Taking Money from Strangers – and Friends: Evidence on Chinese Corporate Form from
the Dongya Corporation, 1932-1950
Brett Sheehan
Department of History
University of Southern California
bsheehan@usc.edu
This is a work in progress; please do not cite without permission of the author.
On September 4, 1934, Tianjin’s Dongya Corporation posted an odd notice in the local
newspaper. The company thanked all of those who had recently purchased stock in the
corporation. The stock offering was temporarily closed, however, and in spite of “all the
enthusiastic comrades whose letters asking to participate [as shareholders] were still pouring in,
it was difficult to continue accepting [investment]… Please,” the company pleaded, “those who
want to buy one or two shares should wait until [the company] planned to accept more
investors.”1 The content of this notice seems quite surprising. Dongya had only existed a little
over two years at the time, and this enthusiasm to invest in a company with such a short track
record seems strange. Moreover, the idea of large numbers of strangers wanting to purchase one
or two shares of Dongya stock appears inconsistent with models of Chinese business that posit a
dual track of possible options for organization: the family owned firm or the state-owned or
sponsored bureaucratic-capitalist enterprise.2
The implications of these inconsistencies between conventional wisdom and Dongya’s
strategies of capital accumulation are significant on three different levels. On the
macroeconomic level, the question of the adequacy of capital in late-nineteenth and earlytwentieth century China remains unresolved. Some scholars assert that China suffered from a
shortage of capital or that available capital could not be used for industrial growth because of
cultural predispositions for investing in status-giving, and poorly earning land or because of
patterns of involution.3 In contrast, some scholars argue for relatively high rates of investment,
1
Tianjin Dagong Bao, Sept. 2, 1934, 2-5.
William Kirby, “China Unincorporated: Company Law and Business Enterprise in Twentieth-Century China,”
Journal of Asian Studies, 54:1 (February 1995), 43-63.
3
For a review of the early literature and a debate on this issue, see Victor D. Lippit, “The Development of
Underdevelopment,” Modern China, 4:3 (July 1978), 251-329 and Albert Feurwerker, “A White Horse May or May
Not Be a Horse, but Megahistory is Not Economic History,” Modern China, 4:3 (July 1978), 331-339. On
involution, see Philip C.C. Huang, The Peasant Economy and Social Change in North China, (Stanford: Stanford
University Press, 1985) and The Peasant Family and Rural Development in the Yangzi Delta, 1350-1988, (Stanford:
2
especially in the modern sector.4 These questions of capital adequacy and investment patterns lie
at the heart of understanding China’s economic history. In addition, little work exists on capital
and investment during the time of war and revolution from 1937 to 1949, and the impact of the
war on business remains poorly understood.
On the level where macroeconomics and microeconomics intersect, much evidence exists
to show that the private, limited liability, joint-stock corporation did not function as effectively
as a vehicle for the concentration and use of available capital in China as it did in the West.
Chao Kang has argued that Shanghai’s textile mills remained chronically undercapitalized,
though he implies that this arose from mismanagement.5 Tomoko Shiroyama echoes Chao’s
conclusions by pointing to the high leverage of textile firms.6 Other scholars claim that China’s
cultural or legal environment proved inimical to the formation of large corporations outside of
the state-owned sector. A recent appraisal blames the lack of developed equity markets to
provide incentives to managers to protect minority shareholder rights.7 One scholar has gone so
far as to say that on the one hand “The idea that members of the public would be invited to join
one’s business and share in its control and profits was indeed repugnant. On the other hand, the
notion that one’s money be put into the pocket of some strangers for them to run a business was
just as unthinkable.”8 In fact the bulk of the scholarship on Chinese business history portrays
“particularism” as one of its salient characteristics. From this point of view the primary question
Stanford University Press, 1990). Huang restates the importance of involution to his view of the Chinese economy
in “The Study of Rural China’s Economic History,” Republican China, 18:1 (November 1992), 164-176.
4
Thomas Rawski, Economic Growth in Prewar China, (Berkeley: University of California Press, 1989), chapter 5.
5
{citation}
6
Tomoko Shiroyama, China During the Great Depression: Market, State, and the World Economy, 1929-1937,
(Cambridge, Mass. and London: Harvard University Asia Center, 2008), 81.
7
William Goetzmann and Elisabeth Koll “The History of Corporate Ownership in China: State Patronage, Company
Legislation, and the Issue of Control,” in Randall K. Morck, ed., A History of Corporate Governance around the
World: Family Business Groups to Professional Managers (Chicago and London: The University of Chicago Press,
2005), 149-184.
8
Li Chun, quoted in Kirby, 50.
revolves around the efficacy of particularism, not its existence.9 In light of such emphasis on
particularism, the large number of strangers writing letters to Dongya to purchase shares seems
strange indeed.10
Finally, on the microeconomic level, it is interesting to note that Dongya management
actively pursued a variety of strategies over two decades that combined insider, public, and
employee ownership of it shares. The coexistence of insider particularistic networks, broad
public participation, and employee stock ownership leads to a number of questions. How did
such strategies impact Dongya’s capital accumulation processes? Did employees and members
of the general public become major players among Dongya stockholders? How did the pursuit
of public and employee ownership reflect Dongya’s particular corporate culture? Why did
minority shareholders trust that their rights would be protected? Although these questions arise
from the activities of one firm in the 1930s and 1940s, they have much larger implications. For
example, in China today much of the state sector faces privatization, and the very nature of
ownership remains contested. Public and employee ownership might be one means to maintain
“socialist values” in the private sector. From the standpoint of business history, it is possible that
public and private ownership only provided a veneer that aided insider control, or perhaps
allowed Dongya management to become more independent of particularistic ties. Dongya’s
experience also raises the possibility of historical precedent for a type of enterprise different
from the family firm, the state-owned enterprise, and the Western-style corporation.
9
Robert Gardella and Andrea McElderry, “Guest Editors’ Introduction: Interpretive Trends and Priorities for the
Future,” in Robert Gardella, Jane K. Leonard, and Andrea McElderry, eds., Chinese Business History: Interpretive
Trends and Priorities for the Future,” a special issue of Chinese Studies in History, 31:3-4 (Spring-Summer 1998),
12-13.(3-15)
10
Wellington Chan has argued forcibly that Chinese business is not in a “culture trap” and that ways of doing
business can change if the economic and legal environment changes, “Tradition and Change in the Chinese Business
Enterprise: The Family Firm Past and Present,” in Gardella, Leonard and McElderry, 127-144.
