Market demand for tea in Europe may have appeared overnight but import volumes did not grow to large proportions nearly so instantaneously. Imports of tea from China grew over the course of the 18th century and even spaced out over many decades, the steadily rising demand strained the capacity of Chinese merchants to supply the volumes of tea desired abroad. No doubt bringing additional tea plantations into cultivation takes some time, but a more immediate limiting factor was the working capital of Canton-based merchants. When capital did become readily available over the 1760s and 1770s, merchants were eager to take advantage, but the result was a credit crisis among Canton-based Chinese merchants that saw many of them fail to repay their debts.
Merchants in Canton
The tea trade grew briskly in the 18th century as consumption in England and elsewhere in Europe was picking up. The British East India Company legally imported over 1.7 million pounds of tea in 1739 and perhaps another 2 million pounds was smuggled into Britain annually at around this time. After 1730, prices were falling, meaning even more people could afford tea so the import volumes went well beyond what only the rich could consume. By the 1740s, consumption of tea in England and Wales probably amounted to about one pound per person per year.
While associated perhaps just as much with India today, China was Europe’s first source of tea (茶). It was there that the 18th century saw the development of new tea products, like oolong and pekoe. Indeed, Chinese seeds and Chinese tea planters were crucial to the growth in commercial-scale tea production in India but only in the early 19th century. The 18th century tea trade between Asia and Europe was essentially about Chinese tea alone.
Tea was acquired by European trading companies from Hong merchants, Chinese merchants licensed to trade with foreigners in Canton (广州市), in southern China. The Hong merchants belonged to an extremely exclusive and lucrative guild backed by government restrictions on new entrants. It’s rare for merchants to benefit from state support like this but the protections may have hurt commerce by blocking new talent and resources from accessing the Canton trade. Also, despite the protected status, merchant failures happened often. This risk was meaningful to surviving merchants since Hong merchants guaranteed each other’s debts as a price for maintaining their privileged status.
On the opposite side of the trade were European trading companies like the British East India Company. They bought tea in Canton but offered few products which saw much demand there so that European countries invariably ran trade deficits against China in the 18th century.
Need for Credit
Hong merchants acquired tea from merchants and growers to resell to European merchants. They paid advances to secure that supply earlier in the growing season and these and other payments to suppliers were made in silver. Perhaps because of the closed nature of their business and voracious demand from abroad, Hong merchants were always short of capital to make purchases of tea from inland planters to the extent of European demand. Also, since they sold little in China, the East India Companies needed to borrow or tie up their own capital in buying tea until the cargos could be sold in Europe. So, both the East India Companies and the Hong merchants were in need of credit.
One local source of funds was the earnings of Europeans in Asia. These people saved in anticipation of retiring in Europe before too long and they often made large sums of money in Asian trade. In India, British East India Company sailors, captains, and others often accumulated large private fortunes and they may have been even better at making money than their employer.
However, it was not straightforward to transfer this money home. To some extent, merchants with surplus money could buy bills payable in Europe issued by their employers, providing financing to the trading companies. The East India Companies needed this local funding since they were largely buyers, but not sellers, of merchandise in Asian ports. Still, the British East India Company in Canton suspended its issuance of bills drawn on London in 1774. This had the effect of trapping savings in Asia.
So, Europeans in Asia reinvested their savings locally until other means of repatriating that wealth arose. Thus, financing was provided to Hong merchants, provided primarily by Englishmen and Scots, but the Dutch and French were relevant creditors too. In the case of the French arriving in India and China, some French East India Company employees raised money in France to be lent in Asia, a special case of savings from income earned in Europe being invested in Asia. Generally though, it was money already in Asia that financed trade there.
Making Loans
Sailors, captains, merchants, or other company employees in Asia did not invest their savings themselves. Brokers created a business intermediating these savings. British brokers in Canton arranged loans between Englishmen and Scots, whether active in China or in India, and the Hong merchants. One of these brokerage firms was Mess. Hutton & Gordon, founded by East India Company surgeons.
The brokers served lenders who were far from Canton. One report delivered to the Governor-General of Bengal reported that “almost all of the European inhabitants of any long standing have debts due them in China”. These included not just ship captains and merchants for the East India Company but civil servants in India too. Even three Members of Parliament back home were due repayment on debts of Chinese merchants.
An edict in Canton, issued by Governor Li Shih-yao (李侍堯)in 1760, prohibited Hong merchants from taking on new debts but this was ignored. The going rate on these illegal loans ranged from 18% to 24% over the 1760s and 1770s. This was much higher than the going interest rates in India’s merchant community but well below the legal maximum rate in China of 36%. However, because they were essentially illegal, the loans could not be secured by any assets of the Hong merchants who borrowed the money, making the loans riskier. Still, officials were usually willing to be of some assistance in recouping foreign investors’ money lent to local merchants though the process was not always reliable.
