Shanghai Rubber Stock Market Crisis (Chinese: 橡皮股票风潮) was an economic crisis caused by the bankers and stock-holders overstimulating the rubber stocks in Shanghai in 1910. This crisis led to a great number of bankruptcies of Chinese native banks in Tianjing, Guangzhou, etc. Historically, this crisis, accomplished with the market crisis in 1920s, brought massive destruction of market development in Shanghai.
Background
In the late period of Qing dynasty (the earlier 20th century), the automobile industry was growing, accomplished with the product of rubber. In the United States, the export of rubber increased from $57 million in 1908 to $70 million in 1909. In Britain, the export of rubber grew from 840 thousands pounds in 1908 to 1.41 million pounds in 1909. This demand stimulated prices of the commodity. Under the highest needs of rubbers, many rubbers companies began to wage money from stock markets, which also happened in Shanghai . For example, Langkate, Perak, Kalumpong, Senawang, Tebong companies began to collect funds from stock market in 1900s.
Process
Fundamentals-driven market
Accomplished with the higher price of rubber in 1909, the related stock prices got a huge increase. Banks provided a series of convenient services of securities loans for the rubber stocks. First, the foreign banks announced to regulate mortgage discount at the level of 50%-80%; The Chinese native banks (钱庄) and Chinese Merchants Bank followed. To a certain extent, these financing activities inflamed the rubber stocks.
Here are some stock prices (per share) in this peak period:
At that time, the P/B ratio of rubber prices in stock market got the peak as 10-20 times; also it was common to see the premium prices got increasing as eight to nine times.
High premium, stockholder and market speculation
Accomplished with the higher stock prices and stimulation of financial organizations, new rubber stocks were issued into market. Since January 1910, more than 10 kinds of new rubber stocks existed in the market. These stocks were increasing with the frantic market; at the same time, the newspapers posted a huge number of advertisements, showing the nice management of rubbers companies and good relationships with banks such as HSBC, SCB, also announcing that the famous social activists had joined into the board of directors.
By selling the stocks, these rubber companies also opened account at foreign banks in Shanghai. For example, the Chemor United Rubber Co. posted advertisement for funds at Deutsch-Asiatische Bank. Java Rubber Co. established account at Chartered Bank. Besides, Chinese native banks bogged down in this quagmire. Data shows the total of investments was 60 million Tael, in which the Chinese people held the 70%-80% of stocks. Some native banks not only lent money for investment, but also bought stocks by themselves. In addition, some banks also called loans from other banks. At the peak period, all kinds of people, including government officials, businessmen, and common employees joined into these investment activities.
Stock-market crashes and failure of government bailout
In the middle period of 1910, the United States adopted a policy to barrier the consumption of rubber. In June, the price of rubber dropped dramatically in the international market, which reached the price at nine shillings and three pence in the later July, then got a worse price at six shillings. This brought the decrease tendency in stock market. On July 21, 1910, three Chinese native banks Zhengyuan (正元), Yaokang (兆康), Qianyu (谦余) bankrupted, then five ones closed as follow.
At the same time, the Daotai (Mayor) of Shanghai Cai Naihuang (蔡乃煌) and the chairman of Shanghai Commerce Association Zhou Jinzhen (周金箴) arrived Ningbo and reported the situations to Zhang Renjun (张人骏, Liangjiang governor) and Cheng Dequan (程德全, Jiangsu governor). Zhang reported this to the center government. On July 27, Qing dynasty Government approved the loans from the foreign banks. On August 4, Cai signed a contrast of "Loans for keeping Shanghai's economy" with 9 foreign banks, in which the Shanghai government loaned 3.5 million Tael. Furthermore, Cai arranged 3 million Tael from Shanghai Customs (an official budget fund named "Shanghai Custom Treasury", 沪关库款), and saved them into Yuanfengrun (源丰润), Yishanyuan (义善源) banks and their sub-agents. After this attempts, the economy got back to a stable situation temporarily.