Evidence from the experience of the Dongya Corporation alone will not suffice to answer
the macroeconomic question of the adequacy of capital in China. Nonetheless, Dongya
successfully raised capital over approximately twenty years, and it did so often under very
adverse circumstances like the worldwide depression of the 1930s and the period of war and
revolution from 1938 to 1949. After about 1943, however, growth in invested capital did not
keep up with inflation, showing the limits imposed by China’s unstable economic and political
environment. This record suggests that enough capital existed for some enterprises, at least prior
to 1943, even if many firms did not have access to it, or perhaps did not know how to access it.
In terms of the viability of the joint-stock corporation, Dongya’s success shows that corporations
funded by large numbers of individuals not known to each other could thrive in the legal and
cultural environment of the 1930s and 1940s. There were no inherent barriers to the formation
of private corporations, though at the same time Dongya’s patterns of management and capital
accumulation also reflected aspects often associated with Chinese particularism. Finally, at the
microeconomic level, Dongya management’s pursuit of public and employee ownership had a
mixed record. On the one hand, plans for a nationwide network of small shareholders did not
come to fruition and ownership remained primarily regional. On the other hand, over time the
ownership of the company became progressively broad, including large numbers of very small
shareholders and employees. This broad ownership did not jeopardize management control of
the firm, however, and it may even have helped management become more independent of large
shareholders to whom the managers had particularistic ties. In addition, the strategies adopted to
increase public and employee ownership combined a desire for capital accumulation with a
process of what I call “strategic sharing” of profit and ownership intended to forge ties between
the Dongya corporation and its distributors, its customers and its employees.
A Thumbnail Sketch of the Dongya Corporation
Song Feiqing (1899-1955) founded the Dongya Corporation in Tianjin in 1932.11 Son of
the Self-made Shandong businessman and politician, Song Chuandian, Feiqing attended school
in Shandong, Shanghai, and Beijing before entering Yanjing university in Beijing as a chemistry
student in 1917. He went to the United States in 1920 and studied chemistry and business at
Northwestern University for a year before returning to China to help in his father’s business. His
father had established his firm first in the city of Yidu (present day Qingzhou) Shandong, but by
the 1920s its headquarters had relocated to Jinan, the provincial capital. Song Feiqing’s father
had built the business primarily on manufacturing and exporting hairnets to Western countries,
and by the 1920s approximately 30,000 people in the Shandong countryside were involved in
weaving and dying hairnets for the Songs. His son’s knowledge of chemistry related directly to
the family business because of the need to develop dyes for the hairnets. By the mid-1920s the
company had diversified into a variety of export-import products, and Song Chuandian had used
his wealth as a platform to launch into provincial politics, becoming head of the Shandong
provincial assembly in 1923. Conflict in Jinan in 1928 at the time the Northern Expedition
arrived in Shandong virtually ruined the family’s business and the Songs fled to Tianjin where
they had a branch office and where they could be relatively safe in the shelter of the foreign
concessions.12 Song Chuandian soon moved to Shanghai, but his subsequent attempts to
establish a business there came to little and he died in 1929.13
11
Although “Dongya” literally translates as “East Asia,” the official English name of the firm was “The Oriental
Corporation.”
12
Reasons for the Song family troubles differ. Fang Zhaolin, “ ‘Diyang lingxiu Song Feiqing” [The Butting Rams
Leader Song Feiqing] in Jindai Tianjin shi da shiye jia [Ten Great Industrialists in Modern Tianjin] (Tianjin: Tianjin
Renmin Chubanshe, 1999), 180(176-206) states that arriving Nationalist soldiers mistakenly considered Song
Feiqing’s father to be one of the warlord Zhang Zongchang’s followers. In contrast, the personal papers of Li
Jingfang, Song Feiqing’s wife, state that a price was placed on her father-in-law’s head by the Japanese. The latter
The burden of rebuilding the family fortune fell to Song Feiqing, who had stayed in
Tianjin. The Tianjin branch of the family business imported primarily automobiles and
automobile parts and was not large enough to support either the numerous relatives that had fled
Shandong or Song Feiqing’s own growing family. Although he had tried, and failed, in a
venture to produce wool knitting yarn in Shandong in the 1920s, Song Feiqing decided to make
another attempt in Tianjin in the 1930s.14 The Dongya corporation became very successful,
achieving approximately 24% of the Chinese knitting yarn market by 1935 and adding machine
woven woolen goods to its product mix. At the time of Dongya’s founding, virtually all wool
knitting yarn in China was imported, and the company’s success capitalized on the National
Goods Movement of the Nanjing decade.15 In fact, Dongya was so successful that two of its
major foreign competitors, Patons and Baldwin and Ewo, built factories in Shanghai in 1936 in
order to make their presence in China more competitive.
In 1937, however, the Japanese invasion of China interrupted peacetime trade patterns
and within a year supplies of the high-quality Australian wool Dongya needed to make knitting
yarn began running short. As a result in 1940 management decided to manufacture gunny sacks,
used for transporting rice and soybeans. In December 1941, with the outbreak of the Pacific war,
the British concession in Tianjin where Dongya was located came under Japanese control.
Unlike most large firms in north China, however, no Japanese company ever took over the
is plausible because of Japanese actions taken to promote their position in Shandong at the time of the Northern
Expedition.
13
This sketch is based on a variety of sources, especially the notes and writings of Li Jingfang prior to her death. Li
Jingfang’s personal papers were made available to me by the Song family in Berkeley, California.
14
Information on the ill-fated Shandong venture is sketchy, but personal papers left by the long-time Dongya
employee, and Yidu native, Li Jingshan mention it. Li Jingshan’s papers made available to me courtesy of his
daughter who lives in Tianjin.
15
Brett Sheehan, “Jinkou Rongxianye yiji ‘Bian Maoyi’ -- Dongya Gongsi 1930 Niandai zhi Jinkou Tidai Xingxiao
Celue Dui Zhongguo Jingji, Shehui ji Wenhua Yingxiang,” [Imported Wool Yarn and ‘Knitting’ -- The Economic,
Social and Cultural Impact of the Oriental Corporation’s Import Substitution Marketing Program in the 1930s], in
the Institute of Modern History, Chinese Academy of Social Sciences, ed., The Second International Symposium on
Modern China and the World Conference Volume, (Beijing, 2002).
