The Financial and Economic Position of China

OF recent years China has been passing through social, economic, and political readjustment without parallel in history. For centuries she had clung characteristically to isolation and tradition, but the rapidity with which the nation in recent years has been readjusting its life and so enter- ing the comity of nations surely merits the admiration of all. The progress of the country is all the more remarkable when it is remembered that it has been made despite the civil disorder, brigandage and piracy which has prevailed in many provinces. It is said that no one knows what the population of China is within many millions, but, according to a fairly recent estimate by the Chinese Maritime Customs, it is around 48o millions, or, about 1,28o persons to every square - mile. More than 8o per cent. of this population is engaged in agriculture for a livelihood, and these people, most of them industrious, law-abiding, and, within a certain narrow range, capable, have learned to carry on their avoca- tions in what to a less hardy people would seem to be quite impossible circumstances. The millions have to live some- how, so somehow they till their soil, maintain a rough and effective village government which goes on whatever dis- sensions may be raging among the more highly placed, and somehow they get their produce about the country and to and from the Treaty Ports. The Treaty Ports are the places of entry and egress for the foreign trade ; they are kept going by the Maritime Customs, with its foreign commissioners of customs, who collect the revenue and support and advise the local officials, and being in China's service, and yet foreign (with the prestige attaching thereto) are able to serve as a point d'appui upon which trade can maintain itself.

A POLICY OF RECONSTRUCTION.

With so large a proportion of the population engaged in husbandry, it will be realised that those who have the destinies of China in their hands are relatively few, and in their case it may perhaps be claimed that at long last education has begun to tell. Education in China, in fact, largely due to the efforts of the West, has made wonderful strides during the last century and continues to do so, and one fervently hopes that the present disastrous war will not put the clock back. There have emerged from the educated' Chinese many brilliant and wise statesmen, and, given peaceful conditions, so great are the qualities of the people, that China will undoubtedly rise to a great place among nations. That much has been done is unquestionable. A few years ago, China's poet-politician, Mr. Wang Ching-wei,: wrote that the establishment of national unity in China depended upon the maintenance of internal and external peace, and, in spite of many setbacks, it must be admitted that for several years the country has been making marked progress towards the establishment of domestic tranquillity.

In furtherance of its settled policy of unification and reconstruction, the National Government, in face of many difficulties and much opposition, has been endeavouring, with some success, to lay a sound foundation for economic reconstruction, added to which, up to the time of the present hostilities, considerable progress had been made in the establishment of a sound financial policy. The reorgan- isation of the internal finances has been undertaken, and in 1936 an internal debt consolidation scheme was presented to and accepted by bondholders, the interest rate on domestic bonds being reduced to 6 per cent. and the amortisation schedules considerably extended. In the same year a Recovery Loan of $340,000,000 was placed with the Govern- ment Banks, and no further recourse was made to the domestic bond market. There were, however, a number of provincial and railway bond issues, some of which were secured on the revenues of the Central Government. During 1936-37, considerable progress, too, was made in the settle- ment of the arrears of foreign debt. The railway loans that have been thus adjusted are the Tientsin-Pukow, the Honan, the Lung Hai and the Canton Kowloon Railway Loans. Settlements with the bondholders have been made by a scaling down of interest rates over a period of years, cancellation of part of the interest payments in arrear, and a slower rate of amortisation. Then, as stated in a recent Consular Report on China, certain outstanding debts to foreign interests for railway materials and -other supplies have been similarly settled. Practically all the Chinese public issues previously in default on the London market have been, in fact, satisfactorily readjusted, and, in con- sequence, the resultant charges on. the Ministries of Finance and Railways have been reduced to quite small figures. This, it was hoped, would give time for the Chinese Govern- ment to complete its plans for the rehabilitation of the finances of the country. The present imbroglio will necessarily dislocate those plans ; the duration of hostilities, falling revenues, and the extent of the damage done to the railways and other property are all factors that will enter into the question.

CHINA'S FOREIGN LOANS.

The foreign loans secured on the Chinese Maritime Customs, and those secured on the Salt Gabelle, fall rather into another category. The revenue collections from these sources hitherto have provided for the full service and interest on the loans, and have still left a comfortable surplus for other purposes, though naturally in the present circumstances the returns will be seriously diminished.

THE BUDGET POSMON: Here it is convenient to discuss China's budget statements; commencing with the fiscal year ended June 30th, 1935. It may be noted that Sir Louis Beale has- stated in ',his recent report on Economic and Commercial Conditions in China that the published data are inadequate to convey accurate and detailed information regarding the finance of the Central, Provincial and other Governments, though the importance of careful accounting :and budgeting is being increasingly appreciated. The deficit for the year in question was, in round figures, $196,00o,00o, and, according to an official statement, the deficit for 1935-36 was larger. Nevertheless, the budget for 1936-37 only provided for $125,000,000 as proceeds . from loans, as compared with borrowings for the year ended June 3oth, 1935, of $328,000,000. For the year 1937-38 the National Government on June 25th last presented a balanced budget at $1,000,649,000, and no provision was made for bond borrowing. In 1936-37 estimated expenditure was given • as $990,658,000, revenue at 8768,982,000, and income from bonded and other borrow- ing $221,676,000. For 1937-38, the highest estimated expenditure was for military expenses, 8392,000,000, while loan service obligations were given as $324,000,000, and S283,000,000 was allocated for other State purposes, in- cluding provision for economic reconstruction. On the income side of the account, estimates were made for Customs Revenue to produce $369,000,000, Salt Labelle $228,000,000, and the Consolidated Taxes were estimated to produce 8175,000,000. Needless to say, these satisfactory budget estimates are not now likely to be realised.

