China Cambridge Economic History 2022, ’Ideology & Contours of Economic Change’
Claim to new theory, plus role of intellectuals, Japan contrasts, impact of the West, marxism, stagnation to modernisation, the age of machines, trade, financial revolution
Debin Ma wrote:
CHAPTER 1
Ideology and the Contours of Economic Change
… For the 1850–1949 period under study, this chapter emphasizes the fact that, ultimately, industrial revolution in modern East Asia started with borrowed institutions and ideology. This takes us back to the much older conceptual framework of modernization known as “Western impact and Chinese response” in the Chinese or East Asian context. In particular, this chapter reasserts the peculiar and unusual importance of the external or Western influence on a large country like China. Developing a new conceptual framework, I argue that given the dual monopoly of ideology and power under the Qing, political and economic changes often had to be initiated from outside the empire. Openness and external influence could act as a constraint in a polity lacking internal checks and balances. The external represents a new source of alternative power that breaches the monopoly of power and ideology. However, how much the external could exert an impact depends on how much it elicits formal institutional and ideological change in the domestic context.
In this regard, I show that rather than resource endowments such as coal, or even the discovery of New World resources, what impeded China’s progress in the globalized world is what some historians of China have called the scarcity of “intellectual resources” 思想资源, or what sometimes is referred to as ideology. However, the scarcity of intellectual resources in mid-nineteenth-century Qing China is of a particular sort, that of confronting the rapidly advancing West transformed by the Industrial Revolution. This Chinese scarcity could have been overcome through massive borrowing, learning, and importing of Western ideology and institutions, which is partly what Meiji Japan succeeded in doing. These intellectual resources allowed the late industrializer to construct an entirely different set of political governance, economic systems, and social organization.
I argue that both the capacity and the willingness to borrow and learn themselves are endogenous to China’s pre-existing political institutions and geopolitical position in East Asia. In this regard, China’s highly centralized and absolutist political regimes and traditional dominance in a China-centered world order have led not only to a closure of mind to new intellectual resources, but also to failure to recognize or perceive impending crisis and threats. So the process of change is not automatic, requiring complicated and sometimes risky feedback processes between social and political experiments, institutions, and ideology. This chapter links this complicated process of Western impact and Chinese response by connecting the changing incentives to economic agents on the ground with the shifting ideologies of elites at the top. It matches the contours of economic change with the specific timing of intellectual and ideological transformations during this period and embed our narrative in two specific cases of commercial and financial development. The first section lays out the quantitative profile of Chinese economic change from 1850 to 1950. The second section turns to historiography and builds a new analytical framework linking ideology with economic changes. The third section examines the three phases of economic change based on the new analytical framework.
The Chinese Economy, 1842–1949: Stagnation or Takeoff?
… [The] fact that most of the transformations we have described so far [above, omitted here] were connected with China’s modern and foreign sectors has led to the rise of what many called a dualistic economy characterized by a sharp divide between the small pockets of modern cities or treaty ports and the vast rural hinterland, a phenomenon famously described by R.H. Tawney as “small islands of privilege at the seaports and on the great rivers … a modern fringe … stitched along the hem of the ancient garment.” Rhodes Murphey went further, to describe the impact of treaty ports on China as being like “a fly (who) could ultimately irritate its host enough to provoke a violent counterreaction, but not to change the elephant’s basic nature.”
However, as I will argue below, because of political-economy and institutional spillover, the impact of the external and modern sector cannot be captured by quantitative effects alone. To understand this peculiar pattern of economic change, namely an economic takeoff around the end of the nineteenth century after a hiatus of four decades after being opened to Western imperialism, I turn to a review of historiography and build a new conceptual framework to link intellectual evolution with economic cycles.
Paradigms and Frameworks
Western Impact and Chinese Response: A Re-assessment of Historiography
Among the most important modernization paradigms that explains the modern Chinese development is the so-called Western-impact-and-Chinese-response framework championed by the sinologist John Fairbank. Writing in 1954, Teng and Fairbank remarked,
Since China is the largest unitary mass of humanity, with the oldest continuous history, its overrunning by the West in the past century was bound to create a continuing and violent intellectual revolution … Throughout this century of the “unequal treaties,” the ancient society of China was brought into closer and closer contact with the then dominant and expanding society of Western Europe and America. This Western contact, lent impetus by the industrial revolution, had the most disastrous effect upon the old Chinese society. In every sphere of social activity the old order was challenged, attacked, undermined, or overwhelmed by a complex series of processes – political, economic, social, ideological, cultural – which were set in motion within China as a result of this penetration of an alien and more powerful society. The massive structure of traditional China was torn apart … The old order was changed within the space of three generations.
To some degree, for China, as for many other non-Western countries, modernization is nearly equivalent to westernization, and in this regard the Chinese record is a partial failure in comparison with Japan, the only non-Western country to succeed at that time. However, this Fairbankian impact-and-response framework itself was challenged by Fairbank’s own student, Paul Cohen. In his widely acclaimed book Discovering History in China, Cohen argues that the impact-and-response framework may inadvertently lead to an amplification or simplification of the Western influence in China, neglecting the role of Chinese agency and China’s internal dynamics. Indeed, as Cohen argued, much of the so-called Chinese response to or embrace of the West may well be superficial, and reflect more the domestic dynamics. There were also regional and temporal variations of the Western influence, which could be highly visible or even predominant among certain social groups and the treaty port zones, or more specifically in what Cohen referred as the Hong Kong–Shanghai corridor, but largely absent from the vast hinterland. In short, Cohen calls for the discipline of sinology to return to China and to viewing China on her own terms.
