SOME ASPECTS OF EASTERN BANKING

By WIT T.Tam F. SPALDING, Author of Eastern Exchange, Currency and Finance, &c., &c.

THE man who elects to follow the profession of banking in the Far East chooses, if not an adventurous career, at least one in which there is endless variety. He has to be a practical banker, an expert in foreign exchange, some- thing of a trader and produce merchant, a keen judge of men and things, and last, but not least, an expert dealer in the precious metals. Silver is the very life of the East ; gold hardly less so. As with the showman at the fair, banking with the East is said to be a case of what is lost on the swings is gained on the roundabouts, which, being interpreted, means that should other financial operations prove unremunerative, a banker may look to bullion operations to help him out. Silver, however, has all too often proved a broken reed which if a man lean on, it shall pierce his hand. So the Americans found when they tried their luck in Eastern banking, with the result that they bought several hundred million dollars' worth of • experience, and we should hope and pray that it has been a good investment.

ABSORPTION OF SILVER.

Silver is perhaps the greatest aspect of the problem in Eastern banking and exchange. The East has an in- satiable appetite for the metal. It flows into China, and the stream into India is a never-ending one ; it rarely flows out of either country. " Where does it all go to ? an Eastern banker was asked. " Confucius alone knows ; I don't ! " was the laconic reply. " Anyway, we've got to have it to finance trade," he added.

Well, in 1925 China imported from England and the U.S.A. some 69 million standard ounces, and in 1924 she took about 62 million standard ounces. How is it used in China ? In this way. Silver in China is used as a measure of value of commodities both internally and externally. The Chinese expect to be paid in silver for their purchases whatever be their value in terms of gold in the countries from which they emanate. They also require payment in silver, no matter what be the gold price of China's exports, and the banker has, so to speak, to hold the scales between the two, and to squeeze his profit in the process. The Chinese do not view silver as a measure of value in the sense that we view gold. Apart from the exchange between silver and gold, as silver in China is a commodity, its value rises and falls according to local conditions. If there be a large supply of the metal in one province, and a scarcity in another, silver in the first province will appre- ciate to a degree almost beyond comprehension in Western countries. The price level of commodities in the place where silver is scarce will depreciate in an even greater ratio. For each occasion that it is profitable to transfer gold from one country to another, it is many times more profitable to move silver from one Chinese province to another, and it is the banker's job to take advantage of these varying conditions and to circulate the silver. If he seize time by the forelock and lays down funds on the spot just when wanted, the greater his profit. In a word, with silver he has got to know what to do, when to do it, and how to do it : that is the alpha and omega of silver exchange.

SINO- FOREIGN TRADE AND EXCHANGE.

Banking in China is a complex business. In addition to the negotiation of bills of exchange, the banker has the ever-present anxiety of buying and selling silver. With silver it is weight that counts, not the number of pieces. Time and again China has seemed to be on the verge of adopting a dollar currency, but numerous as arc these coins in circulation, they have never replaced the ubiqui- tous tad, or Chinese ounce of silver. Of taels, again, the number is legion. For the most part the tael of silver circulates in the form of small ingots or " shoes of sycee," of varying weight and size, and every province has its own tael weight differing just a little from that of every other province. Shoes of sycee, so called from a fancied re- semblance to a Chinese woman's foot, are taken by weight and not by 'count, and are exchanged at their silver value as a commodity. Apart from the internal demand, it might be asked why trade should be so dependent upon this silver. It is not a matter of chance that Sino foreign trade is so largely carried on through the medium of sycee silver, but one of necessity. Sycee silver is the only accepted medium of exchange of which trade can be sure of getting a free supply, hence the continued demand for the metal from the West. Just how the value fluctuates may be briefly explained. Suppose there be a large demand in, say, Shanghai for sterling owing to heavy imports, the Chinese will require gold exchange with which to pay, and as demand increases, so the value of sterling (gold) rises and that of silver falls. It is the reverse with exports. Heavy exports from China result in the offering of gold bills on London in exchange for silver, and the greater the supply, the more will silver appreciate. In practice, exchange and trade may be said to react upon each other. The value of Chinese commodities being expressed in terms of silver, and the value of most of the commodities im- ported by China being in terms of gold, exchange between gold and silver will tend to vary with the nature and extent of this commerce. Silver, it is plain, is the variable factor, and since the rate of exchange, say, Shanghai on London, expresses the equation between two factors, gold and silver, the price of the one of which is fixed and that of the other variable, it follows that the rate of exchange with China is intimately connected with the fluctuations in the market price of the metal.

THE CURRENCY CHAOS.

Silver is, however, only one aspect of the problem in Eastern banking ; the chaotic cdndition of the currency is another. We may take the present position of Dairen as a good example. Although a supposed gold standard has been adopted by the Japanese authorities there, both Chinese and Japanese currency is in circulation. There are two varieties of yen notes issued by the Japanese, the ordinary yen note and the Newchwang note, the latter being 30 per cent. more valuable than the former. Quite recently, 100 yen in Newchwang notes were the equiva- lent of about 134 yen in ordinary yen notes. Then, of Chinese money, both dollars and fractional currency (small money) are in circulation, some issued by the Fukien, Kwantung and Hupeh mints, some by the Tientsin Government mint, and there is a fractional difference in exchange between all. For example, a few months ago, 100 yen Newchwang notes were equivalent to 133.90 yen ordinary yen notes ; 100 yen Newchwang notes were also worth $117.15 small Chinese money, while $100 big Chinese currency was the equivalent of 103.40 yen Newchwang notes, or 137 yen ordinary notes. Again, $1 big money exchanged for $1.21 small money, or 253 coppers, and a 10-cent piece, small money, exchanged for 21 coppers.