Dongya Corporation. The company continued to operate quasi-independently under the
Japanese puppet regime. In 1943, as overall economic circumstances declined, the skyrocketing
price of medicine under wartime conditions prompted Dongya management to establish a
chemical plant to produce new sulfate drugs.16
After the Japanese surrender in 1945, the company continued to produce the full variety
of products introduced over the preceding years: wool knitting yarn, woolen goods, gunny sacks
and medicine. The late 1940s proved a tumultuous time, though, as Song Feiqing and Donya’s
managers had to deal with accelerating inflation and increasingly difficult labor relations.
Nonetheless production continued and the company persisted. In 1949 Tianjin fell to the
Communists and Song Feiqing managed to forge a working relationship with the People’s
government. In fact, his meeting with Liu Shaoqi at that time became the stuff of legend and
controversy during the Cultural Revolution. Song Feiqing did not stay to see much of the
socialist transformation of his company, however, left for Hong Kong in 1950 and later moved to
Argentina where he died in 1955.
Frequent changes in China’s political environment had forced Song Feiqing and the
Dongya Corporation to adjust the company’s product mix from knitting yarn and woolen goods
in the 1930s to gunny sacks during the early war period, then to medicine later in the war, and
then to a combination of all three in the postwar period. The company’s flexibility extended well
beyond its product line, however. For example, from the time of its founding in 1932 to the time
Song Feiqing left China in 1950 Dongya management had to cope with no fewer than five
16
On the importance of medicine in the republican period see Sherman Cochran, “Marketing Medicine and
Advertising Dreams in China, 1900-1950,” in Wen-hsin Yeh, ed., Becoming Chinese: Passages to Modernity and
Beyond (Berkeley: University of California Press, 2000), 62-97.
complete changes in China’s monetary system.17 War constantly interrupted routes of
distribution and supply. Inflation during the 1930s and 1940s led to shortages and required
numerous adjustments in wages. Nonetheless, throughout the entire period, Dongya continued to
issue new shares and its capital base grew through a variety of strategies.
Strategies of Equity Capital Accumulation
Insiders and Outsiders
When founded in 1932, the Dongya Corporation’s capital came from a small number of
family members and political patrons (Table One)
Table One
Ownership of the Dongya Corporation in 1932 (Yuan)
Shareholder
Invested % of Relationship
Capital Total
Song Feiqing
50,000
21.7 President of Dongya
Song Xiafei
50,000
21.7 Feiqing’s younger brother and Vice-Pres. of Dongya
Zhao Zizhen
30,000
13.2 An employee of Song Feiqing in the car business
Han Sixie
50,000
21.7 Son of the militarist Han Fuju
Zhang Huizhong
50,000
21.7 A relative of a subordinate of Han Fuju’s
Total
230,000 100.0
Source: Cui Shuju and Jin Yanshi, eds., “Tianjin Dongya Maofang Gongsi shiliao,” Tianjin
lishi ziliao, No. 2 (February 1984), 9, 10.
Although two of the major investors were Song Feiqing and his younger brother, the connections
among the Songs, Zhao Zizhen and Han Fuju were fairly shallow in terms of normal ideas of
particularism in China. According to one account, Zhao Zizhen went to work for the Song
family business in Tianjin after 1928, and he, in turn, met the militarist Han Fuju when the latter
17
The different monetary systems include the fabi reform of 1935, the imposition of currency issued by the Central
Reserve Bank of the Japanese puppet state in 1938, re-imposition of fabi in 1945, issue of gold notes in 1948 (a vain
attempt to stem hyperinflation), and then conversion to the Communist monetary system in 1950.
purchased a car through the company. After that, Han used the Song family business to purchase
other imported goods and he frequently came into contact with Zhao. When Song Feiqing
founded Dongya in 1932, Zhao convinced Han and some of his circle to invest.18 In other words,
the Songs, Zhao and Han had known each other a very short time and shared nothing in terms of
native place or family. The connections among them arose in an almost random fashion, though
Zhao Zizhen’s ability to develop personal relationships apparently played a role in making casual
connections closer.
By 1933, Dongya’s capital had expanded to 300,000 yuan, though no information is
available on specific shareholders.19 In 1934, however, Song Feiqing made a radical proposition
at the January 3 meeting of Dongya’s board of directors. He proposed doubling the company’s
capital base by getting 3,000 shareholders to purchase one share each at 100 yuan per share. He
stated that such a plan would “open up (kaifang) for the purpose of getting sympathy from all
circles, [gaining] participation from our company’s patriotic compatriots, reducing aspirations
for [others] to open similar [competing] factories, and concentrating force in order to protect and
promote our products.”20 Only six months later, Song reported to the board that the 300,000
yuan goal had almost been reached and by September the company was forced to place the
notice quoted at the top of this paper saying the stock offering was closed and asking for people
to stop writing in.21 There is no extant list of Dongya shareholders at the end of 1934, but the
total number of shareholders had reached 375.22 Given that at least five of them were Dongya’s
original shareholders, a maximum of 370 new investors had been added. Assuming this
18
Fang Zhaolin, 182-183. On Hanfuju see Howard L. Boorman, ed., Biographical Dictionary of Republican China,
Vol. 3 (New York and London: Columbia University Press, 1968), 51-54.
19
Dongya Archives, 1-3-5-09.
20
Dongya Archives, 1-3-5-09.
21
By July of 1934, 2,660 shares had been sold for a total of 266,000 yuan in new capital, Dongya Archives 1-3-510.
22
Cui and Jin, 13.
maximum, each new shareholder invested an average of 810.81 yuan, or slightly over eight
shares apiece. This number fell something short of Song Feiqing’s goal of 3,000 people
purchasing one share each, but still represented a radical change in the composition of Dongya’s
shareholder base.
