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Domestic Banks In Economic Development: Marketing Networks And Financial Technologies In Prewar.China by Evan Erlanson This study of the Chinese financial system during the Republican era is an effort to relate the scholarship of China specialists to the greater body of work on economic development, and in particular, financial development. It builds on the existing body of scholarship on Chinese economic development and seeks to move beyond the view of a dualistic Chinese economy by showing how innovation in the service sector created the potential for structural change even in remote, low-income areas of the country. Until recently, scholars have approached the Chinese economy from a top-down perspective which concentrates on entire industries, giving less consideration to the qualitative changes driven by individual businesses. The notable exceptions which have provided detail on the inner workings of Chinese firms have prioritized the issues of competitiveness, institutional structure, and business culture over issues affecting the purely domestic economy. lOne step forward in the general debate over prewar economic development would thus be to integrate the two fields of economics and business history. For some time now, scholars of Chinese agricultural economics have debated the accuracy of data sources and the extent of economic integration between sectors and macroregions. Yet few have approached these issues in ways that allow the authors to determine whether the modem sector of the economy had transformati ve effects on the way that business was transacted between city and country, inland ports and deepwater ports. Studies of agricultural markets, such as Lillian Li' s study of silk production and marketing, emphasize technological factors on the production side, while devoting less attention to secular changes in marketing structure, especially in areas outside of Shanghai and Guangdong.2 Meanwhile, those who have argued that partial transformation took place in the prewar economy have often analyzed the economy as a sum of its parts without sufficiently explaining the interactions between its constituent sectors. An alternative way to evaluate economic change and integration is through the service sector of the economy, which intermediates between the producers and consumers of goods. Given the poor aggregate economic data available to Twentieth-Century China, XXI~ NO.1 (November 1998): 67-117 68 Twentieth-Century China scholars, this method yields a great deal of insight on questions which have troubled China scholars in the past. Among these, one that has emerged frequently is the issue of whether the commercial expansion observable in prewar China represented economic advance or stagnation.3 In my attempt to answer this question, I will limit my focus to financial services, in the process questioning many of the criteria by which scholars have historically judged Chinese economic development. The primary goal will be to pinpoint how actors in the service sector affected the supply and demand conditions for domestically produced goods, thus creating a conceptua1link between individual businesses and the agricultural economy as a whole. I. ApPROACHES To CHINESE BANKING As the study of banking systems in developing countries has progressed, it has become increasingly apparent that the link between finance and development may vary according to the orientation and internal structure of the economy and whether financial innovation is led by the market or the state. This study of trade finance in prewar China will describe one instance in which a private banking sector contributed to market-led economic growth. I achieve this by examining how financial innovation affected the market structure for agricultural products in the Middle and Upper Yangzi economy of the 1920s and 1930s. By the stodgy standards of finance, the Chinese banking system was still in its infancy circa 1920, comprising a handful of small commercial banks and lacking a full-service central bank. Total bank assets made up only a small fraction of national income at a time when financial intermediation ratios4 in the developed world generally hovered around 90 percent of gross domestic product . Despite their small size, however, the Chinese banks were successful in introducing technological innovations to commercial banking and especially trade finance. These innovations, not common to banking systems in other developing countries, notably those of Latin America, allowed banks to raise the quality and liquidity of their assets...


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