Cohen’s approach of “discovering history in China” offers a powerful corrective to what some would see as the Eurocentric tinge in the Fairbank framework and a possible inspiration to the recent California school’s emphasis on China’s own superior indigenous initial conditions in living standards, commercial and contractual traditions, and human capital before the mid-nineteenth-century onset of Western imperialism in China. Most interestingly, the lower Yangzi region, which the California school championed as having comparable living standards and developments to England or the Netherlands during the eighteenth century, also hosted the treaty port of Shanghai, which was to become the leading financial and industrial city of the nineteenth–twentieth centuries. In this regard, the Shanghai “economic miracle” of the twentieth century can be viewed as as much an import from the West as attributable to its own superior native roots.
This overseas intellectual inward turn towards a China “on her own” forms an interesting contrast to Chinese historiography within mainland China, which at least from the 1950s had long built a dogmatic version of the Marxist narrative that posits a unilinear, universal – ironically highly Eurocentric – version of the law of societal evolution, progressing from the lowest stage of slavery in ancient times, to feudalism, capitalism, socialism, and communism. In this historiography, with the nineteenth- and twentieth-century Chinese economy and society characterized as semicolonial and semifeudal, the encroachment of Western imperialism – although a national humiliation – represents progress, or an assault on a backward “feudalist“ Qing China by a more advanced and productive capitalist system. In this regard, the paradigms of modernization and Marxism converge.
Very curiously, one offshoot of this mainland Marxist historiography is a lively debate on the so-called “Sprouts of Capitalism,” inspired by Mao Zedong’s claim in 1939: “The development of China’s commodity economy within her feudal society has spawned the sprouts of capitalism. Even without the influence of Western capitalism, China will gradually develop into a capitalist society on its own.” Generations of Chinese scholarship labored to discover those so-called traces or “sprouts” of capitalist production relations in traditional Chinese agriculture, handicrafts, and commerce. Despite coming from different or opposite ideological and institutional backgrounds, this emphasis on indigenous sources of Chinese development saw an interesting confluence with the California school. Alternatively put, just as China might have progressed “naturally” to capitalism without the onslaught of Western imperialism, the Industrial Revolution might have equally eluded the West or England had they not stumbled up coal deposits or the discovery of the New World.
The idea that eighteenth-century China might already have been on the cusp of, or a natural progression toward, modern capitalism or industrial revolution does not sit well with the lackluster Chinese aggregate economic record of the nineteenth to twentieth centuries, as partly revealed in Figure 1.1. While it is beyond the scope of this chapter to evaluate the entire literature on pre-nineteenth-century China’s initial conditions, I argue that our interpretation of the patterns of economic change or the lack thereof in modern China needs to be placed in the context of a rapidly industrializing West and Japan and needs to be sought in the scarcity of intellectual resources rather than of natural resources. Below we turn to our framework on the importance of intellectual resources.
Ideology and Economic Changes: A New Framework
Although they were an ethnic minority from China’s seminomadic northeastern frontier, the ascendancy of Manchu rule under the Qing actually marked the culmination of a millennia-long evolution and maturing of a highly centralized, unitary Chinese political regime governed by an absolutist emperor at the top of the power pyramid. Aided by a formal bureaucracy recruited through a highly structured nationwide (national–metropolitan–provincial) civil service examination rooted in Confucian classics, imperial China could implement a system of direct administrative rule (junxian 郡县) with mostly educated officials assigned to directly govern over a thousand counties nationwide over her vast territories on a two- to five-year rotating basis. Hence the combination of direct administrative rule with the legitimacy of imperial personnel appointment became a potent instrument of political control and rule that no or few other traditional regimes had mastered. In this regard, Chinese rulers managed to break free from the constraints of feudal and local autonomous institutions that had characterized Europe, and possibly much of the rest of the world for that matter. Beyond the borders of empire, where they could not implement direct rule, the Qing, like previous dynasties, constructed a China-centered international order through the so-called tributary-states trade system. This system engulfed neighboring small states or territories in East and Southeast Asia as near protectorates that would pose no major military or political threat. Hence absolutism Chinese-style curtailed interstate competition and weakened independent vested interests, civil society, and autonomous political and social groups, all to serve the purpose of minimizing any potential threat to the throne from below.
In this system, imperial or political legitimacy hinged on the state’s capacity to suppress internal dissent and external challenge. Although military superiority or repressive capacity remained paramount to political legitimacy, they were insufficient by themselves and were only resorted to under extreme cases of threat. Hence crucial to this legitimacy is the development of a consistent ruling ideology or belief system that would be – in our case – Confucianism or neo-Confucianism that rationalized Chinese-style absolutist imperial rule. To establish the monopoly of this ideology over the interpretation of political and social events, systematic control and manipulation of information or alternative ideologies were essential to the system as characterized by the widespread incidence of literary inquisitions and intellectual persecutions. Although this system was effective in perpetuating imperial rule and the status quo, it stifled the possibilities of endogenous development of ideological and institutional transformation from within and from below, leading to what Jin Guangtao and Liu Qingfeng termed the super-stable structure of the Chinese empire before the mid-nineteenth century. Changes or even revolutions could happen in this system. But without corresponding intellectual development in new political and institutional ideologies, this just meant that violent revolution or dynastic overthrow (as happened very often in Chinese history) were part of dynastic changes that harbored no fundamental institutional change.
