When commodity booms materialize, the effects are felt not only where the sought-after materials are mined or harvested but also in the financial centers of the world, the places where the commodities are marketed and traded and where production and trade is financed and insured. Rubber was a new gold in the late 19th and early 20th century, required for making tires for the millions of bicycles, motorbikes, and cars being added to the world’s roads. London was the leading financial center and so was the logical place for new rubber firms to go to raise capital. However, distant Shanghai punched above its weight in financing the booming rubber trade. Though, just as the rubber boom was more keenly felt in Shanghai, so too was the eventual rubber bust.
Global Rubber Market
In the 19th century, the principal source of natural rubber was South America and the Brazilian Amazon specifically. The region was the center for rubber production until the first decade of the 20th century when production shifted eastward. For one, rising demand relative to supply had buyers looking elsewhere. Second, since Brazil’s industry was largely based around tapping into trees in the wilds of the Amazon, it was susceptible to replacement by organized plantations in less remote areas. Asia possessed lower wages and had no worse, if not better, access to European capital markets. As a result, rubber production moved to Southeast Asia, specifically to British and Dutch controlled parts of Malaysia and Indonesia.
The industry there owes something to an Englishman named Henry Wickham who managed to smuggle 70,000 rubber tree seeds out of Brazil in 1876. These were planted in botanical gardens in London, Ceylon, and Singapore. Since it took between 6 to 8 years for a tree to begin producing rubber, even small amounts of production outside South America could not occur until the 1880s.
Experiments in cultivating natural rubber on the Malay Peninsula were successful and commercial planting began in 1895. By then, the rubber industry had been booming after the patenting of Dunlop’s pneumatic tire. Initial capital for Southeast Asian production came from the proprietors of tea estates in Ceylon but this was replaced with money from London which enabled faster growth. Between 1905 and 1911, 70,000 acres of rubber trees were planted annually in Malaysia.
In the first few years of the century, there was clearly an increasing amount of capital flowing into rubber cultivation. Twenty-seven rubber companies raised new capital on the London Stock Exchange in 1906 alone. The years before 1910 brought high returns to investors in rubber firms, encouraging the formation of new companies and new rubber plantations. Demand related to the motorcar industry seemed sure to accelerate the growing need for rubber.
Investment in the rubber industry originating from London may have been larger in an absolute sense but Shanghai was even more absorbed in the rubber boom. Shanghai was a trading and financial center, well situated geographically and linked to the farther reaches of the world by telegraph cable. The city was home to Chinese and foreign banks and the Shanghai Stock Exchange, formally established in 1904 but dating back even earlier. The banks lent money against rubber shares trading on the stock exchange, supporting investment in a myriad of new rubber companies.
In Shanghai, the rubber boom may have started when the Kalumpong Rubber Company was launched in 1906. The company issued 14,000 shares of fifty taels each. One tael in Shanghai was worth about 1.09 troy ounces of silver. Two more Shanghai rubber companies were formed in 1907. This was just the beginning. The growth in Shanghai would follow London’s example and in time, Shanghai came to meaningfully supplement capital from London bound for Malaysian rubber estates.
The rubber boom would have to wait until later in the decade before truly taking off. A financial crisis and recession in the United States, the largest market for rubber, had caused rubber prices to fall from 1907 to 1908, hitting a low of about £400 per ton in London. Prices rose from here though, reaching £800 per ton by 1910. Brazilian producers were restricting supply and American car-related demand rose.
After this recovery, more Malaysian rubber plantation companies were formed in Shanghai. There were existing commercial ties with Malaysia since Shanghai firms had already been involved with sugar and tobacco production there. Two new companies were launched early in 1909; their share prices doubled by year-end. Another four were introduced to the market in the second half of the year.
Each of these companies used the capital raised to develop hundreds or thousands of acres in Malaysia into rubber plantations. Shanghai companies bought at some of the highest prices, often over £50 (~300+ taels) per acre, more than the average price paid by British firms, which were paying between £1 and £15 for an acre of virgin land or more like £40 for a planted estate.
A typical share offering was conducted as follows. A syndicate would buy the estate in advance of the offering and the transfer to the new company would be made with the proceeds of the share issuance. Trading companies like Jardine, Matheson & Co. and David Sassoon & Co. promoted the shares. Prospectuses, sometimes misleading, were advertised in the press and banks lent money to those buying.
In some instances, local Chinese banks financed their own subscriptions in shares using very short-term chop loans from foreign banks. Orders could be placed at bank offices, where offers were fully subscribed within hours of opening. Only a fraction, perhaps a quarter, of the share price needed to be paid up front; the rest would be paid in installments thereafter. Combined with denomination as low as five taels, less than one pound sterling, this made participating in the boom affordable to a larger populace.
Shares in Kalumpong Rubber Co., sold for fifty taels in 1906, rose to 230 taels by the end of 1909 after the dividend had been increased from 6% to 16%. This was a level higher than offered by most other companies listed on the Shanghai Stock Exchange. Success brought imitators and in just the first six months of 1910, thirty rubber estates raised money on the exchange, raising 13.5 million taels of capital. Kota Bahroe Rubber Estates Ltd saw its 100,000-tael share offering garner 1.6 million taels in orders in March 1910. Buyers were Westerners as well as Chinese.
