Merchants of Hong Kong in the 18th Century

When I was in Hong Kong I was visiting the HKU Library and ran into the book called “Merchants of Canton & Macao — Success and Failure in eighteenth-century chinese trade” by Paul Van Dyke. As I was sensing the city’s heavy-weight financial and commercial significance and experience throughout my short visit, I was sure this book could shed a lot of light about this place, about China, early global trade and capitalism. I was not let down even a bit. The book is hard to read — it doesn’t contain a lot of financial analysis but mostly historical facts. It revolves about subjects that are very far from today’s financial environment, and even though the writer did a tremendous works of scanning through the relevant ledgers of all the parties involved in the trade, the book is still very technical with many numbers that by themselves prove no significance to me. In this review I will touch upon the main insights I got reading it.

Introduction — or How was Qing’s dynasty Xenophobia the preamble to 19th century Imperialism

A basic question you need to ask about the setting of all the Chinese and south-east asian trade, is Why did it all occur in China? There’s no reason Chinese merchants and sailmen couldn’t take Chinese manufacturing abroad on their own and sell directly to the European markets. Having this part of the production chain under their control could also avoid many of the mishaps discussed later, where Intra-European wars prevented trade and ships coming in many periods during the 18th century. The Americans, who kept Neutral, and did have their own merchant ships, kept trading with Europe in these periods, while the Chinese merchants who prepared stock to send out to Europe got into serious debts in these periods.

While there was no official Chinese policy against trading out of China, a few of the government’s actions effectively ruled out any such activity. Merchants that have spent some years outside of China were persecuted, arrested or executed after being charged with treason, contacts with foreign governments, or hiding illegal immigrants — the illegal immigrants being their own foreign wives and kids. Also more subtle activities such as sending letters to foreigners were severely punished.

As far as I can extract from the text, the reason for this anti-growth policy is taxes and customs. It’s harder to control merchants when they’re out of the country. They can evade taxes and customs much more easily, let alone the fact that foreigners were charged higher customs than local men, so it was more profitable for the local authorities to have the trade be done in foreign ships than local ones. Of course libertarians will oppose this type of market intervention due to government regulations approach, but also an old fashioned nationalist can understand that limiting this type of free trade did enormous damage to the Chinese people in the long run, as it prohibited the development of its trade and naval capabilities, while irritating foreign actors and encouraging them eventually to enforce opening of the market by force.

What types of Regulations and other arbitrary impositions were the Canton Merchants Subjected to ?

The emperor was due to receive a high tax every year. The tax was a fixed collective sum the local authorities needed to send. This meant the following -

In Successful years the local officials would ask to benefit more — they would ask for gifts, clocks, other expensive mechanical devices brought from Europe.

In Unsuccessful years the local officials were stressed about funding the emperor’s tax, and even though everyone was in a bad financial situation they would demand high taxes, get merchants into debts out of which they sometimes never recovered, went out to merchants who never had to pay taxes. They basically pillaged the whole business community until they got the satisfactory amount, without any guarantees of fairness or tax predictability.

It’s unsurprising then that almost no merchant family stayed in business over the period. If they had profits, they were taken for taxes, and if they didn’t have, they got no support.

Authorized Merchants — There was a class in the Canton trade called The Hang Merchants. These people were authorized to trade in large quantities with the European Corporates and secure their ships. While being a crony-capitalist that kept non-Hang merchants out of some business, already a bad outcome, belonging to the class came with such downsides that it was sometimes even better not to belong to it. The emperor’s interest was to have as much good come in and out to increase customs. This meant that Hang merchants were obliged to buy the entire content of a foreign ship they secured, even if it had no market that year. They had to absorb many losses on such stocks. What’s more, as they were the authorized merchants, they were always on the local official’s radars. If the officials needed more taxes, special war taxation, financing local festivities, or their own birthdays, they always went first to the Hang Merchants. Hang Merchants were also committed to one another’s debts. In the case a Hang Merchant went bankrupt, others were picked randomly to cover his outstanding debts. There was some free market mechanisms involved in that habit — The European Corporates would compensate someone who took a debtor’s debts by granting him the debtor’s trade share. This was a good mechanism that kept sure European companies will always trade with the most well-run businesses, and also not suffer substantial losses in case any of them failed.

