Post a Comment On: China Matters

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I have a piece up at Asia Times concerning California’s efforts to entice China’s sovereign wealth fund into an investment in its troubled high speed rail project.
Not gonna happen, is my feeling.  The project’s economics don’t smell very sweet, and CIC has already taken huge heat within China for its disastrous investments in Morgan Stanley and Blackstone.  CIC doesn’t need another high-profile failure.
PRC President-in-waiting Xi Jinping, who was lobbied on the project during his visit to LA, might possibly have considered throwing a few billion at CHSR as a promotional expense, in order to display the benign face of rising China to the US.  
But post-Wenzhou-crash and in the atmosphere of strong partisanship that permeates opposition to the project from Republicans and Tea Partyites (if you want a strong feeling that America is circling the drain, politically, Google “Agenda 21”),  a package of Chinese trains and investment is a PR nightmare, not a PR dream, IMHO.
Too busy or too lazy to Google?  Here’s the relevant excerpt from my Asia Times piece:
In the mainstream, Agenda 21 is a toothless United Nations environmental initiative for sustainable development. For the Tea Party fringe, it is a conspiracy staple: a UN-created, George Soros-funded plan for leftists in the government to destroy freedom and private property by setting up a chain of gulags along passenger rail lines full of bike paths and clean air but no cars or liberty.

Enamored of the energy of the Tea Party, the Republican leadership, especially Newt Gingrich, and Fox News have flirted with legitimizing Agenda 21. Agenda 21 Cassandras figured prominently in the public outcry that doomed the only high-speed rail project in the US other than California's: the Florida HSR.

Attitudes like this should dissuade Xi Jinping that the PRC will be welcomed as the savior of California's high-speed rail system:
Oooh baby ... High-speed rail owned and operated by the Chinese throughout the US. ... Roads, sewer systems, and water systems will be owned by the Chinese. ... I can see it now. We lose our rural roads - pulverized to gravel. Our private vehicle usage is limited, restricted, and taxed. Our bus service will be declared insolvent and not cost effective. High-speed rail will be the only way to travel.

