Canton System of Trade

Created @September 28, 2023 4:32 PM

Reviewed

During the eighty-five years preceding China's opening to the West in 1842, Canton was
the only port open to foreign trade, and Chinese for­eign relations of this period
essentially concerned Canton trade.

Canton, located at the southern tip of the empire, had been an historic center of foreign
trade since the Tang period. Subse­quently, during the late Ming and early Qing periods,
its trade was vir­tually monopolized by the Portuguese, who had established themselves
at Macao. Ships and traders of other nationalities were denied admittance, only rarely
succeeding in gaining entry. Barred from Canton, enterprising English traders sought
opportunities elsewhere. They developed relations with the Ming loyalist Koxinga and
his son on Taiwan, selling them munitions in exchange for trading rights there and at
Amoy.
troubled by Koxinga's raids along the coast, in 1662
ordered all ports closed to foreign trade and all coastal inhabitants evacu­ated to a
distance of 30 to 50 li inland so as to cut off his sources of sup­ply. Macao,
however, was exempted from this rule as a favor to foreign traders, and Canton, though
officially closed, was not strictly held to it. With the successful pacification of Taiwan in
1683, the court lifted the ban on foreign trade and in 1685 opened customs houses at
Canton, Fukien, Ningpo, Kiangsu.
Canton was the most flourishing not only because it had the longest history of foreign
trade, but%also because it lay closest to Southeast Asia, which the Chinese called Nan-
yang. An old port, Canton was tradition-bound and corruption-ridden. Such irregular
exactions and the small de­mand for English woolens in semitropical Canton prompted
the Company to seek trade at other ports to the north. It was thought that if trade were
possible in the tea- and silk-producing areas of Kiangsu and Chekiang, their
procurement costs might be lowered.

Canton System of Trade 1

 So in 1698 the Company cre­ated a factory a trading agency or business establishment.
Ningpo, though, turned out no better than Canton, plagued as it also was by official
interference, unreasonable levies, lack of demand for woolens, and, furthermore, the lo­‐
cal traders' insufficient funds for conducting business. Shifting its interest back to
Canton, where another factory had been established in 1699, the Company decided
around 1715 to regularize its trade.
The arbitrary and whimsical exactions and the high costs of tea and silk at Canton once
again renewed the Company's interest in Ningpo around 1753. They were well treated
by the local dignitaries, and the provincial authorities of Chekiang recommended to the
court that since the ships of the “Red Hair"—the nickname for the English and Dutch—
had not come for many years they should be received “with compassion. The shift of
business to Ningpo naturally reduced the calls of English ships at Canton. The
governor-general at Canton, fearful of deflection of trade to the north, petitioned the
court in 1757 to increase the duties at Ningpo 100 per­cent. Though indifferent to
occasional calls by foreign ships at Ningpo, Peking was concerned lest frequent visits
turn it into another Macao.
Moreover, the court feared, the northern ports at Ningpo, Shanghai, and Amoy, being
more accessible from the ocean than Canton, would have difficulty in controlling the
movement of foreign ships, thus contributing to collusion between the aliens and
traitorous natives; whereas at Canton, the established forts at Whampoa and the Bogue
enabled the government to watch the foreigners and their ships. Furthermore, a
substantial portion of the Canton populace traditionally lived on foreign trade; any shift
of commerce to the north would seriously jeopardize their livelihood. Weigh­ing these
considerations, the court decided to increase the customs duties at Ningpo and the
other northern ports, making them enough heavier than at Canton to discourage future
trade. Foreigners were urged to de­sist from going north. Thus, although trade was not
officially prohibited at Ningpo, Amoy, and Shanghai, the only port really left open to
foreign trade after 1757 was Canton. It was a de facto if not de jure prohibition of trade
in the north.

A more seri­ous consequence of the Flint incident, however, was a new, explicit court
decree (1759) that henceforth Canton was the only port open to foreign commerce. This
order eliminated all possibility of extending the trade to other parts of China, thus
perpetuating the Canton system until the end of the Opium War in 1842.