The Co-Hong Cartel — If having the Hang Merchants class was not enough regulation, During the 1760s trade limiting took an even harsher turn. A council of 10 Co-Hongs was established, where each Hang Merchant had to trade through one of these Co-Hongs. The Council would set the price, merchandize standards, everything. People found ways to bypass the council’s restrictions — Secret contracts, Using a different exchange rate — say the council determined a box of tea would cost 16 Spanish Dollars. The merchant would sell the box for 16 Spanish dollars, but demand the payment in Taelers. He would agree to a worse exchange rate than the market’s exchange rate for the Taelers though, so in the end it would serve as a discount to his customer. There was no sense in these fixed prices as every merchant’s operation was always in a different state — some needed more liquidity to pay his debts or inner-China suppliers, or maybe he was stuck with many stocks by the end of the trade season and needed to rid of it — there were so many different reasons to price variations when trading with the Europeans. The Co-Hong self deprecated during the early 1770s with everyone agreeing it was a power grab by a few of the big merchant families, with even some of the smaller families serving in the council itself agreeing with this assessment.

Expropriation of ships — This was one of the most arbitrary and nastiest. There is a story about porcelain traders that couldn’t get their stocks from inner China because the new Canton Governor took their ships to deliver his furniture and possessions to his new home in Canton. This was about a month delay in trade and other stocks needed to wait too as porcelain usually was put in the bottoms of the ships.

A thing of beauty in this system was that many of the merchant families were actually never viable businesses in any modern sense — their cash flow was always negative, every year of the trade. They were considered a viable business though as long as they managed to jungle their debts between the suppliers, customers, and other lenders. In a game theoretic analysis of the division of profits between inner-China suppliers, Canton merchants and European corporates, I would say the modern negotiation would setup reasonable prices that allow Canton Merchants be profitable upfront. The way it actually happened though, is they were not profitable upfront, but were allowed by different actors in the market to delay their payment in the form of debt — showing of course there was enough margin of profit for this actor to allow this type of debt. When they eventually defaulted, this can be seen as retroactively re-negotiating pricing and profit division between the Canton Merchants and other Market actors. Of course, this type of debt driven economy should be very familiar to anyone knowledgeable of today’s Chinese financial markets. High accumulated debts are not dealt with and will float in the system until they pop, to allow virtual fast growth.

Even though most of them ended bankrupt, committed suicide, or lived under debt for generations, Canton merchants probably still had much nicer lives than the regular Chinese farmer or paid worker. This might be the reason the emperor never hesitated reaping them off. Still, it’s a fine demonstration that ‘Tax the Rich’ attitude is a failed attitude.

The European corporations playing ball with the Canton Merchants

Though the trade could be portrayed as a zero sum game where the Canton Merchants and their European counterparts were pulling on both sides of the same rope, the rope being the profit margin between Chinese production and the European consumers, the actual relations surfacing from the text included nice gestures -

Helping out Merchants in financial needs — A Merchant that was trading for many years and built his own refutation and the foreigners trust, in the event of a fire that burnt down his stock, or upon accumulating some heavy debt, would sometimes be saved by the corporates by enlarging his share of trade for the year or giving him interest free loans. It seems it was not of their interest that their colleagues on the other side of the aisle went bankrupt too often.

Avoid addressing authorities — There is one case of a Merchant whose people, upon loading a British ship, disappeared with some of the stocks. He found them, handed them over to local authorities, and returned the goods to the Brits, but not completely — a few boxes were still missing. The British East India Company could have gone to authorities, which always subsided with the European corporates — as they were afraid to lose them and future taxes, while local merchants were interchangeable — The authorities in that case would have made the Merchant pay for the missing goods and also send him to prison. The East India Company decided not to pursue legal action as they felt his actions were candid and he was not of fault.

Where is Hong Kong’s Financial Sector at the time ?