AN EXCHANGE PROBLEM.

A European banker may envisage the problem of the transfer of money to other ports in China. The procedure is highly complicated. The money to be transferred, if it happen to be in Chinese currency, must first be converted into Japanese yen, and again converted into the currency of the port to which the sum is to be remitted. For instance, if $100 big Chinese money is to be sent to Shanghai,- the banker would first convert it into 103.40 yen Newchwang notes. Then he would convert 103.40 yen Newchwang notes into 71 Shanghai taels, and, finally, remit the sum in taels to Shanghai, where the person to be paid would expect to be paid in silver. The yen is the standard currency in Dairen, but other cur- rencies can always be exchanged, though there is no official quotation for francs, marks, roubles or other kinds of foreign money.

INDIA—THE LINK OF THE PRECIOUS METALS.

So much for China : and as if • that were not sufficient problem, the Eastern banker has India—the " sink of the precious metals." In 1925 her net imports of gold were valued at Rs.61 crores, and of silver Rs.20 crores. The economic factors with which the banker has to deal in India are numerous, and possibly they were not so corn- plicated before the closing of the mints in 1893 to the free coinage of silver. Before that year he carried on his operations without the aid of a Government-managed currency and exchange standard. If India had an un- favourable balance of trade, it was the banker's privilege to act as the intermediary for the export of silver to cancel the adverse balance ; if the balance were the other way, he arranged the imports of silver and gold by which the West paid India, and the limits of fluctuation in exchange were, roughly, the cost of importing' and exporting silver. Now we have the additional complication arising from the currency of the one country being in silver and that of the other in gold, to say nothing of the Government's endeavour to maintain a stable exchange. As an Indian writer says, the value of silver may vary considerably in relation to gold during the time of shipment, though the risks of variation may be to some extent overcome by " forward " contracts. However, the parities of gold and silver are sometimes above and sometimes below market rates, the vagaries of which seem impossible to anticipate and difficult to explain. No one under the present system seems to have been able to evolve a definite basis on which to calculate exchangefor the purpose of fixing forward exchange. Yet, the fact remains that Eastern bankers do make arrangements to export silver or gold to pay for India's imports, and to-day, when she is exporting more than she imports, the balance is very efficiently settled by shipments of gold or silver to India through the inter- mediary of the banks. There are differences of opinion as to what shall be the basis of future stabilization of the rupee, but a few words on exchange may be of interest.

INDIAN EXCHANGE.

From the point of view of the man in the street in India the rate_of exchange may be said to depend on the relation between exports and imports. Exporters of Indian pro- duce require rupees against the sterling paid to them in London by their British consignees. Importers of British goods need sterling to pay to the British consignors, and the exclumge banker is the intermediary. The exchange banks, in fact, act as a clearing house ; they provide rupees in India for the exporters, and sterling in London for the importers, an Indian exporter being usually a seller of sterling, while an importer is a buyer of sterling. The exporters, therefore, sell their sterling bills to the banks in exchange for rupees and the importers pay rupees to the banks in exchange for sterling remittances in one form or another. India, with a balance of trade in merchandise and treasure in her favour of some 101. crores of rupees, is now a heavy seller of sterling. The rate at which the exchange banks buy from the exporters and sell to the importers is expressed in so many shillings and pence to the rupee, and at the present time competition among the banks is so keen that the rate has been shaded down to 64ths of a penny, and profits are, in consequence, reduced to a minimum. The quotation for sterling depends largely on the relation between supply and demand ; the larger the supply, the lower the exchange ; the greater the demand, the higher the exchange. Conversely, the higher the price the greater the supply ; the lower the price, the greater the demand. To take an illustration : suppose the supply at any par- ticular time be £1,000, and the demand £2,000, the banks must put up the price in order to increase the supply, and decrease the demand until equilibrium be reached at, say, £1,500. There are necessarily limits to the upward or downward movements in exchange, for, when the price reaches a certain point, it becomes possible for banks or bullion brokers to export or import gold or silver either in specie or in bullion, and thus automatically add to the demand or to the supply, as the case may be. The present position in India will make this clear. Owing to the excess of exports, the supply of sterling is continually in excess of demand. The price, therefore, tends to fall—i.e., • exchange rises, and exporters find it more profitable to import the gold equivalent of sterling from London and dispose of it in exchange for rupees in the local bullion markets than to sell their sterling in the exchange market. The position would be the other way, of course, had India an excess of imports. Naturally, in practice, the mer- chants do not usually occupy themselves with the direct dealing in gold or silver. Most of them will be content to have the settlements in gold or silver effected through the agency of the banks and bullion merchants, but the principle, nevertheless, remains the same.

OTHER ASPECTS OF THE PROBLEM.

Limits of space, of course, have precluded our showing more than a few of the many aspects of Eastern banking. Japan, Siam, Indo-China, Java, all present problems with which the banker has to deal, but underlying them all is the prOvision of funds for the financing of trade between the Far East and Great Britain, so perhaps when the -Spectator comes to deal with the figures of the Eastern banks' balance-sheets in a few weeks' time, the reader will view them with greater interest, now that he realizes the -efforts of the men responsible for the results.