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China and the World Financial Markets 1870-1930: Modern Lessons From Historical Globalization

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  • William N. Goetzmann
  • Andrey Ukhov

Abstract

China began to borrow in the world capital markets in the late 19th century, issuing bonds to pay for defense as well as for large-scale economic development. Particularly interesting is the role that the clash between domestic and international investors played in China's 1911 revolution. The protection of external investor rights was perceived at the time as an infringement on Chinese sovereignty. In this paper we interpret the conflict over foreign investor rights in terms of a disequilibrium in the development of financial markets. Europe's high level of investor diversification put her investors at a relative advantage in bidding for development projects in China, while European investor expectations about protection from expropriation and default, lowered Chinese cost of capital, but also led to erosion of national sovereignty and a dramatic, grassroots political backlash. Despite fundamental differences between China today and China 100 years ago it is still important to consider the dangers of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, protection of domestic corporate investor rights is at least as important as protecting foreign investor rights.

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Bibliographic Info

Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 01-30.

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Date of creation: Jul 2001
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Handle: RePEc:wop:pennin:01-30

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  1. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  2. La Porta, Rafael & Lopez-de-Silanes, Florencio & Schleifer, Andrei & Vishny, Robert, 2001. "Investor Protection and Corporate Governance," Working Paper Series rwp01-017, Harvard University, John F. Kennedy School of Government.
  3. Paolo Mauro, 2000. "Emerging Market Spreads: Then Versus Now," Economics Series Working Papers 2001-FE-03, University of Oxford, Department of Economics.
  4. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188 National Bureau of Economic Research, Inc.
  5. Willard, Kristen L & Guinnane, Timothy W & Rosen, Harvey S, 1996. "Turning Points in the Civil War: Views from the Greenback Market," American Economic Review, American Economic Association, vol. 86(4), pages 1001-18, September.
  6. Roll, Richard, 1972. "Interest Rates and Price Expectations During the Civil War," The Journal of Economic History, Cambridge University Press, vol. 32(02), pages 476-498, June.
  7. Rene M. Stulz, 1999. "Globalization of Equity Markets and the Cost of Capital," NBER Working Papers 7021, National Bureau of Economic Research, Inc.
  8. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, 04.
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