Hong Kong today is worldly known for its vivid financial sector. In the book though, you never see it mentioned. It might be missing due to the sources — the book is mainly based on the European corporates ledgers, as the local merchants did not hold books for long to avoid government inspection in the case they wanted more taxes. As mentioned before local authorities could raise taxes retroactively and the accounting books could provide them good leads who has the capital for it. But it’s hard to believe there was a big financial sector at the time, as we often hear of outrageous yearly interest rates of 20% and 30% given to the Hang Merchants by European corporates. It’s a mystery. A place with such high volumes of trade that requires a lot of caching and buffering of capital is perfect for the emergence of a strong financial sector. I can put forward two theories — one is that the actors in the trade were enough and no outside actors were needed — today as far as I understand there is regulation preventing commercial banks, to avoid a total halt of economic activity in the case of financial strifes — you don’t want Amazon to be Amazon+JPMorgan so in the case of some bad speculation no one will get his deliveries. But at the time it might have been enough that merchants made loans among themselves and also with their inland suppliers and foreign corporates. I still think this is improbable due to the high interest rates mentioned in the records. The market doesn’t seem to have been efficient, so there was a place for more actors to get into it. My other theory would put this on the government. Their taxation policy or lack of such coherent policy was very detrimental for the accumulation of capital. Merchants were kind of OK — they paid much to suppliers and received large sums from their customers, but they never had huge amounts of capital laying and waiting to be grabbed by the government. Any financial company that would emerged in the days though would be open to high government scrutiny and tax confiscations.

The Porcelain traders

Porcelain trades had a good time — they were not under the Co-Hong or Hang Merchants regulation. The reason was that porcelain trade required unique knowledge and was very different from the tea trade which was the main volume of trade. The Hang Merchants feared them though, as I believe they thought that if someone would become big in the Porcelain trade, and assemble an infrastructure of ships, suppliers connections and cash flow there will be nothing preventing him from taking on the tea trade too and be best positioned to become very big. So they tried to put hurdles in their way.

It seems though that by the end of the 18th century the Porcelain trade declined significantly, and this was not due to some government regulation but because of genuine market conditions. The Europeans have learnt during the 18th century how to make good porcelain products, at least the more simple and popular ones. The Porcelain trade was also much more influenced by fashions — tea is tea, even though there are different types of tea, but porcelains are a thing of beauty and taste of what’s beautiful can vary heavily in short periods of time. Considering the long round-trips to China and the information bottleneck — while European manufacturers could have clients talk with them directly, here information of what should be manufactured had to travel through the European Corporates bottleneck — it’s pretty obvious why the trade declined. There is an example of porcelain requested by the British East India Company, with British patriotic decorations. It was sold to them in some year, and the local manager informed the canton merchant the next year would probably be the same. So the merchant prepared a large amount of this porcelain, but the next year the company declined purchasing it. Of course, this merchandise is impossible to sell to anyone else. Only the British would want British patriotic decorations. So the merchant was left with these stocks and heavy losses. This is besides the general problem of unpredictability of trade and knowing how many ships will arrive and how much production is required each year. Also, Porcelain can be kept longer and easier than tea — so in case the sales in Europe were lower than expected some year, the corporations could just hold the stocks and sell them the year after, which doesn’t apply to tea or other fresh products. This means in the case of low sales in Europe of tea the European Corporations would take the damage, but in the case of Porcelain they would transfer it to the Canton Merchants by not buying more stock the year later. And so the successful porcelain traders ended up operating in a different fashion than the tea traders. They were not about preparing large volumes of stocks and working exclusively with the European Corporates. They were rather having their big and diverse Porcelain shops, where everyone — local buyers, south-east asian buyers and also buyers representing the European Corporates could come in and buy.

Another interesting point about Porcelain trade is how it came up as a technical need to balance the ships. When the ships were loaded with tea, which is very lightweight, they needed more weights in the bottoms of the ship. So Porcelain was perfect for that — it has a value of its own, so it doesn’t just take space — Everything in the ship needed to be sellable, including the wooden boxes themselves.

Supply and Demand before Adam Smith

It’s clear reading this book people have realized the laws of supply and demand, years and years before the 1776 publishing of Adam Smith’s ‘Wealth of nations’. In inner correspondence you see people understanding that if information came of a big ship with rice stocks, rice prices are going to take a downturn, so it’s better to sell rice now in a lower price so no stocks will be left when prices actually fall. You can see this type of market signals, though very primitive, on slow and unstable information chains throughout the book, where knowledge of future market trends are affecting current prices.