Fully owned and operated by the Chinese. In our country. Airport-style searches. Restricted use tickets. Overcrowding. Limited line service. Why? Because we can't maintain our own infrastructure? Can we maintain our sovereignty? Just wondering.
California’s lethal combination of rail and political and economic peril put me in mind of another gigantic north-south rail project, biggest of its kind, which scrambled for foreign investment, ignited a political firestorm, and brought a great state to its knees—even before it defaulted on its bonds, and almost 30 years before the line got built: the Hukuang railway, which began its tortuous path to completion in the latter days of the Qing dynasty.
“Hukuang” means “Hubei/Guangdong”.  The purpose of the railway was to connect central and south China via a thousand-plus mile rail line between Canton and Hankow across some very nasty, mountainous, and expensive terrain.  Local and national funding wasn’t up to scratch, so it was deemed necessary to tap the power of private capital.
In the old days, of course, railroad investment ran the other way, from West to East.  In the early 20th century, it was China that needed capital and it was America that sought power and profit through investment in the Chinese railway network.
As an article by Michael Mahler details, Hukuang was the big infrastructure play in China at the time.  It also represented the Qing dynasty’s rather desperate attempt to get its financial and geopolitical house in order with the help of international capital and the foreign powers after the disaster of the Boxer Rebellion.
Originally, the credit would have been issued in 1909 by a consortium of British, German, and French banks.  However, America’s vaunting ambition induced complexity, rancor, and fatal delay that played a significant role in sinking the Qing dynasty.
Getting an American share of the £ 6,000,000 bond issue to finance construction of the Hukuang line was a cornerstone of President William Taft’s “dollar diplomacy”: the use of the good offices of the American government to extend the reach of American investment and trade, thereby projecting US power.  
Placing his faith in greenbacks rather than battleships, Taft mobilized J.P. Morgan, Kuhn Loeb, First National Bank, and National City Bank to promote US diplomatic and financial interests in Asia.
  Specifically, Taft (and later Woodrow Wilson) hoped that a “China Consortium”, composed of British, French, German, and US banks working in harmony under the direction of their governments on "Open Door"principles, would serve as the exclusive conduit for massive Western public investment in China, thereby swamping Russian and Japanese efforts to carve China, starting with Manchuria, into exclusive national spheres of influence and/or colonies.
In response to the insistent lobbying by Taft’s Secretary of State, Philander Knox (including a threat that the US would cancel its remission of the Boxer indemnity), the US group was granted a quarter share of the Hukuang consortium (even though the Americans at that time did not possess the financial heft to dispose of their share in the US and needed European channels—and the bemused forbearance of their partners--to lay off their holdings).
The Hukuang loan was the largest commercial debt undertaking ever assumed by the Qing dynasty, dwarfed only by the gigantic Boxer and Sino-Japanese war reparations.  Since the revenues of the Maritime Customs (the loan guarantee of first resort for a risk-averse foreign power) were maxed out, the loan was secured by salt, rice, and likin (local transit) taxes.
Unfortunately, the two years of bickering provoked by the US muscling in on the consortium meant that the Qing dynasty was in extremis when it was finally time to issue the loan, and ill equipped to handle the political blowback it provoked.
In order to lock up foreign funding, the Qing dynasty was obliged to effectively nationalize all railway operations in China.  This meant cancelling concessions to local Chinese companies with competing projects, whose stock offerings had been enthusiastically underwritten by patriotic and nationalistic gentry and overseas Chinese determined to create an alternative to foreign control of the critical sector.
The announcement of the Hukuang loan on May 20, 1911, less than three weeks after the cancellation of the domestic concessions, including one to a floundering local outfit unable to make a convincing go of the Hukuang line, infuriated gentry investors in the now-defunct railways. They made common cause with disgruntled students and ardent revolutionaries in a “Protect the Railways” movement.  
It was as if the Tea Party, the Occupy movement, and the Chamber of Commerce had all banded together to stick it to the government.
Disgust with the Manchu regime over the railway issue quickly fed into widespread alienation, unrest, demonstrations, and rioting that ate away at the legitimacy of the dynasty.  In October 1911, while two of its regiments were dispatched to deal with railway protection movement unrest, the garrison at Wuchang revolted; within two months the Qing dynasty had, for all effects and purposes, collapsed.
Ironically, the Chinese government had foreseen the political perils and tried to back out of the loan, only to be forced to conclude it by foreign pressure:
The U.S. minister to China, William J. Calhoun, was greatly embarrassed by instructions that he demand that the Chinese conclude the loan negotiations. He argued that it was undignified, "unworthy of civilized powers," to force a loan on an unwilling government. But Calhoun's protests were brushed aside, and the U.S. government joined in the pressures to which the Chinese succumbed in May 1911. As the Peking government anticipated, conclusion of the £6 million loan led to increased violence in the provinces and ultimately to revolution.
So the oblivious mandarins of the Qing empire had a better handle on the problems and the consequences of the loan than the masters of the steam-powered universe.  Imagine that.
Hukuang, therefore, is frequently invoked as the precipitating factor in the fall of the 3000 year-old Chinese empire.  
Needless to say, the China consortium did not have an easy time selling Hukuang bonds. 
According to a history of Morgan by Vincent and Rose Carosso, JP Morgan sold off its roughly 9% share (north of half a million pounds) with the help of its London and Paris offices, and netted a less than princely $50,000 for the New York partners.  This was in the day when JP Morgan was run strictly by and for the partners, and they were not at all happy that two years of time, effort, and aggravation on behalf of President Taft’s “dollar diplomacy” had yielded so paltry a return.  
On the other hand, perhaps the partners were consoled and even heartened by the observation that they had been able to get the bonds off their book-- and book a profit!--while the Qing was in virtual free fall.
Though post-Qing China declared bankruptcy in 1921, Chiang Kai-shek’s Republic of China government did not repudiate the debt and struggled, sometimes unsuccessfully, to pay interest on the bonds out of salt revenues (since the railway had not yet been completed).  Chiang Kai-shek’s government renegotiated the debt in 1936-7 but eventually defaulted on the bonds in 1938, shortly after the line was completed, when the travails of the Sino-Japanese War made further payments impossible.  The Communist government subsequently repudiated the debt as “odious.”
The Hukuang bonds themselves lived on, and became a significant impediment to normalization of PRC-American relations in the 1980s.  Speculative investors who had purchased the bonds as relations thawed in 1976 filed a claim in US court against the PRC.  When the PRC didn’t appear in court, the judge awarded a summary judgment of $41 million to the claimants, threatening the PRC with attachment of its then meager assets in the United States.  Deng Xiaoping communicated his exasperation to the US government and Jerome Cohen, the doyen of China legal scholars, jumped in. 
It still took three years and the intercession of George Schultz’s State Department for the case to go away.
Today Hukuang bonds are a valued only as a scripophily collectible.  But a £ 100 Hukuang bond sells for $695—more than its face value.

We’ll have to see if California high speed rail bonds will match that performance.
Image of Hukuang bond from scripophily.net