In the seven days between February 17 and February 24, 1910, the average share price for Shanghai rubber stocks rose 26.5%. The week of March 10 was another strong one with rubber shares rising 44.1%. The exciting performance was isolated to the rubber sector with the rest of the Shanghai market finding disinterest. To make the most of their money, some investors bought shares for forward delivery, essentially locking in a price for a future purchase of stock; if the price rose, they could make a profit without having to put up any money immediately, allowing investors to bet even larger sums than they possessed.
Share prices would peak in April 1910 before slumping. Reasons included falling rubber prices, competing new issuances, and higher interest rates demanded by banks. The price of rubber began a downward trend that would continue into the 1920s. In just the first year of this decline, prices fell from £800 per ton to £500. By mid-June 1910, the established firms’ shares had fallen 14% from their peak. This not particularly frightening drop masked the danger since shares in the newer companies fell by far more, some in excess of 50%. Even a small drop could spell trouble since many investors bought shares forward without much means to pay up if the shares lost value.
Some brokers refused to sell the shares forward anymore, a means by which investors had locked in prices for future purchases of stock during the boom. This was for good reason, with stocks falling, those who bought shares forward now faced losses. Suppose someone bought a share in a rubber company for forward delivery at 50 taels but by the time the settlement date arrived, the shares were trading at 30 taels. The investor would essentially have to pay the difference of 20 taels per share or default on his contract. On the Shanghai market at the time, forward settlements were standardized to dates three months apart, so no one would know how dangerous conditions would become until the end of the second quarter 1910.
“Business this week has been entirely devoted to the clearance of June Settlement accounts. Never before in the annals of the Shanghai Stock Exchange has the volume of clearances to be effected been so enormous. It became necessary for the Settling Days to be extended … The week under review has been an anxious one for clients and brokers alike, and all classes of people have shared in the prevailing uneasiness. At the time of writing merely a few transactions remain to be cleared and congratulations are being exchanged upon the carrying through of what, at one time, appeared to be an impossible situation”Bisset & Co. reporting to the North China Herald, June 30 1910
This would not be a normal settlement date. Indeed, though the June settlement came and went without a major disaster this was only thanks to extraordinary action. Brokers were able to take on the shares which clients had defaulted on with the help of a firm, Cathay Trust, which had recently raised capital and which stepped in to advance money on rubber shares held by brokers. Cathay Trust lent the Shanghai Stock Exchange 1.5 million taels which it could then lend to six brokers facing difficulties; the loan was guaranteed by solvent brokers.
Cathay Trust’s intervention provided only a momentary respite. In July, the failure of Chinese banks, some involved in the rubber speculation, brought new turmoil to the markets and the rescued brokers could not meet interest payments and the solvent brokers guaranteeing Cathay Trust’s loan had little to offer themselves. A larger bailout of the Shanghai financial community was extended by a handful of foreign banks organized by the Shanghai government, including the Hongkong and Shanghai Bank (modern HSBC). This larger bailout, 3.5 million taels in all, provided relief to the Shanghai financial markets.
In the end, the rubber shares stabilized though the experience rattled Shanghai; 1910 would mark the end of the Shanghai rubber boom of the early 20th century. Even still, there remained 47 listed rubber companies in Shanghai in the autumn of 1910, meaning it was still the largest sector in the market. However, a quarter of rubber companies were still paying no dividends by 1915 and in 1914, no company paid a dividend as high as the Kalumpong Rubber Company had before the bust. This firm remained the best paying company though, but ‘only’ at 12.5%. Surviving Shanghai banks kept their distance from speculative activities for some time.
The rubber boom of the early 20th century involved nearly every corner of the world. Natural rubber was harvested from the wilds of the Amazon or from plantations in Southeast Asia. The creation of these plantations was funded by investors in Europe and China and their end product was sold to manufacturers, most notably in the United States. Though Shanghai may have been ravaged more than any other financial center by the deflation of the rubber boom, the real-world events driving the enthusiasm largely played out far from the city.
More from the Tontine Coffee-House
The Shanghai first visited by the American insurance executive Cornelius Vander Starr would not have been too different from that of the rubber boom days. Also, read about an agricultural boom and bust involving Indian indigo. Lastly, consider subscribing to this blog’s newsletter here.
1. Frank, Zephyr, and Aldo Musacchio. “The International Natural Rubber Market, 1870-1930.” EHnet, Economic History Association, 16 Mar. 2008.
2. Ji, Zhaojin. A History of Modern Shanghai Banking: The Rise and Decline of China’s Finance Capitalism. Routledge, 2016.
3. Thomas, W. A. “An Intra-Empire Capital Transfer: The Shanghai Rubber Company Boom 1909–1912.” Modern Asian Studies, vol. 32, no. 3, 1998, pp. 739–760.
4. Thomas, William Arthur. Western Capitalism in China: A History of the Shanghai Stock Exchange. Ashgate, 2001.