Viable merchant strategies

Some merchants fail, some succeed. Here are a few approaches that proved themselves for the more successful merchants in the trade -

Being very political — If you can get the authorities to your side of the trade, you will gain a lot of benefits. There are also disadvantages — you’ll have a lot of people to pay tributes to, and when they will have a problem they will look for you first. When you do it, do it big — because some of the people that were only a bit connected, didn’t get much of the benefits but did appear on the government’s radar, which was to their disadvantage. Poankeequa, who was head of the Co-Hong at some point and is considered maybe the biggest merchant in the Canton trade deployed this tactic successfully.

Being very a-political — This is Tan Anqua’s tactic. Whenever he was offered to be a Hang Merchant, or in the Co-Hong, he always found ways to avoid it. He remained a simple and peripheral, but with a very precise market share — high quality tea. It was enough to maintain his family for generations, and while he wasn’t the biggest fish in the river he was doing well and less susceptible to downturns than other merchants.

Be very good in one special thing — This applies to Tan Anqua as mentioned but also to Poankeequa — he had almost a monopoly on the silver trade, which he was doing with the spanish and swedes. The swedes were actually an intermediary to more spanish silver, so it was his connections with the spanish through his family in the Manila Chinese community — where he lived in his young age — that allowed him to control trading in South American and spanish silver. This gave him a steady income upon which he built his empire.

Be hands-on with your suppliers — Some of the more successful merchants, both in Porcelain trade and other trades were spending much time of their year in the village and monitoring production. This required skill, might have been less comfortable than staying in the city and required to have people you can trust on that will take care of customers and other mishaps when you’re out of the city, but it proved itself to allow better prices buying from suppliers, better quality assurance and thus better relations with your customers as they were satisfied with what they got.

Why are Communications and Transportation so important, Financially

• During 18th century the opening of the trade route east of the philippines that allowed ships to get to Canton during monsoon season was a big deal. Before that prices varied between different months, there was a short window of opportunity to trade and provide the ships so pre-order was a big thing that caused many mismatches, losses and debts.
• Back and forth communication between the European headquarters and representatives in Canton was a big overhead. A little like sending an Astronaut to Mars, there were decisions that were better taken on the spot, but needed waiting 1–2 trade years to be applied. Similarly getting from Canton to the inland places of production could have taken a month or more. This way a merchant would close a deal with his European counterparts, only to discover once he got to Fujian that half the silk worms died this year and prices will be much higher, so it was a losing bargain for him. If he had a telegraph, all of this could be avoided. On the other hand, one might think if after the invention of telegraph this merchant would even be needed as an intermediary. The mass commercialization of smartphone has cut a lot of the small players in areas taken over by Uber, AirBnb and the such.
• Predictability — Will there be ships this year ? Should I order the special British Porcelain designs ? Is there a war between the Dutch and the british ? Trading without knowing all these stuff is highly speculative.

Funny Anecdotes

Last but not least, all this human activity has many funny sides to it.

#3 goes to the Porcelain trader that filled the Porcelain boxes with padding filled with cockroaches.

As the American guides warned, If you made a deal with a Canton merchant where he felt the prices were skewed against him, he will find any possible way of screwing you back.

#2 goes to the Dutch merchants who rented a loft from one of the Canton merchants, that demanded he will not leave a space in the factory to his own workers, because

‘They smoke and brew tea all day, and we don’t want the place to catch a fire’

It’s worth noting fires were indeed very common in Canton of that time and this specific property ended up burning to dust anyway.

#1 is given to Poankeequa, the big Canton merchant, for disappearing to the countryside for long unexplained periods of time. He was very good in giving unreasonable excuses, such as going out to mourn and bury his brother at least three times. I’m unsure why he was doing it, whether it was getting away from authorities, a depression he was dealing with, or just wanting to stay in touch with his suppliers — but then why make all these excuses.

My personal favorite though goes again to Poankeequa, which at some point understood the Co-Hong is going to be fall apart once one of the big merchants died in 1770, and so he managed to manipulate the British who were very much against this cartel to pay him 100,000 Taelers so he would press the right buttons in the local government to get rid of the Co-hong. He thus made a nice gain on something that was bound to happen anyway.