As the company grew in the 1930s, so did Dongya’s equity capital. By March of 1935
another 53,000 yuan had been added for a total of 653,000 yuan.23 Then in early of 1936, Song
Feiqing presented another plan to the board to increase public ownership of Dongya. In March
he told the board of directors that small shareholders could “concentrate fragmented capital and
help strengthen the sales of company products.”24 According to this vision Dongya could tap
unused sources of capital and simultaneously gain publicity and loyalty for its products. To that
end, in June Song Feiqing proposed that “shareholders should spread over the entire country,”
and he set a quota for every province. Recognizing that capital solicitation would be easier in
richer regions, he divided China’s provinces into four levels. The quota for level-one provinces
(Jiangsu, Guangdong, Hubei, Hebei, and Shandong) was 500 shareholders each. The quota for
level-two provinces (Fujian, Anhui, Jiangxi, Hunan, Sichuan, Henan, Shanxi, and Shaanxi) was
250 shareholders each. Level-three provinces (Guangxi, Yunnan, Guizhou, Gansu, Ningxia,
Chaha’er, and Suiyuan) had a quota of 50 shareholders each and even level-four provinces,
China’s poorest (Qinghai, Xinjiang, Xikang, Xizang and Mongolia) should have at least 10
shareholders each. Song’s plan also subdivided each province’s quota, setting goals for every
major city and county in China. Thus Nanjing should provide 100 shareholders (one fifth of
Jiangsu’s quota), while Yannan in Shaanxi only had a quota of 10 shareholders.25 Even
Dongya’s usually enthusiastic directors seemed somewhat taken aback by the audacity and scope
23
Dongya Archives, 1-9-3-03.
Cui and Jin, 21.
25
Dongya Archives, 1-13-2-02, 1-13-2-06; Cui and Jin, 21-22.
24
of this plan. They approved it with the recommendation that it be “implemented gradually,
starting with nearby areas first.”26
Implementation of the plan proceeded along two fronts that mixed particularism and
impersonalism. On the one hand, Dongya’s directors privately agreed to work through their own
networks of friends to find new shareholders.27 The workings of such networks remain murky,
but a few clues can be found in company records. For example, one of Dongya’s auditors
(jiancha ren) named Li Youwen worked for the Tianjin office of the Customs Administration.
During capital campaigns, he convinced a number of colleagues at the Customs Administration
to invest in Dongya. Even after he had been transferred to another Customs office and resigned
as auditor of Dongya, he continued to recommend that colleagues invest in the company. In
return, Dongya named him an honorary director in 1936.28 In that same year, a local Tianjin
lawyer purchased 1,000 shares of the company, and in return Dongya engaged him as the firm’s
legal counsel.29 It is interesting to note that in both these cases there was an apparent quid pro
quo that investors, or people who found investors, expected some recognition for their actions.
Particularism provided a source of capital, but also imposed responsibilities on the company. On
the other hand, in contrast to its use of particularistic networks, the company advertised to solicit
shareholders from the general public. By mid-1936, Dongya was publicizing its capital
accumulation program as the “Raise a Million Campaign,” meaning it wanted to reach a total of
one million yuan in capital. The company published a popular women’s magazine called The
Ark (Fangzhou yuekan) which it used to advocate “modern” lifestyles, promote knitting, and
26
Dongya Archives, 1-13-2-06.
Dongya Archives, 1-13-2-02.
28
Dongya Archives, 1-13-2-02.
29
Dongya Archives, 1-13-2-02.
27
advertise Dongya products.30 In the July issue it published a notice asking for “patriots” to
become shareholders and stating, “it doesn’t matter how many shares” each person could buy.
To make purchase easier, major branches of the Bank of China, the Bank of Communications,
and the Shanghai Commercial and Savings Bank all over China could act as agents to receive
funds. Potential shareholders who did not live near one of those bank branches, could write
directly to the Dongya Corporation.31
By March of 1937, Song was reporting to the board that total capital of 923,900 yuan had
been raised, almost reaching the company’s goal of 1 million yuan. He no longer referred to
specific quotas for specific towns, but still emphasized the desire to “find as many small
shareholders as possible,” especially those with holdings under five shares each. The board
rejected a plan to set aside a block of 500 shares to be sold in tenths of a share as “too
confusing,” but otherwise approved of the nature of the capital drive.32 By the end of 1937,
Dongya had reached its million yuan goal from a total of 1,800 shareholders. With average
shareholding of 555.56 yuan (or 5.56 shares) per person, the company had come very close to the
ideal of large numbers of shareholders with fewer than five shares each.33
By that time, of course, Japan had invaded China proper. War and occupation changed
the political and economic environment for Dongya’s capital accumulation strategies. In March
of 1940, with supplies of Australian wool running low, the board of directors agreed to purchase
equipment for the manufacture of gunny sacks. At the same time, the minutes referred to a plan
to increase capital from two million to five million yuan in three stages of one million each.
Sometime in the previous year capital had increased from one million to two million yuan,
30
Circulation of The Ark was about 10,500 in 1936. On the nature of The Ark, see Sheehan, “Jinkou.”
“Tianjin Dongya Maoni Fangzhi Gufen Youxian Gongsi baiwan gu yundong qishi” [Notice about the Million
Capital Campaign of the Oriental Corporation], The Ark, No. 25 (June 1936), no page number.
32
Dongya Archives, 1-17-1-01.
33
Cui and Jin, 13.
31
though no details on that process are known.34 Between that increase and the additional three
million proposed in early 1940, it is clear that Dongya’s management had embarked on a major
capital accumulation campaign, even under occupation conditions.35 Two months later, the
company had already surpassed the five million yuan goal, having garnered 5,983,100 yuan.
Since investors had been “vying eagerly for shares,” and all of them were “closely related to the
operations of the company,” the directors had to agree that authorized capital be set at six
million, instead of five.36
The 1940 capital drive differed from those in 1934 and 1936. Rather than solicit shares
from large numbers of small investors unknown to management, the vast majority of new shares
were purchased by directors and their associates. Wang Yusheng, the chairman of the board
during the Japanese occupation period, alone subscribed to more than one million yuan.
Likewise, suppliers and distributors together took another half million. The three top-ranked
Dongya executives, Song Feiqing, Zhao Zizhen, and Song Xiafei together purchased almost
700,000 in shares. At one point, a number of important people from “financial circles” wanted
to invest, even though no shares remained to be purchased. In order to accommodate them, a
group of Dongya directors decided to return some of their own shares, so the financiers’ desire to
invest could be satisfied.37 Even in wartime, demand for shares remained high and the company
was able to quintuple invested capital through these particularistic channels in the course of
about twelve months.