Canton System of Trade 2

 Canton Trade
The Chinese attitude toward foreign trade was an outgrowth of their
tributary mentality. It postulated that the bountiful Middle Kingdom had
no need for things foreign, but that the benevolent emperor allowed trade as a mark of
favor to foreigners and as a means of retaining their grati­tude. Hence, trade was not a
right to be insisted upon, but a privilege that could be withdrawn by China for any
misbehavior. Moreover, since the Canton trade was conducted between private foreign
and Chinese citi­zens, it required no formal diplomatic relations, only unofficial commer­‐
cial transactions. Therefore, no direct contact was permitted between the foreign traders
and Chinese government officials; the former could only petition the governor-general,
governor, or Hoppo (customs superinten­dent) at Canton through the Chinese
monopolistic merchants ( Hong Merchants ) assigned to do business with them.
The origin of the hong merchants has sometimes been placed, erro­neously, in 1720,
which was actually the year they formed a guild in Canton; the hong merchants had
existed long before. The number of hongs dropped to thirteen toward the end of the
Ming period ( from thirty-six. This created the designation of "The Thirteen Hongs,”
which persisted into the Qing period. Actually the number of the hong merchants during
the Qing period fluctuated considerably, and only twice in 1813 and 1837 actually
totalled thirteen
Wai-Yang ( European and American )

Peng-Kang ( SE Asia - Nanyang )

Ch'ao-Fu ( Fukien and Qao

Juxtaposed with the Thirteen Hongs were the thirteen foreign “fac­
tories,” or agencies, located outside the Canton city walls on the bank of the Pearl River.
The factory grounds and buildings, spread over some twenty-one acres, were rented
from the hong merchants at an average annual fee of 600 taels. The Chinese commonly
dubbed these British, American, French, Dutch, Belgian, Swedish, Danish, Spanish, and
other miscellaneous factories the “Barbarian Houses” ( 1-kuan).

The British trade, predominant over that of all other Western coun­tries, was
monopolized by the East India Company. Yet there was quite an active private
English venture, too. The Company granted charters to private ships to sail from
India to China under its license. This trade was known as the “country trade,” and
the ships “country ships,” as op­posed to the “Company ships.” Six out of every

Canton System of Trade 3

 ten of the country ships originated from Bombay, and two each from Bengal and
Madras. The country traders were mostly Englishmen doing business in India,
judging from their names; but they also included some Indians and Parsees. This
country trade accounted for 30 percent of the total British trade at Can­ton
between 1764 and 1800
the Company believed that when the ships' officers had a personal stake in the cargo,
they would strive more diligently to make a speedy and successful voyage.
Furthermore, they realized that no one could prevent the carrying of private goods
anyway, so it seemed better to regulate than prohibit it. Therefore, another source of
private trade originated from the Company's policy of allowing its ships' officers to carry
a specified amount of gold and goods, supposedly to compensate for their small
salaries.
As per Earl H Pritchard, this private trade accounted for about 15 percent of the total
British trade at Canton between 1764 and 1800, but it increased rapidly after the
opening of the 19th century.

Rise of the Hong Merchants

The hong merchants rose to prominence only after much arduous struggling. At one
point they were nearly driven out of business by the so-called “Emperor’s Merchants“
(Huang-shang), who,
empowered to monopolize foreign trade, appeared in 1702 at Canton,
Amoy, and Chusan. As it happened, the Emperor's Merchant at Canton
reputedly a former salt official who secured his new status from the crown prince
through a donation of 42,000 taels—apparently possessed neither great capital nor a
large stock of goods ready for delivery. Unable to fill orders without delay, he elicited
complaints from foreign traders, which were echoed by hong merchants excluded from
the profitable commerce. In 1704, five arriving English ships refused to deal with him,
entering into clandestine arrangements with the hong merchants, who, having bribed
the Hoppo, now openly competed with the Emperor's Merchant and eased him out of
business.