The link between the stagnation of ideology and the limits to institutional change is echoed by another intellectual historian. Wang Fansen contends that the contours of China’s traditional intellectual resource endowments define the boundaries of political and social changes and the horizon over which Chinese intellectuals could hover for solutions. The most outstanding examples are the late Ming–early Qing Confucian scholars such as Huang Zhongxi 黄宗羲 and Gu Yanwu 顾炎武, who were resurrected in the late nineteenth century as China’s enlightened sages for their penetrating insights and attacks on the ills of the Ming’s absolutist and repressive regime. However, when it came to proposals for reform, the seventeenth-century Huang and Gu could only conceive of a passionate call to return to Chinese antiquity and the classics. These attitudes are, as Wang argues, typical of Chinese elite intellectuals of the time in general.
By the mid-nineteenth century, however, the resources of a vast and unexplored intellectual horizon had opened up, but they were from an alien Western tradition, written in Western languages that few, if any, Chinese intellectuals mastered or even heard of at the time. But it was not merely the scarcity of foreign-language talents or the suitability of Western ideology to Chinese reality that posed the problem. Rather it was something far more basic and fundamental: the willingness and capacity to recognize, first, cognitive dissonance within China’s existing system, and, following that, the need for a paradigmatic change. As eloquently stated by historian of thought Ge Zhaoguang, it was precisely the glory of Qing’s so-called triumphant eighteenth century that sowed the seeds of her failed response to Western challenge in the mid-nineteenth century. The Qing rulers’ success in the control of a vastly expanding and diverse empire increasingly through repression of intellectual dissent and unity of ideology left her with a unique sense of grandeur and confidence that meant she could only treat the outside world with nothing but sheer ignorance and arrogance. In that regard, Qianlong’s reply to Lord Macartney in 1792 is quite gracious by that account. This is echoed by Wang Fansen: until a major political and social-economic crisis could be keenly perceived, the Chinese intellectual soil – thoroughly soaked in the deep cultural self-confidence of the traditional literati – was simply not fertile enough for the transplant of new intellectual resources.
In comparison, Tokugawa Japan’s relatively decentralized feudal system, peripheral geopolitical position in the China-centered world order, and long tradition of absorbing foreign (mainly Chinese) culture and ideologies engendered a different cultural attitude towards Western impact and ideology during the mid-nineteenth century. For example, catalytic events such as the 1842 Sino-British Opium War did not propel immediate institutional or political changes in Qing China, but did send a powerful warning of the impending Western threat to the elites of neighboring Tokugawa Japan. Indeed, China’s defeat in the 1840s and subsequent failures may have so alarmed Tokugawa Japan that in a couple of decades that it turned China from once being a model to be admired to being a lesson to be avoided.
But effecting paradigmatic changes carries risks and uncertainties as they upset the traditional ideological equilibrium. They are more likely to take place through other successful examples or the arrival of new ideas or paradigms that provide a new and consistent framework to explain the cognitive dissonance. In this regard, China’s defeat in the 1894–1896 Sino-Japanese War provoked greater reaction for Chinese reform than the initial Western imperialism. The Meiji success with Western models as a newly westernizing Asian nation in response to the same Western challenge that Qing China had faced now began to stir up cognitive dissonance in the giant neighboring Qing.
In this sense, institutional change requires time, experiments (or sometimes historical accidents), and a feedback loop between events, experiments, and ideas. We arrive at a model explaining why reform had the twists and turns with their particular temporal and regional patterns as described above in this chapter. …
Our emphasis on ideology and ideological change pushes us beyond just the paradigm of institutions as emphasized by the advocates of institutionalism.
Western Impact and Chinese Response Again
Within our new framework, we return to the paradigm of Western impact and Chinese response with an important twist: the impact of the West is critically important, but only to a degree and in the manner in which the Chinese (or Japanese) manage to respond. We emphasize the role of Chinese agency in utilizing, adapting, and eventually redesigning new rules and institutions to propel economic change.
In the nineteenth and twentieth centuries, Western imperialism did not fully subjugate China, but manifested itself through the acquisition of trading rights, leased territories, and treaty ports, as well as extraterritoriality and spheres of interest. In the early twentieth century, when central control was weakened, Western treaty ports expanded rapidly at the expense of Chinese sovereignty. The expansion of these privileges and extraterritorialities in an era of political chaos and national disintegration turned out to be a blessing in disguise for two reasons.
First, some of these “privileges” happened to coincide with necessary conditions for growth, namely the maintenance of peace and public order, the security of property rights and contract enforcement, freedom from arbitrary taxation or official exaction, and the right to transparent rules and predictable jurisprudence. Second and more importantly, as shown later, foreign “privileges” in the treaty ports were often taken advantage of by Chinese businesses and residents.
Here, we examine the evolution of two key consequences of Western intervention. First is Shanghai, China’s largest treaty port, particularly its International Settlement, which resulted from a merger of all Western (and later Japanese but excepting the French) concessions operating with a governance structure akin to a European type of self-governing incorporated urban community. Shanghai’s foreign residents organized a Municipal Council with members elected by an association of taxpaying Western, later Japanese and eventually (in 1928) Chinese, residents. The council operated according to the rule of law vested in its own mini-constitution, levying taxes and fees; running its own prison, police, and volunteer army; and providing public goods such as roads, utilities, and port facilities. The power and territory of the International Settlement greatly expanded in the wake of the 1911 Qing collapse, with full territorial jurisdiction over all its residents, including the Chinese.