By the early 1940s inflation had become a major consideration for Dongya management,
and in June 1942, the minutes of the board of directors notes that with rising prices six million in
34
In February of 1939 the company still had capital of one million yuan. It must have doubled to two million yuan
later in 1939 or very early in 1940. Records for this period are very scarce so the details remain unclear.
35
Dongya Archives, 1-27-3-01.
36
Dongya Archives, 1-27-3-02.
37
Dongya Archives, 1-27-3-02.
invested capital was not sufficient. At the same time the directors had approved plans to
purchase an oil producing factory, and they authorized additional capital to fund that. In the end,
the purchase never concluded and capital remained at the six million level.38 At the end of 1942,
however, government authorities issued regulations forbidding non-financial institutions from
accepting deposits. Dongya had accepted and paid interest on deposits from shareholders since
at least 1939, and this prohibition meant that alternative financing had to be found to replace
more than two million in deposits from shareholders and employees. The directors authorized a
four million yuan increase that would bring Dongya’s total invested capital to ten million yuan.
In addition, in a move similar to that of the 1940 capital campaign, special rights to purchase
new shares would be extended to current shareholders. All shareholders could purchase four
new shares for every six old shares they owned. Of course, many of the small shareholders who
had become Dongya investors in 1934 and 1936 had now become insiders and were able to take
advantage of such sales to insiders, so such a policy did not represent a complete reversal of the
idea of public ownership. Subscriptions were so heavy that the new capital had been raised by
March of 1943 and all but 49 shares of the new issue of 40,000 shares went to existing
shareholders.39 In the end, the prohibition on taking deposits did not continue, or was not
enforced, and in addition to the new capital the company still accepted substantial deposit
balances, further increasing its external funding (see below).
Invested capital remained at the ten million yuan level until March of 1944 when plans to
establish a chemical plant to produce medicine prompted an increase in capital from ten million
to twenty million yuan. Combining elements of previous stock offerings, 60 percent of the new
shares were reserved for existing shareholders and 40 percent were sold to the general public. In
38
39
Dongya Archives, 1-38-5-02 and 1-38-5-03.
Dongya Archives, 1-38-5-05, 1-42-3-04.
order to find buyers, the company placed advertisements in newspapers in Tianjin, Beijing,
Nanjing and Shanghai.40 Most if not all of the new ten million had been raised by the end of the
year.
Due to hyperinflation in the postwar period, Dongya’s financing became progressively
more chaotic. In 1946 the company increased invested capital from twenty million to 300
million. A year later, invested capital increased once again, reaching 1.5 billion yuan.41 By
approximately 1950 the total had ballooned to 37 billion yuan.42 Most board of directors
meeting minutes have been lost for this period, but a newspaper report from 1947 indicated that
that year’s stock offering was not for the purpose of expansion.43 Instead, it and the following
increase were just ways of keeping up with inflation. Without board of director minutes,
statistical methods will be needed to understand changes in investor composition in the late
1940s. Before turning to figures, however, I would like to first outline two other strategies that
Dongya had pursued over the years to influence the composition of its investor base: stock
ownership as a means of marketing and employee ownership.
Forging Ties: Marketing and Employee Ownership
Twice during capital expansion drives, Dongya specifically recruited shareholders
involved in the sales and distribution of its products. In 1934, at the same time that Dongya
embarked on its first campaign to increase public ownership among small investors, the company
also began using stock bonuses to strengthen ties with its distributors and customers. According
to the plan Song Feiqing presented to the board, any customer or distributor who purchased 200
40
Dongya Archives, 1-30-3-01.
Cui and Jin, 23.
42
Dongya Archives 21-132-9-01.
43
Dagong Bao, November 27, 1947, 1-3.
41
pounds of yarn received a five yuan certificate. The certificate could not be exchanged for cash,
but twenty certificates could be traded for one share of Dongya stock. To emphasize the
program’s intent to forge long-term ties with its distributors and large customers, the bonus
certificates could not be transferred to others. Song justified the plan by saying that the company
will lose a little more than 20,000 yuan in potential capital, but “in four or five years, after
distributors in all parts of China, or [textile] factories that directly purchase our yarn, have
become shareholders, they will not use other [brands] of yarn.”44 Later in 1943, during the drive
to increase capital to fund Dongya’s expansion into the production of medicine, the company
specifically targeted people in the medical profession, including doctors, nurses, pharmacists,
hospitals, and managers of medicine shops, as potential shareholders.45
Evaluating the efficacy of these plans will require further research. Identifying the
occupations of specific shareholders is a daunting task, especially given that the company had
more than 2,500 shareholders by 1950. Based on information currently available, it appears that
both achieved some success. Nonetheless the company began to modify its relationship with its
distributors in 1935, indicating that the plan to win loyalty through stock ownership did not
prove completely satisfying. At that time the company decided to purchase shares in its major
Tianjin distributor (the Tianjin Patriotic Goods Sales Hall), creating interlocking shareholdings
between the two firms.46 A year later, Dongya adjusted its relationship with its other distributors
by deciding to follow Nanyang Tobacco’s method and subsidize particularly enthusiastic
distributors who were willing to exclusively sell Dongya products.47 In the end, Dongya’s plans
44
Dongya Archives, 1-2-5-10.
Dongya Archives, 1-30-3-01, Cui and Jin, 23.
46
Dongya Archives, 1-9-3-03.
47
Dongya Archives, 1-13-2-01. On Nanyang’s investments in distributors, see Sherman Cochran, Big Business in
China: Sino-Foreign Rivalry in the Cigarette Industry, 1890-1930 (Cambridge: Harvard University Press, 1980),
130 ff.
45
to strengthen ties with distributors through ownership, interlinked stockholding, and subsidized
exclusive distributorship were interrupted by the outbreak of war in 1937. Nonetheless such
tactics, including those of recruiting stockholders in the medical community, indicated a belief
on the behalf of management that closer ties with individuals and firms engaged in the marketing
of Dongya products could be forged through participation in the company’s ownership.
Dongya management extended this idea to employees as well. High-level executives and
members of their families had been shareholders in Dongya from virtually the beginning, but in
1943 the company adopted a plan to extend ownership to all of the employees of the firm, based
on schedule outlined in Table Two.
