Corporate Finance in the Early Twentieth-Century China: The Case of the Lower Yangtze Delta

Recent studies in Chinese economic history point out that modern industry burgeoned in China in the 1890s.  Shanghai and the several cities along the Yangtze River formed the most important industrial center, as light industries including cotton spinning, silk reeling, and flour milling developed there. The first challenge for a would-be entrepreneur was amassing enough capital to start an enterprise. Traditionally, many commercial enterprises in China had been run according to a partnership system (hegu) in which relatives and friends invested in a business, assumed unlimited liability, and divided up the profits. However, launching a mechanized modern industry required a larger initial investment—in land and imported machinery—than had traditional commercial enterprises, and the Chinese economy lacked institutions that facilitated the raising of large amounts of capital. 

How did the newly founded industrial enterprises obtain the start-up capital and then secure funds to keep running their operations?  In particular, how did entrepreneurs look for investments beyond their acquaintances?  By exploring these key questions on corporate finance through analyses of business archives recently opened to the public, this paper investigates the institutional background for and the key dynamics of the initial phase of China’s industrialization in the early twentieth century.