Capital Markets in China and Britain, 18th and 19th Century: Evidence from Grain Prices

Abstract

Does the difference in capital market development between major advanced economies during the 18th and 19th centuries explain the subsequent divergence in their income levels? We employ a storage model to obtain regional interest rates from monthly grain price changes, and we compare the integration of capital markets in Britain and China. The first step is to validate the approach by showing that grain price-based interest rates match salient features of the 19th century U.S. capital market. Our analysis using almost 20,000 new interest rates reveals that Britain's rates were lower than China's, even compared to China's more developed areas, although not by a large margin. The regional integration of capital markets in Britain was substantially higher than in China, however, indicating lower barriers to capital flows than in China. At distances above 200 kilometers regional interest rates in British regions are about three times as strongly correlated as interest rates in China. Our results show that while China appears not to have been as capital-scarce as generally presumed, it had a strong disadvantage relative to Britain in its ability to allocate capital to the location of efficient use. Overall these results suggest that capital market performance may have been an important reason behind the divergence in incomes across countries in the 18th and 19th century.

Political Institutions, Economic Liberty, and the Great Divergence

“…Even during China's second commercial revolution, however, inter-city growth correlations were less than half the level observed in Western Europe. This resonates with Wolfgang Keller, Carol Shiue, and Xin Wang (2015) finding, based on co-movements in interest rates, that eighteenth-century England's capital market was much better integrated than even the Yangzi Delta's.…”

China's Foreign Trade and Investment, 1800-1950

“…Rather, the payment of trade taxes was a matter of bargaining power, and the system was rife with corruption. 48 The Chinese Maritime Customs (CMC) was founded in 1854 by the foreign consuls in Shanghai to collect maritime trade taxes that had been going unpaid due to the inability of Chinese officials to collect them during the Taiping Rebellion. Although the CMC was nominally under the jurisdiction of China's Foreign Office (the Zongli yamen, 總理衙門), which was newly established in 1861, in practice it operated under the management of foreign powers.…”

“…The top CMC position and director of its operations was the Inspector General, who worked side by side with his Chinese counterpart, called the Superintendent of Customs, who oversaw the collection of trade taxes from the so-called native trade, that is, from Chinese-owned junks. 48 Tax collection was poor even in major ports such as Shanghai. The British Consul of Shanghai estimated in one year that the loss of tariff revenue in Shanghai was at least 25 percent, and complained that "two or three sleepy menials at $5 or $6 a month" were the sole means existing for the collection of duty, with which he was bound by the Treaty of Nanjing to cooperate; CMC, Decennial Reports, Fifth Issue, vol.…”

Introduction to the Special Issue: A new economic history of China

“…These included wage series as well as attempts to construct more comprehensive indices of income measures such as GDP, both at the national and regional level. 4 Income and wage data were complemented by efforts to construct other long-term series, including population (Cao 2001), measures of human capital (Baten et al 2010; Gao 2015), urbanization rates , price indices (Peng 2006, Allen et al 2010, Liu Guanglin 2014, the money supply and public finances (Liu Guanglin 2014, and long-term interest rates (Peng et al 2008, Tang Jianjun 2016, Keller, Shiue, and Wang 2016. Although collection efforts continue (as do the critiques of some series), it is clear that these long-run statistics have laid a solid foundation for understanding of the development of the Chinese economy and helped to pinpoint the specific timing and magnitude of the Great Divergence.…”