Table Two
Dongya Corporation 1943 Employee Stock Ownership Plan
Category of Worker
Number of Shares
Daily Workers
1
Monthly Workers
2
Yearly Workers
3
Lower Lever White Collar Employees
3
Higher Level White Collar Employees
5
Source: Dongya Archives, 1-42-3-06
The gift of stock did come with strings attached, however. Employees had to continue working
for three years before owning their shares outright and any violation of company regulations (and
regulations were many) during that period would result in three year clock starting over at the
beginning.48 Clearly, company management desired to use the employee stock ownership plan
to increase its control over the labor force. In an added bonus, one former employee said that the
presence of employee shareholders allowed Song Feiqing to get a quorum at shareholders
meetings and to help form consensus behind his ideas at those meetings.49
Nonetheless, the employee stock ownership plan had more idealistic motives as well.
Stock ownership can instill pride of ownership in employees and give them a stake in the future
of the firm. In addition, Dongya employees did not have to purchase their stock, indicating that
the plan also gave them a small measure of profit sharing. Profit sharing and employee stock
ownership plans had seen tremendous growth in the West, especially in the United States, in the
1920s, at exactly the same time Song Feiqing was in Illinois studying business at Northwestern.50
In the West, however, the stock market decline and economic depression had contributed to
declines in both employee stock ownership and profit sharing. In contrast, Dongya management
saw fit to adopt such a plan in China in 1943, during the hardest and most difficult time of the
war.
In the absence of direct evidence from Dongya’s management as to their motives and the
timing of their actions, more indirect analysis will be necessary. Figure One provides a
schematic to understand the motivations for employee stock ownership. Three possible motives
for employee stock ownership -- profit sharing, pride of ownership and utopianism -- provide the
horizontal axis across the top. On the left, managements’ desired level of control makes up the
vertical axis.
48
Dongya Archives, 1-42-3-06.
Cui and Jin, 23.
50
On profit sharing and employee stock ownership plans see, Robert F. Foerster, Employee Stock Ownership in the
United States (Princeton: Industrial Relations Section, Princeton University, 1927); Gorton James, et al., Profit
Sharing and Stock Ownership for Employees (New York and London: Harper and Brothers Publishers, 1926); and
Arthur Burritt, et al., Profit Sharing: Its Principles and Practices (New York and London: Harper and Brothers,
1918).
49
Figure One: Types of Employee Stock Ownership
Motive for Employee Stock Ownership
High
Level of
Management
Control
Low
Perceived
Profit
Ownership
Utopian
Sharing
Interest
Communalism
Co. Managed
State
ESOPs
Dongya Corp. Socialism
Direct Sales to
employees
Cooperative/
Shareholder
democracy
Dongya’s plan did not represent pure profit sharing because the level of stock ownership did not
depend on the profitability of the enterprise. In addition, white-collar employees had a separate
plan for annual bonuses that did derive from profitability. At the same time, management
rhetoric in the 1940s often includes a strong utopian gloss.51 For these reasons I place Dongya’s
motives somewhere between the desire to instill pride of ownership and utopian communalism.
Level of management control remained high at Dongya, especially since employee shares
remained small. The result is more suggestive than definitive, but Dongya’s approach lay
somewhere between that of most Western capitalist enterprises and state socialism. One point
can be made more firmly. Forms of business enterprise vary greatly both within China and
without.
Dongya’s strategies to use stock ownership to build marketing networks and strengthen
relations with labor share an important element with its strategies to increase public ownership.
All are predicated on the belief that connections were forged between an individual and the
Dongya Corporation through the act of ownership. This connection sometimes reinforced
51
Song Feiqing’s management philosophy will be the subject of future research.
existing relationships -- as with distributors and employees -- but was meant to make them
stronger and infused with a sense of common purpose. At other times the ownership connection
came first -- as with new small shareholders or doctors and pharmacists -- and it was assumed
that closer links would follow. Before considering the larger implications of Dongya’s capital
accumulation tactics, however, a brief discussion of the results of their policies -- and the gap
between ideal and reality -- will first be necessary.
A Few Numbers Regarding Dongya’s Capital and
Shareholders
Equity Capital Accumulation
On the surface, Dongya’s invested capital base grew frequently and successfully over the
course of the period from 1932 to 1950. Over those eighteen years, total invested capital surged
by a factor of 160,000 times from 230,000 to 37 billion yuan. High levels of inflation during the
later years makes the story much more complicated, however. Inflation levels began to ramp up
almost as soon as the war began and Dongya management first took notice of rising prices by
adjusting salaries for inflation in 1938, and they made regular adjustments thereafter.52 If I
adjust Dongya’s invested capital base for inflation, new patterns of capital growth appear, as
seen in Table Three. On an inflation-adjusted basis, Dongya’s invested capital grew steadily
through 1940, but then began dropping precipitously. New capital infusions simply could not
keep pace with inflation. Granted the adjustments here are crude. On the one hand, inflation
indices are always controversial, and during the latter period of hyperinflation when prices
changed hourly, no index could represent the year in full. On the other hand, as Dongya’s
52
For example, see Donga Archives, 1-23-2-01, 1-23-2-03, and 1-27-3-01.
financial assets depreciated, its inventory, land and hard assets would have appreciated,
providing a hidden source of capital for the company.
Year
1932
1933
1935
1936
1937
1940
1943
1944
1946
1947
1950
Table Three
Invested Capital Adjusted for Inflation
Invested
Inflation
Adjusted
Capital
Index
Capital
230,000
300,000
0.8528
351,782.36
600,000
0.8065
743,955.36
800,000
0.9341
856,439.35
1,000,000
1.0975
911,161.73
5,810,100
3.7338 1,556,082.28
10,000,000
18.1122
552,114.04
20,000,000
90.5379
220,901.96
300,000,000
1,048.6889
286,071.49
15,000,000,000
48,819.1700
307,256.35
37,160,410,250
444,320.4604
83,634.25
Note the 1948 index is used as a proxy for 1950. Actual inflation was
probably much greater. Inflation index uses standard numbers for
Tianjin developed at Nankai University, as quoted in Cui and Jin, 65.
In spite of these problems, I think that the overall conclusions are still valid. Dongya’s form of
private, joint-stock corporation succeeded in acquiring invested capital for its needs from 1932 to
1940, but inflation during the later years of the war and the post war years hindered capital
accumulation.
Continued willingness of investors to place money in Dongya shares indicates that they
perceived the company as having some value, raising questions about the return on investment to
shareholders and the existence of a secondary market for the buying and selling of shares.