The second key institution – China Maritime Customs – had similar origins and a similar trajectory. The low fixed tariffs imposed by Western powers were initially collected by Chinese customs officials, but increasingly overseen by foreign consuls who set up the China Maritime Customs in Shanghai in 1854. Although nominally an imperial Chinese organization, the Customs gained autonomy with Britons dominating its senior staff. Its staff gradually came to include large numbers of Westerners and later Japanese, with the promotion of Chinese nationals into senior positions only starting in 1929. With over 20,000 staff in forty main customs houses across China, the Customs rapidly emerged as China’s most stable and efficient centralized hierarchic bureaucracy even as China herself descended into political disintegration. Following the Qing collapse in 1911, the Maritime Customs effectively took over the collection of the Customs charges and the distribution of the net revenue.
The insertion of these colonial institutions unintentionally ruptured China’s long-standing imperial monopoly of power. The resulting gaps in imperial control created room for newly emergent Chinese business interests, many with deep links to foreign businesses, to create new networks of power and wealth that intensified growing pressure for formal political and institutional changes, especially following China’s defeat in the 1894–1896 Sino-Japanese War. However, the institutional changes arising from Western influence could only have nationwide effects after they had triggered intellectual and political responses from Chinese elites, which is where we turn to now.
Liang Qichao 梁启超, China’s foremost intellectual and reformer of the era, succinctly summarized the Chinese response. Writing in 1923, Liang surmised that changes or reforms would have never got off the ground until the Chinese were willing to recognize and acknowledge that there were problems to begin with. This partly began during the period from 1842 to 1894 when the Qing saw firsthand the power of Western military equipment used to suppress the Taiping Rebellion (1851–1864). This opened the door to the introduction of Western (particularly military) technology and machines, or, in Liang’s phrase, material things (qiwu 器物).
China’s 1894–1896 naval defeat by Japan shattered her confidence in her own systems, terminated this initial stage, and inaugurated a second stage of introducing new “institutions” – (zhidu 制度). This process, which continued for two decades until roughly 1917–1918, brought the comprehensive importation of Western-style government and law, along with modern corporate enterprises and financial institutions. The third stage followed the recognition that institutional transfers could not succeed without understanding and absorbing their underlying cultural and ideological foundations as reform demands changes in both spirit and form. The result was the New Culture movement, which brought the massive introduction of Western culture and ideology (wenhua 文化), even leading to the radical abrogation of Confucian ideology.
Building on the insights of Liang, Yang Nianqun added a geographic dimension to Liang’s temporal stages of reform, matching each of these three reform sequences with distinctive regional political elites and with Ming–Qing schools of Confucianism, centered in the provinces of Hunan, Guangdong, and Jiangsu–Zhejiang, corresponding to China’s middle Yangzi, Lingnan, and lower Yangzi macro-regions respectively. Yang’s regional study drew inspiration from Paul Cohen’s early work on late Qing reform, which emphasized the regional dimension of Western influence and highlighted the major cultural divide separating China’s littoral and hinterland. More importantly, both Liang and Yang point to China’s own intellectual endeavor in absorbing Western impact, as Cohen would put it, on her own terms. These intellectual and ideological responses by the intellectual and political elites paralleled practical efforts on the part of new economic actors and networks who took advantage of Western privileges to push the boundaries beyond the traditional structure.
Patterns of Economic Change: From Machines to Institutions to Ideology
The Age of “Machines”
The mid-nineteenth century, marked by the encroachment of Western imperialism on Chinese shores, started off disastrously for the Qing dynasty. Qing’s defeats in the Opium War (1842) and other military battles, and even the devastating Taiping Rebellion, which saw a calamitous cumulative loss of 60 million to 80 million lives, did not shake the elites’ faith in traditional ideology and institutions.38 Political elites from China’s agrarian mid-Yangzi heartland of Hunan and Anhui, such as Zeng Guofan 曾国藩 and Li Hongzhang 李鸿章, rose to national prominence following their success in mobilizing fiscal and military resources from their home provinces to eventually suppress the Taipings. Closely aligned with the official ruling ideology, the Tongzhi Restoration (1861–1875) – which Mary Wright famously called the last stand of Chinese conservatism – engineered a remarkable economic recovery through the revitalization of traditional institutions: the reinstatement of Confucian orthodoxy, the restoration of the national civil service examination (largely interrupted during the Taiping Rebellion), and temporary exemption from land taxes to lure cultivators to resettle war-torn agricultural regions.
As a natural extension of the Tongzhi Restoration, the Self-Strengthening movement (1860–1894) initiated programs that aimed to expand Chinese military strength by developing a small number of Western-style, capital-intensive enterprises financed or sponsored by the state and directed by prestigious officials or merchants with official connections. Although these enterprises, which included arsenals, factories, and shipyards, were fraught with inefficiency and corruption, they did record modest achievements.
Nonetheless, the overall ideological orientation during this period remained backward-looking. In contrast to the concurrent Meiji reform in Japan, there were no reforms that touched the fundamentals of the traditional regime: there was no introduction of a modern constitution or commercial law and no reform in the currency system, modern banks and modern infrastructure such as railroads were expressly prohibited, and steamships were limited to the Yangzi and other major rivers. Nonetheless, the ground on which the traditional structure had rested were shifting with the insertion of Western imperialism.