The accrual of interest on existing loans at these high rates could pose as much of a problem for a merchant as accumulating new debts. Loans were invariably rolled over when due since merchants rarely had the money to repay a loan in a single large payment. Because interest was also rolled over, this allowed interest costs to rise still higher with time. Also, without audits and underdeveloped bankruptcy law, it was easy for a merchant to stay in business and even contract new debts while insolvent.
Merchant Failures Intensify
British merchants withdrew credit in the mid-1770s. One of the earliest consequences of this, which accelerated a panic, was the default of one Hong merchant, Sy Anqua (是相官). By the end of the panic, about half of Hong merchants were driven out of business. Some bought a little time by selling their creditors tea at reduced prices, but this reduced revenues and brought them closer to insolvency, if they were not already insolvent by then to begin with.
One of the larger merchant failures was that of Coqua (陳科官) in 1779. This merchant lost his license and was imprisoned but claims of about £300,000 against him were dismissed by government officials on account of Coqua being unlicensed, though he had been properly licensed when the debts were contracted. Perhaps because of this ruling, Coqua escaped his creditors and was reportedly living in luxury a decade later. Yet another merchant with similarly sized debts, Yngshaw (顔瑛舍), failed in 1780.
As the case of Coqua shows, recovering money was not straightforward. In London, creditors put out advertisements in newspapers to form a committee to discuss strategy. In China, brokers petitioned the emperor, occupied the warehouses of defaulting merchants, and even bribed a Royal Navy Admiral to bring a warship to Canton to intimidate local officials.
Some of these more aggressive actions disturbed British East India Company officials worried about the escalating situation and its effects on trade. While it was their shuttering of a facility for transferring money back to Europe that accelerated the lending in Canton, and the lending allowed tea exports to grow, they were now of little help to the lenders, who were often their own employees or former employees.
Thereafter
British creditors claimed to have been due about £900,000 ($4.3 million) in 1781, split across 248 loans. It took many years to recover money. Local officials arbitrating disputes moved slowly and the distance between brokers and their clients, the lenders who were owed money, confounded things. Also, Chinese law limited cumulative interest charged but the manner in which loans were rolled over, turning interest on the old loan into principal on the new ones was a mess to interpret.
The efforts of the committee of creditors in London succeeded in having an ambassador sent to China in 1787, but only for that ambassador to die en route. Unfortunately for the lenders, his successor had little interest in bringing up creditors’ claims to the Emperor in such a historic diplomatic mission. Some creditors, like Captain John Blake, a sea captain turned botanist who had lent money to the Kewshaw merchant firm (張天球), ultimately received only a small portion of their money back, just 10% or so, repaid over a ten-year period and without interest.
Only four Hong merchants from 1760 remained in business by 1780. Yet, the tea trade did not unravel. Rather, the 1780s were a period of tremendous growth. The British East India Company was selling over fifteen million pounds of tea by 1785 and over nineteen million pounds by 1794. This one product was responsible for over 90% of company profits. Growing tea business provided what little recovery lenders saw because a fund was established into which a tax on merchants’ business would accumulate until defaulted debts were settled. This was known as the ‘consoo fund’, from the Chinese word for guildhall (公所).
Lesson
There was a very real shortage of credit in Canton, at least compared to the voracious demand for tea on the part of European trading companies. In the 1760s and 1770s, Europeans in Asia began lending to Chinese merchants at larger scale. This accelerated in the 1770s when there were few avenues for repatriating this invested money back to Europe. When a credit bottleneck exists and there is a pile of savings looking for an immediate home, credit can become available very readily. It may have helped meet a very real need but there is a danger that this credit can become excessive and difficult to recover once withdrawn.
More from the Tontine Coffee-House
Read more about the Canton trade and the Englishmen who repatriated their fortunes from India to Britain in the 18th century. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
- Cheong, Weng Eang. The Hong Merchants of Canton: Chinese Merchants in Sino-Western Trade, 1684-1798. Routledge, 2013.
- Hanser, Jessica. Mr. Smith Goes To China. Yale University Press, 2019.
- Hanser, Jessica. “Two Botanists, A Financial Crisis and Britain’s First Embassy to China.” Curtis’s Botanical Magazine, vol. 34, no. 4, Dec. 2017, pp. 314–22.
- Margairaz, Dominique, et al. Merchants and Profit in the Age of Commerce, 1680–1830. Routledge, 2015.
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