Return on investment is exceeding difficult to calculate. Financial statements are incomplete and
during the late 1940s the company compensated for inflation by distributing yarn and woolen
goods as dividends to shareholders. Ignoring, for the moment, the payment of goods in kind,
rough estimates of value can be made. Dongya shares carried a face value of 100 yuan up until
the late 1940s when it was increased to 250 yuan. Like many Chinese firms, new stock was
usually sold at par, regardless of market value, and carried a minimum fixed return (guanli) of 6
percent of par.53 Based on available figures, during the years of stable prices up to and including
1938, inflation-adjusted dividends averaged slightly more than 16 percent, a healthy return
considerably greater than the 6 percent guarantee. From 1940 to 1944 total dividends averaged
almost 20 percent per year, but after inflation adjustments the real return was closer to 2 percent,
far less than the minimum guarantee.54 Figures are not available for the late 1940s, but monetary
payments almost certainly did not keep up with ever accelerating levels of inflation. Payments in
kind might have been more valuable, but determining that will take more research.
Dividends are not the only means to make money on equity investments, and price
appreciation can be a major incentive to invest. Tianjin had a variety of informal and formal
securities markets during the republican period, though Dongya was not regularly listed until
sometime in the 1940s. Lacking published market prices, the first evidence of the worth of
Dongya shares came in 1943 when the company discovered itself short of new shares to use in
its employee stock ownership plan. In order to get enough shares, it offered 300 yuan per share
to purchase a few hundred shares back from existing shareholders.55 By the post-war period,
prices had increased considerably. Dongya was quoted at 6,840 yuan per share at the beginning
53
On the practice of minimum fixed dividends, guanxi, see the path breaking paper by Zhu Yingui {insert citation
from Beijing conference}. New stock issues could continue to be sold at par because virtually all profits were paid
in employee bonuses or dividends. Rather than increasing capital by accumulating earnings, Dongya issued new
shares.
54
Dongya Archives, 1-3-5-09, 1-9-3-01, 1-17-1-01, 1-23-02-01, 1-38-5-01, 1-30-3-03, 1-30-3-05.
55
Dongya Archives, 1-42-3-04. The board authorized 300 yuan per share, but the actual letters to shareholders
offered “market price,” indicating that actual market prices might be a little less.
of 1946, 155,783 at the end of 1947, but only 68,862 per million shares at the end of 1949.56 On
an inflation adjusted basis, however, none of these prices amounted to more than 20 yuan,
indicating price depreciation.
In light of these findings, the popularity of Dongya shares to investors after about 1940
remains something of a mystery. It is possible that the hard assets represented by Dongya shares
represented a hidden store of value in the face of rampant hyperinflation. Perhaps by the late
1940s, investors’ did not have the luxury of looking for income or capital appreciation, but only
could engage in a desperate attempt to try to find uses for their money that depreciated more
slowly than money itself. In any case, although investors remained willing to purchase new
stock issues of the company, those purchases could not possibly maintain Dongya’s equity
capital at pre-inflation levels.
Equity did not compose the only source of external financing for the Dongya
Corporation, of course, and the company often took deposits on which it paid interest from its
shareholders and made use of bank loans. Although data is incomplete, Table Four shows that
these other sources of external financing never had the primary place that equity funding had.
Table Four
Sources of External Financing (000’s of yuan)
Year
1940
1941
1944
56
Invested
Equity Investor Bank
Capital Deposits Loans
5,810
1,147 1,027
5,810
2,264 1,584
20,000
919 13,000
Inflation
Adjusted
Total
Inflation
External
Financing
Index
Financing
7,984
3.7338
2,138
9,659
4.2050
2,297
33,919
90.5379
374
Information on secondary stock markets and quotes for Dongya can be found in Tianjin tongzhi: jinrong zhi
[Tianjin Gazetteer: Finance Gazetteer] (Tianjin: Tianjin Shehui Kexue Chubanshe, 1995), 609-617.
In addition, although increases in external debt financing managed to compensate for inflation
between 1940 and 1941, by 1944 inflation had become so bad that huge increases in both equity
and bank loans did not keep the company’s total of inflation-adjusted external financing from
shrinking dramatically. Given the terrible rates of inflation after 1944, it is likely that similar
results existed for those years as well. In sum, equity supplied Dongya’s major source of
external financing, making it vital that we understand its strategies of expanding its shareholder
base.
Shareholder Composition
Like Dongya’s success in capital accumulation, its record in influencing the composition
of its shareholder based was mixed. As shown in Table Five, average holdings and average
holdings as a percentage of total capital declined steadily and dramatically over time.
Table Five
Breadth of Shareholding
Year
1932
1935
1936
1937
1940
1950
Number of
Number of
Shares
Shareholders
2,300
5
6,000
375
8,000
446
10,000
800
58,101
1,767
148,641,641
6,183
Average
Standard
Holding
Deviation
460.00
89.44
32.88
17.94
12.50
32.88
82.22
24,040.38 142,560.30
Average Holding
Average as %
of Total
20.00%
0.55%
0.22%
0.13%
0.06%
0.02%
Source: Cui and Jin, 13 and a database compiled from shareholder lists for 1940 and 1950 found
in Dongya Archives, 2-132-9
These trends indicate that the company did succeed in broadening its shareholder base well
beyond the tightly bound group of five in 1932. Similar conclusions can be drawn by examining
concentration of holdings, as seen in Figures Two and Three, and Four that show percentage of
total shares held by investors at various levels of shareholding.
Figure Two
Dongya Corporation
Shareholder Concentration, 1932
Numbers of Shares
100.0%
80.0%
60.0%
40.0%
20.0%
0.0%
0-50
51100
101150
151200
201250
251300
301350
351400
401450
451500
Figure Three
Dongya Corporation
Shareholder Concentration, 1940
Numbers of Shares
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
0-50 51-100 101150
151200
201250
251300
301350
351400
401450
451500
501550
551600
601650
651700
701750
751800
801850
851900
901950
9511000
Figure Four
Dongya Corporation
Shareholder Concentration, 1950
Thousands of Shares
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
0-100
100-200 200-300 300-400 400-500 500-600 600-700 700-800 800-900
9001,000
1,5001,600
2,2002,300
2,3002,400
2,4002,500
2,5002,600
8,8008,900
Although the units of division are different in these two charts (1932 and 1940 in numbers of
shares and 1950 in thousands of shares), the general trend is clear. In 1932 shareholding was
extremely concentrated. With more than 80 percent of the company owned by investors with
holdings between 451 and 500 shares, the distribution of bars on the figure skews to the right. In
1940 and 1950, however, the distribution of the bars shifts to the left, showing broadening
ownership. In 1940 shareholders who owned 0-50 shares each owned approximately 30 percent
of the company’s shares and shareholders who owned 51-100 shares owned another 15 percent.