Canton System of Trade 4

 To strengthen their position, the hong merchants organized a guild in 1720 called the
Co-hong and adopted a code of thirteen articles to regulate the prices and practices of
transaction. The original membership consisted of sixteen hong mer­chants divided into
three classes, stipulating that new members could join upon payment of 1,000 taels.

Out of all business transactions, 3 percent was set aside as a reserve, called the
Consoo fund, against cases of in­solvency. The guild, though a private organization,
received official pa­tronage, for it served as a convenient buffer between the government
and the foreign traders. Thus, the government officials, who did not under­stand foreign
languages, and the foreign traders, who did not understand Chinese regulations, could
avoid personal encounters. Upon the guild fell the double task of collecting customs
duties for the government and of paying fees for the foreign merchants.

Cohong disbanded in an year

1745 → Hoppo selected 5/20ish hong merchants as security merchants, to assume

responsibility for all business transactions and to secure the proper conduct of all
foreigners. By 1754

1754 → All hong merchants had become security merchants.

1760 → On petition of the rich hong merchant Puankhequa ( Tung-foo company ), the
Co hong was revived but it soon became ridden with serious problems of dissension
and of debts to foreign traders.

1771 → by giving Puankhequa, 100,000 taels to bribe the Chinese authorities, the East
India Company succeeded in getting it disbanded,

1782 → Co-hong resurrected, this time to survive until the end of the Opium War in
1842.

Hong Merchants: Their Burdens

The staff of the hongs was comprised of

1) compradores, who served at once as brokers, accountants, and cashiers

Canton System of Trade 5

 2) linguists, the indispensable go-betweens who actually, by foreign descrip­tion, "knew
no language but their own”

3) schroffs, the silvermasters who assayed the quality of silver, ingots, or dollars, in their
capacity of "teller”

4) scribes and clerks.

The rich hong merchants were subjected to merciless exploitation by officialdom

1) regular annual tribute

2) to collect foreign clocks and watches to give to the governor and the Hoppo, who in
turn presented them to the court.

3) They were expected to proffer gifts on such festive occasions as imperial birthdays
and marriages

4) Fre­quently they were asked to contribute to military and river conservancy operations
5) In addition, as rich residents of the province, these hong merchants were frequently
called upon to donate to educa­tional institutions, public charity, hospitals, and even
clinics for smallpox vaccinations.

6) And at times, they, as security merchants, were fined for crimes and uncivil acts of
the foreign traders.

The constant demands on the hong merchants and the high risks of their commercial
ventures could well drive them into bankruptcy. Yet they could not easily quit business,
because they were government-appointed agents for foreign trade. Many survived only
through foreign loans. On the whole, however, they fared quite well, and a number of
them succeeded in amassing great wealth, as seen in the cases of Puankhequa,
Mowqua, and Howqua.

Hong Merchants: Trading Procedure

All contracts for sales and pur­chases were made a year in advance. ( Inelastic Supply ).
The trading season began before the end of the southwest monsoon in the early fall and
ended during the northeast mon­soon in the winter, lasting roughly the three to four
months from October through January.

Canton System of Trade 6

 Macao → Pilot, linguist and Compradore was employed. Compradore purveyed ship
and crew provisions

Bogue → Measurement and payment of fees.

Whampoa → Anchored at Whampoa an cargo was handed over to one of the hong
merchants, who fixed the commodity prices with­out competition from others. Similarly,
foreign traders purchased goods only through the assigned hong merchant.
The hong merchant taking the foreign consignment bore complete responsibility for the
foreign ship. He undertook settling the traders in the proper factory and recommended
to them the compradore, linguists, schroffs, and servants. He was not obligated to sell
the complete con­signed stock, but could take a part of it while farming out the
remainder to other hong merchants. In fact, according to the original agreement of the
Co-hong, a hong merchant could not acquire more than half of the total cargo of a
foreign ship. For instance, Howqua, in dealing with the East India Company, usually
took fourteen shares of the stock, leaving the rest to the others, some of whom took
only one share or even half a share.