Foreign Trade in the Age of Machines
Although the treaty port system accelerated the arrival of new technologies and institutions, industrialization lagged far behind the opportunities opened up by the inflow of trade and technology. Attempts by Chinese and European entrepreneurs to take advantage of opportunities linked to new technologies and trade arrangements reveal the presence of powerful obstacles to innovation within China’s late Qing economy. These are most clearly visible in the obstacles confronting private efforts to introduce new technologies and business structures.
These obstacles existed precisely because the legality of traditional Chinese commercial and business activities rested on patronage rather than universal property rights. Often commercial guilds and organizations acquired monopoly privileges in exchange for paying a fixed tax quota to the government, and hence some form of shelter from arbitrary exactions. This institutional arrangement, according to Eiichi Motono, formed the structural foundation of traditional Chinese merchant groups and networks under official patronage.
However, the Western presence established a new source of power and authority in China. The “unequal treaties” granted every foreigner the right to trade and own property in the treaty ports, most importantly subject to Western legal systems. The imposition of “free trade” and extraterritorial privileges turned out to have unintended consequences. The treaty port system imposed by Western “free-trade” imperialism set Chinese trade tariffs at a modest 3 or 5 percent during this period. To shelter their trade from the arbitrary native transit taxes known as lijin 釐金, the Westerners insisted on a flat transit tax when their goods moved through China’s interior. These transit levies were assessed and, after 1911, collected by the foreign-controlled China Maritime Customs.
Chinese merchants soon found opportunities to benefit from these “Western” privileges through false registration of their produce as destined for export (rather than domestic use), outfitting their ships (or junks) with Western flags, and investing their capital in foreign-owned businesses or simply registering their businesses as owned by foreign nominees. More critically, what Motono referred to as English-speaking Chinese merchants began to develop their own commercial networks outside the traditional commercial groups, who had relied on the payment of native transit taxes as a means to acquire monopoly privileges. Motono identified the late 1880s – a timing that corresponds well with the first surge of Chinese firms– as the key turning point when traditional Chinese commercial organization began to crumble. Motono argues convincingly that these merchant–official nexuses forged through tax-farming arrangements formed the structural foundation of traditional Chinese merchant groups and networks. The Western presence, although small in relation to China’s national economy, constituted a new source of power and authority in China that drew away Chinese merchants towards new commercial groups formed outside the tax-farming-based system. This eroded the imperial system’s long-standing monopoly over political power, just like “a great dike may be breached by tiny termites.” He sees the transit pass system as a vehicle for eroding the authority of mercantile guilds, fracturing traditional group solidarity among members of particular trades, and enhancing the property rights and security available to Chinese businesses.
By co-operating with, utilizing, or embracing Western extraterritorial privileges, mostly in the treaty ports, these forces formed pressure points that eroded the power base of traditional vested interests. Or, as more effectively put by Motono, it was the Chinese themselves who promoted a Western impact on China. But being confined largely within the treaty port zones and the Western sphere of influence, this “Western impact” generated a “dual-track” system which often placed Chinese business interests in an unfavorable position. They caused backlashes and pushbacks and stirred up calls for formal political and institutional changes within China to level the playing field.
These trickles and leakages turned into torrents following China’s defeat in the Sino-Japanese War of 1894–1895 and the signing of the Treaty of Shimonoseki, which granted foreigners the right to establish factories in the treaty ports. Previously, foreigners only had the “privileges” to engage in trade and finance, but not manufacture. This new arrangement imposed by the Treaty of Shimonoseki opened the floodgates of foreign direct investment and pushed the Qing to accept and grant much broader property rights and protection to all Chinese, not just in business but also in manufacturing. This forms the essence of the 1903–1911 late Qing legal reform in commercial law and the promotion of chambers of commerce.
The Age of Institutions and China’s Turning Point
China’s defeat in the Sino-Japanese War of 1894–1896 by Japan, a nation long regarded as a student rather than an equal, inflicted a profound mental shock on Chinese elites and the public at large. It marked the end of the Self-Strengthening movement and led to a sudden surge of interest in the Japanese experience. Huang Zunxian 黄遵宪, the Qing ambassador to and keen observer of Meiji Japan, wrote a landmark study of Japan’s transformation in 1887. Despite being delivered to Zeng Guofan and Li Hongzhong and circulated privately, Huang’s work drew little attention even when it was printed in 1895. But China’s stunning defeat in 1896 turned this book into an instant best seller, as lamented by one gentry that had we all paid attention to Huang’s book earlier, China would have been spared over 200 million silver taels of war reparations – something equivalent to five times the Qing state’s annual peacetime revenue – extracted by Japan following her 1896 military victory.
Intellectual historian Ge Zhaoguang marks 1896 as China’s key intellectual turning point. He shows that during the 300 years before 1894, Japan translated 129 Chinese works while the Chinese translation of Japanese works amounted to a mere twelve. This trend reversed in the decade after 1896 with 958 Chinese translations of Japanese works but only sixteen translations in the other linguistic direction. Indeed, when Japan became the first Asian society to translate Western materials, the shared vocabulary of Chinese characters quickly installed Japan as the natural intermediary in transmitting Western culture to China, especially because of the inflow of massive numbers of Chinese students and the outflow of Japanese advisers and teachers to China.
