Capital Markets in China and England
in the 18th and 19th Century:
Evidence from Grain Prices
Wolfgang Keller, Stanford and Colorado
Carol H. Shiue, Stanford and Colorado
Xin Wang, Colorado
Timing of Growth Take-offs
• This paper compares capital market
performance in China and England
• Affects the willingness to save, investment,
and growth
• Level of interest rate and market integration
16
14
Range of interest rates in China
Short Term Cotton
Factory Low
Short Term Cotton
Factory Shanghai High
12
Long Term Shanghai
Stocks Dasheng Cotton
Mill (Shanghai)
10
Canton traders short
term
8
Canton traders high
6
4
2
0
1875
Gov't loans avg
Gov't loans low
4.8% to 24% in 18th/early 19th century
(Li and van Zanden 2013)
1880
1885
1890
1895
1900
Gov't loans high
1905
1910
1915
Canton traders short
term
New evidence on interest rates from
grain prices
• Idea: Stored grain has to compete with other assets
that convert current into future consumption
• Competitive storage equilibrium w/ no arbitrage
rm: interest rate in month m; Pm: price of grain; xm:
grain-specific factors (storage costs, spoilage,
convenience yield, risk, random shocks, …)
• Due to Working (1933), Kaldor (1939)
• Applications include McCloskey-Nash, Shiue, Clark,
Pomeranz, and Brunt-Cannon, among others
0.016
0.014
Grain-based monthly interest rates
0.012
0.01
0.008
0.006
0.004
0.002
0
1760
1770
1780
1790
1800
1810
Britain
1820
China
1830
1840
1850
1860
1870
0.025
China in longer perspective
0.02
0.015
0.01
0.005
0
1720
1740
1760
1780
1800
China
1820
1840
Britain
1860
1880
1900
1920
The remainder of the talk
1. Grain price data in China and Britain
2. Sample variation by region, grain, and level
of aggregation
3. Country-level interest rates for 1770 to 1860
4. Potential biases
– Regional variation
5. Capital market integration
6. Conclusions
Price behavior with storage
16
14
12
10
8
6
4
2
0
Data for Britain: The London Gazette
China: the Qing grain price reporting system
1.6
1.5
1.4
1.3
1.2
Prefecture in Guangxi
province, first-grade rice
1.1
1860
1855
1850
1845
1840
1835
1830
1825
1821
1
0.08
0.07
Between-harvest prices, storage, and
interest rates
0.06
0.05
0.04
Guizhou, Rice
0.03
0.02
0.01
0
-0.01
-0.02
1
2
3
4
5
6
7
8
9
10
11
12
- Comparison period:
1771 to 1865
- Overall: 1738 to 1911
- 263 prefectures
- Grains: Rice (different
types), wheat, millet,
sorghum
- Rice 55% of sample
- Sample period
1771 to 1865
- 52 Counties
- Grain: Wheat
Coverage 1771 - 1820
Interest Rates in China and Britain, 1770 - 1865
Average per month
0.016
0.014
0.012
0.01
0.008
0.006
0.004
0.002
0
England & Wales
China (All Grains)
0.016
0.014
Grain-based monthly interest rates
0.012
0.01
0.008
0.006
0.004
0.002
0
1760
1770
1780
1790
1800
1810
Britain
1820
China
1830
1840
1850
1860
1870
Potential biases
1. Storage cost differences
– Between China and Britain
– Over time: changes in storage technology
2. Sample selection: trade, cropping patterns
3. Price reporting (‘data generation process’)
4. Aggregation: Size of region, type of price
Carry cost of grain comparisons
• ΔP/P = r + x
– Comparison of r’s confounded
by differences in x’s?
• Focus on wheat in China
and England & Wales
– Wet-land vs dry-land prod’n
– Storage technologies
• No evidence that storage
technology changes match
the dynamics of our interest
rate estimates
0.016
0.014
0.012
0.01
0.008
0.006
0.004
0.002
0
England & China (Wheat)
Wales (Wheat)
China (All
Grains)
Quantifying grain-specific factors
 Grain storage costs vary
with weather
 Weather is classified
from Very Wet to Very
Dry (5 categories) in
120 stations
 Findings: Storage costs
~ 25% of total carry
cost, consistent w/
other estimates
2. Sample selection: trade, cropping patterns
• Trade is a substitute for storage to smooth
consumption
– Price gradient between harvests becomes less
steep
• Multiple harvests dampen price gradient as
well
British
sample 1821
to 1828
2. Sample selection: trade, cropping patterns
0.02
0.015
0.01
0.005
0
Interest rates in the Yangzi Delta and beyond
Average 1770 to 1860
0.016
0.014
0.012
0.01
0.008
0.006
0.004
0.002
0
Yangzi Delta
Jiangsu & Zhejiang outside
Yangzi Delta
China outside Yangzi Delta
3. Price reporting
• England & Wales data quality mostly high
• Data quality in China varies more
• Chinese data reports frequently no month-tomonth price change
– Example: Guizhou province to about 40% of cases
• Treat as true “zeros” (menu costs of changing
prices); give those obs a lower weight (GLS)
• Variation in interest rates comparable
– Coefficient of variation England: 2.68
– Coefficient of variation China (wheat): 3.15
4. Aggregation
• Chinese prefectures are typically larger than
English counties
– Example: Similar-sized Anhui and England have 15
prefectures and 40 counties, resp. in sample
• For 1770 to 1820, have only the average wheat
price in England, not the lowest and the highest
price as in China
• The former might favor China, the latter might
favor England
• Study also the integration of capital markets for
1821-1865, as a function of geographic distance
0.025
0.02
Capital markets in China and England:
some tentative conclusions
0.015
China
Britain
0.01
0.005
0
1720
1740
1760
1780
1800
1820
1840
1860
1880
• The Great Convergence before the Great Divergence
1900
– In 1816, annual interest rate in England: 13.9%, in China: 15.4%
1920
• No marked decline in England before ~ 1820
• Capital market differences before 1780 appear greater than commodity
market differences