The Middle Kingdom strikes back

"Westerners should not complain about a market illusion they created. Caught up in a whirlwind of global economy growth, often based on toxic assets, it could be said that the Middle Kingdom, crushed and offended in the 19th century, strikes back"

The Middle Kingdom strikes back
History records it that Chinese authorities, in the year 1557, authorized the Portuguese to settle in Macau so that they could fight the pirates that pillaged extensive areas in the Guangzhou (Canton) region, especially on the Pearl River Delta. This allowed the Portuguese to have a restricted access to the Chinese market whose economy was closed to other trading nations. This situation wetted the "appetite” of other trading nations throughout the centuries. The British, already settled in India, eyed this massive new market of millions eagerly. 

However, the British did not have easy access to China. At this time China saw itself as the centre of the universe and proclaimed itself as the Middle Kingdom. The British envoy, Lord McCartney, was dispatched in the year 1793 to Beijing with an array of British industrial products looking to be exported to China. He refused to bow to the Chinese emperor – unlike the Portuguese who wisely did bow their heads for the sake of their national interests and trade. Lord McCartney was expelled, and the following message from Emperor Qianlong to British King George III quickly followed:  "As your ambassador can see for himself, we have everything. I do not value alien or ingenious objects and we have no use for the manufacture of your country.”  

When the British were not able to expand trade with the Chinese through the sale of "alien or ingenious and useless objects” of British manufacture, the British adopted an aggressive marketing strategy. Opium grown in India was illegally flooded into the Chinese market and its population. In receipt, the British took gold and silver and highly prized Chinese merchandise such as silk, tea and porcelain, which were then very sought-after in Europe.  

The devastating consequences of the opium consumption began to threaten the social and financial stability of the country, including  State security and general defence as opium consumption among soldiers and officers was so widespread. China was hemorrhaging masses of its assets for the purchase of opium "imports”. In order to fight this situation, the Beijing government forbade the traffic of opium1, a prohibition that would not be accepted by the British, who maintained exclusivity in the trading operations at the Guangzhou port since the year 1830. The British easily brought opium shipments from India and these shipments represented half of all British exports to China.  

The Portuguese of Macau were not able to defend the Chinese from these "modern pirates of the 19th century”. The Chinese authorities then appealed for a "very abusive” destruction of a British opium shipment in Guangzhou harbour. Queen Victoria and her government were affronted by this unilateral move against its trading interests. They decided to "intervene with the market”, ordering the British fleet to sink a large number of Chinese war junks, outclassed by British ships. The British besieged Guangzhou, bombarded Nanking and blocked road access to Beijing. This episode is known as the 1st Opium War, which resulted in the defeat of the Chinese in 1842, and the signing of the Treaty of Nanking, which obliged China to open five ports for the British opium trade. They were also obliged to pay heavy war indemnities and hand over Hong Kong to the British, as a guarantee of opium trading rights, a British warship was anchored at each of these five ports.  

Some years later, in 1857, the British, this time allied with other western nations, angered by Chinese authorities who had searched the British pavilion boat named "Arrow” decided to once again "intervene with the market”.  The Chinese Emperor refused to accept a new "market openness” treaty; which would give access to eleven new Chinese ports for the opium trade with the Western world, and ensure freedom of movement to European traffickers "legitimately" looking to improve their distribution channels. Beijing was subsequently occupied and all western demands were accepted by means of the Beijing Convention of 1860, and China agreed to create a Ministry of Foreign Affairs in order to guarantee a "civilised dialogue" with western missions settled in the capitol. They wanted to monitor the Chinese economy to ensure a "fair remuneration" of "legitimate interests" of foreign investments associated with the opium trade. This was the outcome of the 2nd Opium War. It is noteworthy the Chinese authorities ceased using term "barbarian" they had previously used in governmental documents to describe Westerners. China indeed has a long memory and it is very unlikely that it has forgotten the lessons and offenses of the past2.   

Contemporary, single Partisan China, grown stronger by globalisation, can now "dismiss" any foreign war vessels at its ports wishing to monitor any commercial and financial flows. China has made a decision to adopt two systems: a "market economy”, acknowledging the temporary need to import western "alien or ingenious objects” for domestic consumption, which triggered the insatiable and blind appetite of Westerners for the Chinese "emerging market”. The second system is a "planned economy” to utilize low labour costs and that display less rigorous concerns for quality and standards.  Through these exported replicas or bric-a-brac, the Chinese are able, through a network of "points of sale”, otherwise known as "Chinese Shops”, to offer these goods on street corners of Europe and worldwide. 

Tremendous Chinese exports have allowed the government to amass very large currency reserves, giving it the status of a "reference financial centre”. Speculation and leveraged buyouts of foreign assets, with or without support of the Chinese government have replicated the models of other financial centres on a larger scale, resulting in the accumulation of significant debt manifested in lavish infrastructure costs, some of doubtful interest and worth. This once-reference economy is now involved in artificially keeping "zombie” companies, funded by the government, afloat that may well be "drowned” by toxic assets, defined as "too large to fail”. 

If in the 19th century, Westerners had imposed on the Chinese an "open market” model that was based on the free trade of opium, as creating an illusory "market” will likely end with a painful hangover. Where there was a once chimeric conquest of the Chinese market, the Chinese now trade freely in open economies. "Westerners” should not complain about a market illusion they created, because a substantial hangover may now await them. Caught up in a whirlwind of global economy growth, often based on toxic assets, or illusory realities, it could be said that the Middle Kingdom, crushed and offended in the 19th century, strikes back.

By Pedro Castro Caldas, Risk Management Consultant

1 In 1839, a Chinese minister reported to the Emperor the situation as follows: "Majesty, the silver price is falling because of the payment for the drug. Soon, your empire will go bankrupt.  How long will we tolerate this game with the devil for? Soon, we will not have any currency to pay for weapons and ammunition. Worse, there will be no soldiers able to handle a gun because all of them will be addicted.”

2  The Portuguese who got Macau in the 16th century in exchange for services rendered, know that quite well, when they found that the Chinese demanded the British to hand back Hong Kong in 1997, conquered in the 19th century by force and humiliation in 1842, and only two years after it, they demanded the Portuguese to return Macau. 

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