China’s naval defeat directly triggered the Hundred Days reform in 1898 backed by the young Guangxu Emperor (r. 1875–1908). Although centered in Hunan – the heartland of Self-Strengthening bureaucrats – the reform’s intellectual leaders came from Guangdong-based elites, such as Huang Zungxian, Kang Youwei 康有为, and Liang Qichao, who had prior exposure to Western influence. Although the reform was quickly crushed by conservatives surrounding the emperor’s aunt, Dowager Empress Cixi, the agenda of the failed Hundred Days reform formed the core of the Qing constitutional movement of 1903–1911, modeled directly on Japan’s Meiji reforms.
Beyond military victories, Meiji Japan offered a remarkable example of a nation with similar (or humbler) cultural heritage which had, however, managed to implement a comprehensive and thorough reform agenda when confronted with a common Western threat. Through the successful adoption of the gold standard in 1897 and the recovery of extraterritoriality in 1899, Japan’s westernizing reform introduced Western institutions but actually kept Western capital and influence at bay.
China’s new reform effort, heavily influenced by Meiji, was comprehensive and ambitious. It aimed to prepare China for a constitutional monarchy by drafting a formal constitution that would establish national, provincial, and local parliaments. Military modernization was high on the reform agenda. Administrative reforms sought to modernize public finance and adopt a national budget. The reform initiative gave birth to new Ministries of Education, Trade, and Agriculture and encouraged the founding of local chambers of commerce. Policy initiatives aimed at currency reform, the establishment of modern banks, and the expansion of railroads and other public infrastructure. The abolition of the millennia-old civil service examination in 1905 opened the door to a modern school system, giving birth to what are today China’s best-known universities.
Although the resulting political decentralization may have inadvertently hastened the Qing collapse, the rise of the new republic opened the door to a massive Chinese experimentation with new ideologies and institutions from the West. This indeed began China’s age of modernity, a genuine experiment with constitutionalism, the rise of regional cosmopolitanism, and the introduction of modern company law and of such new business techniques as double-entry bookkeeping.
Growing local autonomy fostered by political decentralization encouraged the growth and maturing of civil society and, more importantly, boosted political and ideological competition across different provinces and towns as well as treaty ports. The comprehensive data presented [later in the volume] show the turn-of-the-century breakpoint in education, missionaries, and numbers of treaty ports, which partly became the institutional foundation underpinning the rise of modern industry, banking, public finance, and monetary regime as discussed above in this chapter.
The Rise of Financial Revolution in the Age of Institutions
The temporal retreat of central imperial power opened new possibilities for the rise of a quasi-political structure that rested on the institutional nexus of Western treaty ports (most notably Shanghai) and the Maritime Customs service. Both these institutions were intimately connected with Western institutions or Western imperialism in China, which initially only served to protect the limited Western or foreign business interests in the context of extraterritorial privileges. However, in the wake of 1903 constitutional reform and the Qing’s collapse in 1911, this mechanism began to be transferred to China domestically.
The financial revolution that emerged during the politically chaotic 1910s and 1920s illustrates the interplay between Western impact and Chinese response. Shanghai’s free-trade extraterritorial status had long attracted what later became some of the world’s premier Western banking institutions, such as the Hong Kong and Shanghai Banking Corporation (HSBC) and Chartered Bank. But modern Chinese banks, which only started near the end of the nineteenth century, also found their homes there. Even traditional family-owned native banks increasingly chose to locate inside the Western-controlled Settlement. The relocation of the Shanghai Native Bankers’ Association from the Chinese part of the city to within the Settlement in 1917 and the founding of an association of modern Chinese banks in 1918 marked the rise of Shanghai’s Chinese banking community as the leading force in China’s macro-economic, monetary, and financial regulation within a largely self-regulated free banking framework.
Initially, when the Chinese government borrowed from the foreign market, its obligation to repay could be partly enforced through the coercive power of Western gunboats and through the important intermediary institution of the China Maritime Customs, as the agency was relatively insulated from the threat of the Chinese imperial government. When, in 1911, the Maritime Customs directly took over the collection and remittance of the Customs revenue, it opened an account with HSBC, which eventually became the custodian bank of that portion of Customs revenue pledged as security for the service of the government’s foreign debt.
This institutional mechanism for external borrowing was soon transferred to become the cornerstone for a domestic market for Chinese government bonds through the intermediary of large Chinese public banks. China’s domestic public debt originated in 1914 with the new Republican government in Beijing setting up an independent committee composed of Chinese and Western bankers and Maritime Customs officials. This mechanism ensured that tax revenue earmarked for debt repayment was remitted to a special revenue account set up in the Western banks and later in Chinese banks headquartered in Shanghai’s International Settlement. Maritime Customs revenue formed the most secure form of central revenue for a weakened Beijing government and therefore the most reliable collateral for servicing the government’s foreign debt. With government bonds serving as part of reserves for banknotes, modern banks injected new sources of money into the macro-economy. The new viability of domestic public debt spawned a vibrant secondary market in the 1920s and 1930s.
