Piaohao
Piaohao, also known as , , or , in Mandarin Chinese, or Shanxi banks or Shansi banks in English, were a type of bank that existed in China during the Qing dynasty until approximately 1952.
The were started by merchants from the province of Shanxi who were often originally engaged in other businesses before they entered finance. The were mostly active in northern China while the qianzhuang were mostly active in the south. The continued to be the dominant financial institutions of China until 1900 when more modern commercial banks started being created by both the imperial and provincial governments, and the benefitted more from their close ties with foreign banks operating in Chinese treaty ports. During their heyday the had over 400 branches operating across the territory of the Qing dynasty and branches in other countries like Japan, Korea, Russia, India, and Singapore.
After 1912 practically all either closed or were transformed into more modern types of banks. They continued to exist during both the early Republic of China and the People's Republic of China until they were all finally nationalized alongside the and the rest of the Chinese financial industry in 1952.
Structure and business strategies
All were organized as single proprietaries or partnerships, where the owners carried unlimited liability. They concentrated on interprovincial remittances, and later on conducting government services. From the time of the Taiping Rebellion, when transportation routes between the capital and the provinces were cut off, began involvement with the delivery of government tax revenue. grew by taking on a role in advancing funds and arranging foreign loans for provincial governments, issuing notes, and running regional treasuries. The business model of the gave very little protection to the capital of the shareholders; furthermore, the imposed a highly centralized management structure, and a tenure- and performance-based incentive structure which was used to discipline distant employees in faraway branches.The history of the dominant houses in the Shanxi banking shows that it was merchant families who originally began engaging in the monetary business, and they did this often without giving up their original trade. The Shanxi merchants conducted trade in Chinese tea and would travel north through Siberia to cities like Moscow and St. Petersburg; it is suspected that the Shanxi merchants had observed how Western banking works there and attempted to emulate it, but the remained quite unique.
Most were founded based on a joint investment, or . Only a small number of only had a single investor.
The shares held by managers carried non-binding votes that were cast exclusively in management meetings; meanwhile, the shares of the shareholders carried votes which were cast only on Grand Assessment Days. These days were generally held after each fiscal cycle and allowed the shareholders to fire or retain managers and reallocate their shares.
The shares that were inherited through death or retirement were made into a special non-voting class of shares with an expiration date that were only paid out divided. This was done to motivate long-term thinking and to keep the heirs of shareholders outside of the decision‐making process.
A major difference between the and the qianzhuang was that the banking companies grew out of the money-changing businesses known as the and would engage in business typical of banks such as providing loans, savings accounts with interest, and so forth, while the would primarily facilitate the sending of remittances, that is, the sending of money, across the Chinese realm.
Furthermore, tended to be very locally run operations and were typically run only by a single family, or a close set of associates. In contrast, the maintained branch offices across China. This allowed money to be paid into one branch office and withdrawn from another branch office—essentially sent—without having to arduously transport actual physical silver sycees or strings of copper-alloy cash coins under heavy guard across great distances, bringing many risks.
The height of the capital stock of the ranged from about 20,000 to as much as 500,000 taels of silver, yet because most of the reserved an amount of capital protected, known as or , the operative capital of the banks was much less. The bank reserves were kept in the head office, known as the . This was also the place where the household of the bank owner was registered. The tended to have branches, , in every large Chinese city. This made the remittance of money easily possible between the head office and all of its branch offices. The had branches throughout China, but the core area of operation was northern China.
Every three or four years, an account known as the was provided to the shareholders of the, and dividends were then distributed among them. The most common form of shares was money, but some shareholders would guarantee their shares with their office and their expected salary in a system that was known as a person-based share; in Mandarin Chinese this was called or .
The operated in daily business, mainly with monetary remittances. The remittance fee, known as or , depended on the distance of the transaction, the urgency, and the quality of the silver that was paid to the remitting bank. The remittance fee that was to be paid by the remitter was known as . It was either 2 taels per 100 taels of silver that was being remitted, or only 1 tael. Local differences in the value of silver ingots could be used by the for profits by arbitrage businesses; this was known as . Another important part of the business model was the assaying of silver and the production of silver ingots ; these silver ingots are commonly known in English as sycees.
Because the shareholders shared unlimited liabilities, when these changing market forces materialized, many of the shareholders of the went bankrupt, while some shareholders would turn to investments elsewhere and abandoned the model altogether.
The had a system of shares known as dual class shares. These let the owners vote only on insiders' retention and compensation every three or four years. The shares of the insiders had the dividend plus votes in meetings advising the general manager of the on their work such as lending or other business decisions, and were swapped upon the death or retirement of the holder for a ⅓ inheritable non-voting equity class, dead shares, with a fixed expiry date.
These shares were augmented by contracts that would allow the enslavement of insiders' wives and their children, as well as their relative's servants as hostages. These governance mechanisms prevented insider fraud and propelled the to gain an empire-wide dominance over the Chinese financial sector. Due to this system, the remained fraud-free during their entire existence.
An assortment of rules prevented abuses of power by branch insiders such as self-dealing, having side interests which could become a conflict of interest, or even engaging in any other business interests. Neither were insiders allowed to lend their savings to anyone. Branch employees were also not granted any leave with the notable exception being the funerals of their parents; furthermore, branch employees were forbidden from taking their family members with them or marrying while on duty. Severe restrictions were also placed on communication as branch employees were only allowed to write a single letter home each month, but the letter was to be reviewed by the head office of the in Shanxi before it was forwarded to the family of the branch employee.
