
1899 1,527
1900 11,517
1901 12,286
1902 13,973
1903 15,990
1904 14,295
1905 15,437
1906 14,282
1907 29,047
1908 39,740
1909 42,946
1910 45,889
1911 50,686

            In 1900 and 1907, the investment on coal industry radically increased. The year of 1900 is around the Boxer Rebellion, so the Chinese government actively constructed railroads to maintain unity. Also the timeline (Chapter 8) shows that the Chinese started to borrow considerable amounts of money from 1906, and this is nearly 1907, when the investment on the coal industry was nearly doubled. These facts support the idea that there was a strong correlation between railroad construction and coal industry.
            Finally, when the Chinese government borrowed money from abroad to construct armory, railroad and cable, foreign technicians also came to China and became involved in those projects. This facilitated technological growth in China. These changes in the Chinese industrial structure helped China to overcome its stagnation due to decreased productivity of agriculture in the mid 19th century.

VII Conclusion
            From 1861 to 1893, the Chinese government received benefit from foreign loan. Many western countries wanted to invest in China to diversify their portfolio and increase their influence. This enabled the Qing dynasty to receive loans in favorable terms and the central government could maintain its independence. However, as the amount of foreign loan became larger than the government budget and went out of control, the Qing dynasty became dependent on western countries and Japan. The Chinese government drove itself into trouble by excessively constructing railroads, but imperialistic countries also caused this by demanding large indemnity.
            Despite its attempts for modernization, the Chinese government failed to meet its goal because of unbalanced public finance. It did not know well how the international financial system worked and failed to use foreign loans in its favor. This failure weakened the Qing dynasty and contributed to its downfall.

VIII Timeline

1901: borrowed money to repay debts
1910, 1911: borrowed money twice each month for "local" purposes


(1)      Article : Qianlong Emperor, from Wikipedia
(2)      ibid.
(3)      Article : Taiping Rebellion, from Wikipedia
(4)      Richardson 1999 p.19
(5)      ibid. p.21
(6)      ibid. p.22
(7)      ibid. p.87
(8)      ibid.
(9)      Gilbert, 36
(10)      Baig 2995, p.285
(11)      Goetzmann / Ukhov 2001 p.38
(12)      ibid.
(13)      New York Times, 1891.12.27
(14)      Goetzmann / Ukhov 2001 p.35
(15)      New York Times, 1891.12.27
(16)      Article : Treaty of Shimonoseki, from Wikipedia
(17)      Article : First Sino-Japanese War, from Naver Encyclopedia
(18)      Article : First Sino-Japanese War, from Wikipedia
(19)      Goetzmann / Ukhov 2001 p.36
(20)      Article : Boxer Rebellion, from Wikipedia
(21)      ibid.
(22)      Wright 1984, p.44
(23)      Rozman, 227
(24)      Article : Treaty of Aigun, from Wikipedia
(25)      Baig 2995, p.271
(26)      Wright 1984, p.44
(27)      Wright 1984, p.22


Note : websites quoted below were visited in 2009

Bibliographic Sources "
1.      Richardson, Philip; "Economic Changes in China c.1800-1950", Cambridge : UP, 1999
2.      Cheong, Sung-hwa; Ganse, Alexander; "Bibliography of Western language publications on Korea 1588 ? 1590", Seoul: Myoungji ? LG Korean Studies Library, 2008

Primary Sources :
3.      The Statesman's year book, London : MacMillan, years 1878, 1889, 1895, 1901, 1902, 1904, 1905, 1907, 1910
4.      New York Times, Article : Railways in China; 14 Sept. 1885
5.      New York Times, Article : Railways for China; 4 Dec. 1886
6.      New York Times; Article : China¡¯s first railroad; 30 August 1891
7.      New York Times; Article : China pays cash: She wants no loans from the western barbarians; 27 december 1891
8.      New York Times; Article : Source of China¡¯s Money; 27 December 1891

Secondary Sources : 9.      Baig Yang. ¸Ç ¾ó±¼ÀÇ Áß±¹»ç 5 ¡¸ñéÏĞìÑŞÈ˵ 5¡¹from Chinese to Korean. Seoul: Changhae. 2005
10.      Chen, Jack. The Sinkiang Story . New York: Macmillan 1977
11.      Edelstein, Michael. 1982. Overseas Investment in the Age of High Imperialism. New York : Methuen 1982
12.      Edward, E.W. British Diplomacy and Finance in China 1895-1914: Oxford UP. 1987
13.      Feis, Herber. Europe, The World's Banker: 1870-1914. New Haven: Yale Press, 1930
14.      Goetzmann, William. N, Ukhov Andrey. China and the World Financial Markets 1870-1930: Modern Lessons from Historical Globalization : Wharton Financial Institutions Center. July 20, 2001
15.      Stanley, John C. Late Ch'ing Finance: Hu Kuang-Yung as an Innovator. Cambridge: East Asian Research Center, Harvard University, 1930.
16.      Welsh, Frank. A Borrowed Place: The History of Hong Kong. New York: Kodansha America, 1994
17.      Wright, Tim. Coal Mining in China¡¯s Economy and Society 1895-1937. New York: Cambridge UP. 1984
18.      Horowitz, Richard S., Session 152: Foreign Influences and State Power in Qing Dynasty,
19.      Bickers, Robert, The Chinese Maritime Customs Service and the China Trade.
20.      Timeline of Chinese history, from Wikipedia
21.      Timeline: Qing Dynasty 1860-1874, from WHKMLA,
22.      Timeline: Qing Dynasty 1894-1911, WHKMLA
23.      History of the changing Yellow River, from Wikipedia
24.      River flood in 1887, from Wikipedia
25.      Chinese Maritime Customs Service, from Wikipedia
26.      The Chinese Maritime Customs Service: Forgotten History, from Radio86: All about China,
27.      Second Opium War, from Wikipedia,
28.      Zongli Yamen, from Wikipedia
29.      The First Sino-Japanese War, from Wikipedia
30.      Treaty of Shimonoseki, from Wikipedia
31.      The First Sino-Japanese War, from Naver Encyclopedia, in Korean,
32.      Article : Boxer Rebellion, from Wikipedia
33.      Article : Taiping Rebellion, from Wikipedia,
34.      Article : Treaty of Aigun, from Wikipedia
35.      Article : Qianlong Emperor, from Wikipedia
36.      Group History 1865-1899, HSBC

Sources which may be relevant, but which I was unable to access
Naughton, Barry; ¡°The Chinese Economy: Transitions and Growth¡±; MIT Press
Pomeranz, Kenneth; ¡°The Great Divergence: China, Europe, and the Making of the Modern World Economy¡±: Princeton University Press, 2001.
Huenemann, Ralph William, 1984, The Dragon and the Iron Horse: the Economics of Railroads in China 1867-1937, The Council on East Asian Studies, Harvard University, Cambridge.
Bland J.O.P; "Li Hung-Chang (Masters of the Nineteenth Century)"
Foster, John W; "Memoirs of the Viceroy Li Hung Chang"

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