FOREIGN TRADE.

Limits of space preclude a detailed examination of China's foreign trade, but in 1936 the leading position in her import trade was occupied by the U.S.A., with Japan, Germany and the United Kingdom next in order. In the export trade the U.S.A. again headed the list, with Hong-kong, Japan and the United Kingdom next. The British Empire, however, took the first place in the total _import and export trade, with the U.S.A. and its dependencies second, japan third, Cermany fourth, and France and dependencies fifth. Over 8o per cent. of the total foreign trade of China is conducted with these five nations. The Chinese Maritime Customs Returns for 1936 showed that China's total net imports were valued at $94r,544,738 and her net exports at $705,741,403, the adverse balance of trade, exclusive of treasure, being 8235,803,335. In 1936 the net export of silver and gold amounted to $249,623,281 and Customs Gold Units to 17,933,276, equivalent approximately to 8290,000,000. The following figures indicate China's foreign trade for the past three years :

Year. Net Imports. Net Exports. Excess of Imports.

(Figures in millions of dollars.)

1934 . , 1935 .. 1936 .. 1,030 919 942 535 576 - 706 495 343 236 The apparent improvement in recent years is interesting, but it should be noted that owing to extensive smuggling, especially in North China, these figures do not give a com- pletely accurate account of the foreign trade position. Political conditions have hitherto prevented the maintenance of effective Customs control, and as a result the loss of revenue to the Government was estimated to amount to $50,000,000 in 1936.

THE COMPRADOR SYSTEM. - China's foreign trade is on a somewhat curious footing ; for the most part it is confined to the Treaty Ports at which are congregated most of the foreign merchants, who carry on their trade with other places, that is to say, with the outports and the interior of China, mainly through the intermediary of ' the Chinese Compradors. Barriers of language and social customs make the employment of the Comprador a necessity, for he must possess capital, a know- ledge of business and an extensive acquaintanceship among the Chinese nationals. His function is to guarantee the firm's Chinese customers, advise as to market conditions, assist in obtaining business and, generally speaking, act as a go-between and native manager for the firm in its relations with the Chinese business public. For his services he receives a commission on all business done through his intermediation.

The principal direction for trade is via the great Chinese entrepot Shanghai, which in importance as an Eastern com- mercial centre vies with Hong-kong, as it is the channel through which a large quantity of goods and produce flows into the interior of China. Hong-kong itself is the deep- sea port for Southern China, and as a British Crown Colony does not experience the same difficulties as Shanghai and other ports. Trade with - Shanghai is, however, carried on under Treaty arrangements (most favoured nation clause, &c.) with the foreign Powers, which, coupled with the assistance rendered by the European banks, make the way of the foreign trader comparatively easy.

THE Cusroms REVENUE.

The revenues arising from China's foreign trade, collected by the Chinese Maritime Customs, are comprised under headings of Import Duty, Export Duty, Inter-port Duty, Tonnage Dues, Reirenue Sur-tax and Famine or Flood Relief Sur-tax, and the total for the past three years was as follows :

1934 • • ..

$334,645,000 1935 •

• • •

315.5193000

1936

324,633,000

The largest share in the production of this revenue was provided by Shanghai, the figures for the three years being 1934 $175,363,000, 1935 $149,127,000, 1936 $148,869,000. But for the disastrous calamity that has fallen upon China, there is no doubt that 1937 would have shown a great increase in her foreign trade and the Customs Revenue.

CURRENCY REFORM.

On November 4th, 1935, China demonetised silver and instituted a foreign exchange standard. The Government decreed that the bank notes issued by the three Government Banks should be full legal tender ; that debts expressed in silver should be discharged by payment of these legal tender notes ; that silver must be exchanged for the notes within a given period of time, and that the Government Banks were to stabilise the value of the Chinese dollar by dealing in foreign exchange. Thus the National Government accepted and made itself responsible for a system of monetary and financial control without precedent in China. Difficulties naturally were encountered on the introduction of the new system, but it quickly got into working order, and has since functioned even more satisfactorily than its advocates had anticipated.

Such, in the main, were the principal features in China's position before the outbreak of the war. Had it been given to her to enjoy peaceful conditions, there is no doubt that 1937 would have shown a remarkable improvement both in her economic and financial status. Internal reforms had been steadily pursued, considerable progress had been made in many directions, and the augury was for a long period of advancement and prosperity. But, alas, that day is not yet, and the best that we can wish for China is that her travail may come to a rapid end.

WILLIAM F. SPALDING.