During the height of the, 1880 to 1900, their paid out dividends averaged 12,000 taels per fiscal cycle. These dividends were huge fortunes for China at the time—comparatively, a county administrator, or, would earn an annual salary of 45 taels of silver. During this time, the province of Shanxi's best and brightest men were well-advised to forsake the Confucian civil service for careers in the banking sector because of this.
Unlike shares, securities did not expire: they passed to the owners' heirs and paid interest rather than dividends. These policies may well have sharpened incentives to help the banks succeed, but they also showed that the voting rules employed by the could change over time.
History
Early history
The were an early Chinese banking institution were known as Shanxi banks by foreigners because they were owned primarily by Shanxi merchants. The exact origins of the remain unclear, and money-order services or remittance banks may or may not have existed in one form or another, at least in some regions of China, as early as the Ming dynasty period. The were, despite China's long economic history, the first institutions to offer a full range of banking services. Shanxi became a banking centre during this era. The arising of a banking centre in a remote northern inland Chinese province is akin to the United States' financial centre being in remote Fargo, North Dakota, rather than in Manhattan.The first documented, Rishengchang, originated from Xiyuecheng Dye Company Pingyao in central Shanxi. The Rishengchang was founded in 1823 by Li Daquan, the owner of the Xiyucheng, a dyed goods company that would purchase raw materials in the province of Sichuan and ran stores in the cities of Beijing, Shenyang, Tianjin, and others. Lei Lvtai, also from Pingyao, observed expensive shipments of silver often would pass each other, going in opposite directions for vast distances; this inspired Lei to see a business opportunity. Lei suggested to his boss, Li Daquan, around the year 1823 that this presented an opportunity to replace expensive private security, wagons, and pack animals with a clearing house for the interregional transfer of money, the settlement of accounts, deposit accounts, loans, and currency exchange services.
The Rishengchang was capitalized with 300,000 taels of silver by Li Daquan. It is possible that Lei Lutai had added 20,000 taels of silver. Lei was the first general manager of the Rishengchang, with Mao Hongsui and Cheng Dapei as the bank's assistant managers. After a few years Mao Hongsui ran into some disagreements with Lei Lutai over business strategy and within a couple of years Mao had organised five more banks. In turn, the managers of these banks also started leaving and creating their own banks.
From 1823 to the early 1840s, the would experience rapid growth by providing bank drafts as a service for traveling Chinese merchants. These bank drafts could be obtained if a merchant deposited money in cash at a local branch office. The draft was then ripped in half and one half was given to the seller as an IOU and the other to the branch of the bank of the seller. After the buyer confirmed the receipt of the goods, the seller could then claim the missing half of the bank draft that was issued to join at his branch office and effect the transfer of monetary funds into his account there.
To deal with the transfer of large amounts of cash from one branch to another, the company introduced drafts, cashable in the company's many branches around China. Although this new method was originally designed for business transactions within the Xiyuecheng Company, it became so popular that in 1823 the owner gave up the dye business altogether and reorganized the company as a special remittance firm, Rishengchang Piaohao. In the next thirty years, eleven were established in Shanxi province, including Pingyao and the neighboring counties of Qi County, Taigu, and Yuci. By the end of the nineteenth century, thirty-two with 475 branches were in business covering most of China, and the central Shanxi region became the de facto financial centre of Qing China.
During stable times the were based on Confucianist hierarchical structures and imperial edicts. Usually disputes were not brought to any formal courts and the act of taking someone to court was not only ineffective but was considered shameful in traditional Chinese culture. The insider laws of the were based on Confucian traditions and the laws themselves can be described as "a game of ritual formalism". Because the descendants of merchants were not allowed to take any civil service examinations for three generations, the majority of the Chinese magistrates came from other classes of the four occupations, mostly from the land-owning classes. Because the merchant class could not rely on the magistrates for fair justice, they had to create their own system of enforcing contracts—this system included a general manager chosen by the shareholders. These general managers usually had a team of vice presidents that were tasked to supervise the clerks and other bank employees.
During their early years, the would pay depositors interests of 0.2% to 0.3% per month and lend out money at an interest rate of 0.6% to 0.7% per month. The biggest clients of the were merchants and various wealthy individuals, especially the nobility with whom the had connections. The would also record loans made from one party to another.
The society of the Qing dynasty was one where the general population tended to have a mistrust of outsiders. Usually, people only trusted their direct family members or people with whom they had established longstanding ties. In this society large business enterprises that were run by professionals were largely disfavored. Despite these societal factors, Chinese merchant guilds, which were monopolistic in nature, had found a way to circumvent these issues by vouching for traveling merchants who were paying members. Some Chinese merchant guilds would accept members from many regions of China. The Shanxi Dyed Goods Guild, of which the Rishengchang was a member, was restricted to families that originated in Pingyao county, Shanxi; these types of restrictions would also later be adopted by other for their hiring practices. Many would only hire people from the province of Shanxi while other would completely restrict their hiring to only a single county. For their hiring practices, the would check an applicant's family background for three generations—this was because families rarely moved to distant places in China and old neighbors intimately knew each other's families as well as each other's family histories. The background check and guarantor from the applicant's native county ensured both the loyalty and total honesty of the employees that were hired by the , but this system also protected them. If a dispute arose between the employee and the, the guarantor undertook negotiations with the to make sure that the manager was not impugned unjustly.
The decision to completely limit the fulfillment of staff to only people from the same region or whose ancestral roots lay in the same region proved to be a rather powerful governance mechanism. The dividend paid out to the managers was allocated to their blood relatives back in the Shanxi province, which meant that the social and economic status of their families depended on their performance, and any malfeasance from these managers would endanger not just their families' economic and social status back home, but also their freedom and lives. A potential employee with a clean background would present a personal guarantee letter from an eminent personage in his native county for the bank.