Pronunciation Guide xi
List of Abbreviations xiii
1 The Origins of Dafeng, Lixin, and Dacheng 19
2 Technology Networks in the Yangzi Delta 35
3 Integrated Firms in a Dual Market 51
4 War and Isolation 67
5 The Great Leap Outwards 83
6 The Socialist Transition and the Shanghai–Hong Kong
7 Trade and Industrialization in Hong Kong 115
8 Networks in the Reform and Opening Up 131
The industrialization of China is an extraordinary event in human history. Since the start of the opening up and reform process in the late 1970s, the People’s Republic of China (PRC) has become the world’s biggest factory and is now the world’s largest trading power while it maintains a unique structure of firm ownership and business organization. In 2013, China accounted for 43.1 percent of global clothing exports.1 These facts contrast with the historical predominance of agriculture well until 1978, despite all efforts to promote industrialization.2 However, there was a period before 1949 when private textile firms sprouted—especially in Shanghai and the Yangzi Delta— and led a process of industrialization, although this was confined to some cities and ports. This book identifies the trade and technology networks that link this first industrialization with the reform and opening up process that began 50 years later.
During the 1920s and 1930s, Shanghai and other surrounding cities like Wuxi and Changzhou took off and the Yangzi Delta became one of the most industrialized regions in Asia.3 Some of these firms that survived Japanese occupation and the Civil War moved to Hong Kong, where they played a leading role in its industrialization. The textile industry, particularly the cotton sector, was predominant in Shanghai during the 1920s and 1930s, as well as in Hong Kong during the Cold War. Furthermore, the textile industry became a staple sector under Deng Xiaoping’s regime, when Hong Kong firms were taken as models of technologically advanced capitalist companies.4 This book identifies common networks in these three processes of industrialization.
This book talks about the trade and technology networks that “opened up” the Chinese textile industry to the world markets well before the reform started in the late 1970s. It defends the hypothesis of continuity of a business network based on industrial and trading firms that first imported technology and finally exported finished goods, a model that was shaped by the historical experiences of China’s industrialization: the first stage being the 1920s and 1930s, the second in the 1950s, and the third starting in the mid-1970s. However, as most research tends to be compartmentalized between Republican China, Mao China, and Deng China, this continuity has not yet been observed.5
These historical landmarks divide the study of Chinese business history. The Cold War paradigm tends to emphasize the existence of two separated worlds of inner and outer China that evolved in parallel without contact.6 However, this book aims to dispel this paradigm and break with the idea of isolation and compartmentalization, while analyzing the continuity of private networks that transitioned between both sides. By analyzing the evolution of the companies and networks that moved from Shanghai and the Yangzi Delta to Hong Kong—and back from Hong Kong to Shanghai and other Chinese cities—this book studies the complexities of inner and outer China during the twentieth century.
Dafeng, Lixin, and Dacheng were three private industrial firms that appeared in the Yangzi Delta during the 1920s and 1930s. They pioneered in manufacturing finished (dyed and printed) cotton cloth in China and combined this production with spinning and weaving.7 Therefore, they consolidated the entire cotton production process from the spinning of coarse and fine yarns to the cloth finishing. By becoming vertically integrated, they had the potential to climb up the value-added ladder, from the cotton yarn to the dyed cloth, and from the coarser products to the more sophisticated goods. But this process was dependent on regular technology imported from other countries, mainly Great Britain and Japan. Dafeng and Lixin relied on a trading company named China Engineers Limited, which participated in the industrialization processes of Shanghai and Hong Kong. As is common in the cotton industry, merchants like the founder of this company,William Charles Gomersall (1895–1960), played a key role in the development of the textile industry; however, the relationship between machinery traders and Chinese industrialists has not been thoroughly researched.8
Dafeng, Lixin, and Dacheng had the capacity to emancipate the Chinese consumer from the dependency on foreign imports. As a matter of fact, the development of vertically integrated textile mills during the 1930s drove cotton imports into decline. Following the theory of the “flying geese” pattern—that applies to the 1930s cotton sector of Japan—China was entering a more advanced stage of development, where machinery would finally be produced locally.9 However, the country did not surpass this stage, as Japan did in the 1930s, and Chinese textile firms were still dependent on foreign trade for machinery supplies and basic necessities, such as raw cotton.
Different studies have tried to answer to the question of why China did not surpass this stage of development. Most of the research has focused on the Chinese institutions, searching for a negative factor that hindered industrial growth: lack of capital, poor management, low productivity, confusion between family and firm, bureaucratic intrusion, state monopolies, unprofessional accounting, et cetera.10 All these factors have been analyzed and discussed, and it seems that the burden of China’s failure to industrialize is to be found in the so-called institutional constraints, hidden inside the structure of the government or the private firm.11 The institutional economic theory is dominant in explaining the industrial and economic performance of Republican China.12
This book suggests an alternative theory: that the fragmentation of the Chinese market was the determinant institutional constraint. It demonstrates how the fragmentation of the Chinese territory drove Chinese firms to strengthen their links with transnational networks at the expense of domestic distribution. During the Republican period, China’s infrastructure and transport facilities were not only backward, but often totally blocked by the country’s instability. The fragmentation of the Chinese market (the “inner” China) created difficulties for modern industries, which turned into transnational networks (the “outer” China), to find supplies—mainly raw cotton and machineries—and a sales channel for their products. This was a natural reaction that began to take shape during the warlord conflicts of 1923–1924 and the closure of the Northeast market after the Japanese invasion of Manchuria in 1931. But this tendency was aggravated in the next two decades.