This key nexus offered an unusual but credible commitment for the security of bondholders’ property rights and the repayment of government obligations, which laid the institutional foundation for a financial revolution. In a sharp departure from the traditional political regime that left credibility at the mercy or benevolence of a strong and stable state, management of the state’s obligations to bondholders now rested with an institutional mechanism that had grown autonomous from the center. It was that particular mechanism that allowed Chinese bankers and bondholders to place some constraint on the power of the government with regard to public finance, and by doing so it enabled the Chinese government to tap into the private wealth of Chinese citizens for borrowing without coercion.
The Age of Culture and China’s Fateful Ideological Turn
In 1923, barely four years after the May 4th mass movement in 1919 kicked off China’s new age of cultural movement, Liang Qichao wrote with exuberance that Chinese understanding of Western ideology and culture had gradually but irreversibly progressed since the days of Self-Strengthening. It was only in 1876 that a remark by Guo Songtao 郭嵩焘, China’s ambassador to Britain, that the new Western “barbarians” confronting China then – unlike previous Asian threats – also had 2,000 years of civilization, caused a huge uproar and was roundly condemned as near blasphemy. Under Self-Strengthening, despite the recognition of Western military and technological superiority, Western knowledge came to China only in drips through a limited number of indirect translations of Western works commissioned at various governmental arsenals.
This changed rapidly following China’s military loss to Japan. Liang quipped that the first generation of advocates of Western learning were great classic Confucian scholars – himself included – who knew nothing of any Western languages. The same was true of the next generation of advocates of Western learning, most of whom were Chinese students returned from study in Japan. By the 1920s, however, a third generation of young scholars, many returning from studies in Europe and North America, finally took over the baton of Western learning and in certain cases carried it to the extreme, such that, as Liang claimed, Karl Marx was now vying for equal status with Confucius.
Liang’s exuberant banter about China’s intellectual transformation could not conceal the complex and wrenching emotions incurred in the struggle to introduce an alien culture and ideology to China as well as Japan. Indeed, in both countries the first step to legitimizing the pursuit of Western learning started with a step backward: going back to the Chinese classics.
Meiji Japan, for example, called upon the orthodox Zhuxi 朱熹 neo-Confucian principles to legitimize the ouster of the Tokugawa shogunate and the reinstatement of the Meiji imperium under a centralized bureaucratic system. In similar fashion, the rediscovery of China’s long-marginalized anti-mainstream Wang Yangming 王阳明 school of Ming dynasty Confucianism inspired generations of revolutionaries in Meiji Japan, China, and East Asia in general. The most striking or audacious was Kang Youwei’s so-called rediscovery and restoration of “authentic” Confucian classics, which he claimed had been distorted and contaminated during the Han dynasty. These “genuine” – most likely fictitious – classics, Kang claimed, already contained the seeds of ideas that would support and legitimize the Chinese reform agenda in the 1890s.
But by the 1920s, China’s intellectual mainstream had moved far beyond this phase of atavistic nostalgia. Indeed, after the 1911 Qing collapse, the new Republican era saw no equivalent of the Ming loyalists like Gu Yanwu and Huang Zhongxi who had refused to serve the new Qing ruler despite their unrelenting assault on the ills of Ming absolutism. Similarly, there were few who retained the faith in Qing orthodoxy that leaders like Zeng Guofan and Li Hongzhang once had just a few decades earlier. China’s Republican era ushered in a new generation that embraced Western learning and ideology with few nostalgic backward glances. But China’s intellectual turn toward the West soon developed in unexpected directions.
Political reality following the Qing’s collapse in 1911 revealed harsh and dark sides marked by the rise of warlordism, factionalism, civil and military strife, and fiscal bankruptcy, leading to a rising sense of national disintegration and international humiliation. As initial euphoria turned to despair, the Beijing government largely abandoned parliamentary experiments in 1923 soon after Liang enthusiastically wrote about the extent and durability of cultural change. Ravaged by World War I, Western imperialism and liberal ideology went into retreat and the world saw a turn from “Woodrow Wilson towards Vladimir Lenin.” Liang’s suggestion that Marx might rival the standing of Confucius in the eyes of Chinese elites suddenly acquired ominous weight as the rise of a domestic Communist movement and the Guomindang’s engagement first with the Soviet Union and then with Nazi Germany marked an increasing turn toward authoritarianism.
The founding of a national capital in Nanjing returned China’s political center to the heart of its wealthiest region of the lower Yangzi, which had long been distrusted by the Qing court and suspected of anti-Manchu sentiments. But by the 1920s, the lower Yangzi had developed new elites associated with the Shanghai-based treaty port system, symbolized by the powerful Song family, which hailed originally from Guangdong but were educated in Christian mission schools and American colleges. Another was the Nationalist leader Chiang Kai-shek, who married one of the glamorous Song sisters. Chiang, a Ningpo native with strong connections to Shanghai’s financial elites and underworld leaders, graduated from a military academy in Japan, where he developed a lifelong admiration for Wang Yangming. Although Chiang promoted modern innovations, he was raised on the traditional Confucian classics and became a faithful admirer of Zeng Guofan, the Taiping nemesis and upright architect of the Self-Strengthening movement. Under Chiang, the Nanjing regime was increasingly authoritarian but charged with a full ten-year national modernization agenda until it was interrupted by the 1937 Japanese invasion.
The End of the Financial Revolution or Coming Full Circle?