Likewise, in 1950 shareholders who had 0-100,000 shares owned half the company.
Although there were many small shareholders, Song Feiqing’s plan for stockholders
distributed all over China met with much less success. Figure Four shows the most common
residences of Dongya shareholders in 1950.
Residence of Shareholders as Percentage of Total, 1950
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
Tianjin
Beijing
Other
Hebei
Shandong Shanghai
Other
Shareholders with a Tianjin address owned almost 80 percent of the company’s shares, far more
than any other place in China. In total, shareholders who lived in North China (Tianjin, Beijing,
other Hebei and Shandong) accounted for 89.7 percent of all Dongya shares. Shanghai
shareholders composed another 3 percent, with the balance made up by a variety of other places.
Without a doubt, shareholding of the Dongya corporation remained regional, and to a great
extent local, even as the total number of shareholders grew and shareholding became less
concentrated. Dongya’s experience belies its own plans to expand shareholding nationwide and
Thomas Rawski’s assertion that “By the late 1920s, if not before, banks, mines, major factories,
and other large-scale enterprises could tap national capital markets to obtain funds.”57 The
potential impact of the war may be a major factor here, though, forcing Dongya to solicit shares
more locally during the period 1938-1945 than might otherwise have been the case.
Nonetheless, in terms of numbers of shares, since inflation forced exponential growth in the
numbers of shares issued, Dongya issued the vast majority of its shares in the post-war period.
Once again, the ongoing civil war and inflation may have limited the geographic scope of
Dongya’s reach. Nonetheless, it is important to note that the experience of corporations that
57
Rawski, Economic Growth, 159.
Rawski noted for the 1920s may be epiphenomenal, and may apply neither to the years before
the 1920s nor the period after 1937.
In terms of particularistic patterns of the Chinese firm, family ownership stands out as a
hallmark noted by many scholars. As shown in Table Six, however, Song family holdings
declined as a proportion of total equity capital, making up only slightly more than 5 percent in
1950.
Year
1932
1935
1940
1950
Table Six
Family and Employee Ownership
Non-Song
Family
Song Family
Percentage
Employee
Holdings
of
Holdings
No. of Shares
Total
No. of Shares
1,000
43.5%
2,051
34.2%
7,007
12.1%
1,421
7,725,563
5.2%
7,122,178
Percentage
of
Total
2.4%
4.8%
Source: Cui and Jin, 13 and a database compiled from shareholder lists for 1940 and 1950 found in
Dongya Archives, 2-132-9
Likewise, although the employee stock ownership program launched in the 1940s did increase
the number of employees with ownership stakes in Dongya, total employee ownership remained
small, less than 5 percent at its peak in 1950.
The lack of family and employee dominance in shareholding, however, does not
necessarily represent a lack of importance. Dongya’s shareholding was extremely broad and
most shareholders owned only very small pieces of the company (see Figures Two and Three).
Without highly concentrated shareholding by anyone, a family group with 5 or 10 percent might
be enough for control. Likewise, control might rest with management, rather than with any
particular group of shareholders.
Conclusion
Equity capital accumulation strategies of the Dongya Corporation showed a tremendous
range of innovation and flexibility over the years from 1932 to 1950. The company began with a
very small number of five shareholders in 1932. Although the ties among the members of that
group can be described as particularistic, they did not conform to expected notions of “kinship,
place of origin, and schooling.”58 Recent work on partnerships as a Chinese business form also
show that they extended beyond family ties, and that means of establishing trust among strangers
exhibited remarkable flexibility.59 In a similar vein, the evidence here indicates that the nature of
particularism be defined more broadly in understanding Chinese business organization.
Nonetheless, many of Dongya’s key employees were long time family retainers who had worked
in Song Feiqing’s father’s company or who came from Yidu County in Shandong province, so
more recognized forms of particularism thrived at Dongya as well.
After 1932 the Dongya corporation pursued a twenty-year strategy of capital expansion
that combined multiple strategies for accumulating equity capital and broadening its shareholder
base, including sales of small share lots to the general public, appeals to patriotism as a means of
getting new investment, trying to diversify the geographic distribution of ownership, using stock
as a bonus for distributors, reserving all or portions of new offerings for current shareholders,
targeting specific groups like doctors, and distributing stock to employees. The net effect of
58
See, Yen-p’ing Hao, “Themes and Issues in Chinese Business History,” in Gardella, Leonard and McElderry,
112.(106-126)
59
Lin Man-houng, “Interpretive Trends in Taiwan’s Scholarship on Chinese Business History: 1600 to the Present,”
in Gardella, Leonard and McElderry, 70.(65-94) {insert Wank citation}
these strategies resulted in three trends: 1) growth in equity capital up through the early 1940s
and then shrinking capital after that due to the ravages of inflation, 2) low levels of concentration
of ownership, and 3) a highly regional focus with most capital drawn from North China. These
trends point to a mixed picture. The private, corporate form of organization could be successful
in accumulating capital, even from strangers, but wartime conditions, inflation and a largely
regional focus (due to a regional secondary market for Dongya stock?) hindered capital
accumulation strategies, showing that flexibility and innovation alone were not enough. The
constraints here, though, came from the larger political and economic environment and not from
cultural predilections or a restrictive legal system.
Perhaps most importantly, Dongya’s repeated attempts at “strategic sharing” show the
belief that ownership ties can strengthen existing relationships or even create relationships where
none existed before. This idea turns the accepted notion of particularism on its head. The
particularistic connection did not provide the basis for economic relationships. Instead,
management clearly intended that economic relationships in the form of ownership should
provide the basis for a common sense of purpose and commitment that would extend beyond
economics. Strategic sharing of profits and ownership rights, combined with a corporate culture
based on communal ideals, demonstrate the ability of Song Feiqing and Dongya’s other
managers to invent and borrow a variety of techniques that suggest the need to enlarge our
concepts of the range of possible forms of business organization in China, and abroad.