The unexpected cultural turn may have turned China’s modernization path to her own authoritarian or absolutist roots. The paradox of this combination came into full view in the continuing phase of financial revolution in the Nanjing era. In its earlier days, the newly established Nanjing-based Nationalist government in 1927, especially under the new pro-business finance minister Song Ziwen 宋子文 – the American-educated brother of the powerful Song sisters – respected the institutional mechanism for public debt set up under the previous Beiyang regime. It succeeded in taking over the core institutional element of financial revolution through the establishment of an independent Sinking Fund Commission headed by representatives of the Shanghai banking community and government officials. They constituted a powerful independent check on the government’s promise to repay.
The domestic debt issued in 1927–1931 nearly doubled the total for the entire Beiyang era from 1912 to 1926. The ratio of domestic to foreign public debt, which had stood at one to seven during the Beiyang era, rose sharply to six to four during the decade following the 1927 creation of the Nanjing government. In this way, the nascent Nanjing government created favorable conditions for diffusing the fruits of financial revolution in the form of new monetary and financial institutions and instruments unimaginable within the treaty port framework. An important consequence of the banks’ increased holding of securitized government bonds was the rapid increase in the banks’ capacity to expand their issue of bank notes as China’s banking regulations allowed modern banks to use securities – mostly government bonds – to serve as 40 percent of the reserves needed to issue notes. This serves as the critical anchor for China’s financial revolution as it expanded the balance sheet of private banks and enhanced the rise of credible banknote issues.
However, once the Nanjing regime consolidated its power, its leaders moved to re-establish a more authoritarian system that would rein in the treaty port autonomy, particularly in Shanghai, China’s commercial, financial, and industrial capital. The nationalization of major Chinese banks and the establishment of a fiat currency in 1935 and 1936 respectively – without, however, the simultaneous establishment of an internal form of checks and balances and along with the waning of Western imperialism and its associated fiscal–financial nexus – set the stage for the rise of hyperinflation in the 1940s. The resurgence of a fiat-money-based hyperinflation in the 1940s marked another coming full circle to the eras of China’s historical hyperinflation in the Song and Yuan dynasties whose issuance of paper money exploded under wartime pressures.
Japan’s full-scale invasion in 1937 and China’s drive for resource mobilization pushed toward the rise of a wartime command economy. The ascendancy of Communist rule and ideology followed decades of gradual but increasing radicalization of the modernization ideology. When the Communists took power, they were armed with another ideology borrowed from the Soviet Union: Marxism or Communism then established as the new ruling orthodoxy grafted onto China’s authoritarian or totalitarian roots. Indeed, China’s new Communist leader, Mao Zedong, who spent his formative years in his revolution-enlightened native Hunan, became a modernizer, but remained a great admirer of China’s historic founders of often brutal absolutist dynasties, Qin Shihuang 秦始皇 and Zhu Yuanzhang 朱元璋. Mao drew as much inspiration from Chinese classics as from Marxist theory. Most ironically, just as Confucianism was extended or rediscovered to legitimize westernization and modernization in the early twentieth century, so Communism, the most radical ideological import from the West, was now deployed to legitimize a newly invigorated and technologically enhanced version of Chinese absolutism.
Conclusion
This chapter has built explicit links between intellectual and ideological cycles and phases of economic change in China. By incorporating ideology into the narrative of modern China’s economic history, it has emphasized the importance of the Western impact within a framework that also assigns a central role to the Chinese response to and adaptation of Western ideology and practice. This new narrative adds missing elements to the Great Divergence debate, which has considered initial conditions mainly in the form of institutional structures and natural-resource endowments. By highlighting the importance of intellectual resources, this approach exposes the limitations of the Great Divergence thesis, which has tended to project late development experience onto historical initial conditions or institutions and to ignore the dependence or reliance of East Asian industrialization on borrowed institutions and ideology. It is the greatest irony that both the Marxist discussion of the sprouts of capitalism and the Great Divergence inquiry into why China failed to generate an early industrial revolution are founded on the implicit assumption of a unilinear or Eurocentric version of historical evolution or inevitability (of industrial revolution).
The problem of ideas looms particularly large in China’s historical context of absolutist institutions. In the absence or weakness of a domestic “voice,” the “exit” option often remained the sole constraint to the centralized monopoly of power in imperial China. In this regard, leakages in the form of physical capital or intellectual resources from this monopoly rule carried particular weight and significance. Utilization and absorption of these leakages proceeded on two levels – in a bottom-up process whereby rational economic agents took advantage of Western extraterritorial privileges and among upper-echelon political and intellectual elites who eventually modified ideology to legitimatize modernization policy at the national and political level. It was only when these two levels connected or met that China saw the largest of transformations.
This process worked not only in the nineteenth and twentieth centuries, but also in the post-1978 reform era. There, ideology in the top echelon and experiments at the bottom often interacted with tension. Ultimately, it was a rapid convergence of ideology to meet the global standards and rules after China joined the WTO in 2001 that saw China’s most phenomenal transformation. The regime at the center was more willing to compromise rather than exercise arbitrary and unchecked power. However, three decades of unprecedented growth led to a resurgence in confidence, in particular in China’s own ideology and historical legacy. But if such resurging confidence, as the eighteenth-century Qing once had, leads to a revival of Qing-style closure to information flow and restriction of independent thinking, will all the reforms and revolutions be another repeat of history? Let us hope not.
The Source:
Debin Ma, ‘Ideology and the Contours of Economic Change’, in The Cambridge Economic History of China, edited by Debin Ma and Richard Von Glahn, Cambridge University Press 2022
Evolutions of social order from the earliest humans to the present day and future machine age.