A foreign ship could discharge its cargo and stow a new one within three weeks; but
with the procedure described above, more often it would take a month or two. Once
their business was concluded, the foreigners were required to leave Canton
immediately, either returning home or going to Macao for the winter. However, for a
consideration paid to “proper persons,” some foreign traders were allowed to remain in
Canton after the trading season.

An incoming ship was subject to a variety of dues and levies, which fell into three major
categories:
The measurement fee ( According to this standard, ships were divided into three
classes)

The presents and other gratuities → The presents, on the other hand, were highly
irregular levies of a very com­plex nature, including fees for opening the ship’s hull,
examining the hull, allowance for differences in scales and purity of silver, and a host of
other impositions. Until 1726, when the government took over these fees, they went into

Canton System of Trade 7

 the pockets of the Hoppo, the examining officers, the scribes, and the attendants—
which accounted for their irregularity. In 1727, though, the gratuities were consolidated
at 1,950 taels, where they remained for about a century.
Ships going directly to Macao without anchoring at Canton paid about one half the
measurement fees and gratuities, but had to pay an additional 2,520 taels to the Co-
hong for trading privileges outside its territory.

the tariff on goods → The regular customs dues were reasonably low, somewhere
between 2 percent and 4 percent ad valorem, but frequently the customs officials
charged twice as much, and not infrequently three or four times as much. The payment
was usually made by the hong merchants for the foreign traders.

Articles of Trade
England → China : Woolen, Furs, Linen ( Lead, Tin, Iron, Copper ), Knicknacks (
decorative items )

China → England : Tea ( 90-95 % ), raw silk, chinaware, lacquerware, rhubarb (

medicinal ), cassia ( chinese cinnamon → spice )
China → India : Nankeen Cloth, Chinaware, alum, camphor, drugs, sugar, sugar candy,
pepper, vermilion
India → China : Raw Cotton, Ivory, Sandalwood, Silver, Opium

The large volume of tea export may have resulted from several causes. The prohibition
of rice export and the limitation of silk outflow made tea the logical staple item of export.
There was a growing demand for tea in Europe, especially in England, since Europe
produced no tea, having no idea of it until 1550. The first small quantity of Chinese
black tea was brought to Europe by Dutch merchants in 1640 and soon appeared in
England. EIC began to purchase tea from 1684. In 1705, Green Tea made its initial
appearance in London in 1705. Gradually, during the first quarter of the 18th cen­tury,
the Company increased its tea purchase, from which samples were presented to the
crown and the nobles. Soon tea drinking became a fetish among the polite society, later
spreading to the populace who drank it as a substitute for the heavily taxed liquor. By
the beginning of the nineteenth century tea-drinking had become a national habit of

Canton System of Trade 8

 England, and tea lovers went so far as to assert that its mild nature exercised a civilizing
influence on character, whereas liquor often led to violence and miscon­duct.
As its use increased, so did the English import duty—to an out­rageous 100 percent, a
rate sufficient to encourage smuggling from the continent. Finally, in 1784, the
Commutation Act reduced the tea import duty to 12.5 percent, putting an end to the
lucrative smug­gling. Even so, Chinese tea provided one-tenth of the English revenue as
per Michael Greenberg.
Fukien ( Black Tea )
Anhwei ( Green Tea )
Kiangsi ( Both Teas )

It took a month or two to transport tea overland from its pro­ducing areas to Canton, but
much less time to ship along the coast
Evident in the last two decades of the 18th century was the increasing
activity of the country trade, and the entry of the Americans into the
China trade, signaled by the arrival of the Empress of China from New York in 1784.
The Americans were free traders, as opposed to the monopolistic East India Company.

The balance of trade at Canton during the 18th century was very much in China’s
favour, because she needed few foreign products, while West­ern traders purchased
large quantities of tea, silk, and rhubarb.

This deficit was partially re­lieved by the country trade and the private trade which
enjoyed a favour­able balance. The proceeds from the country and pri­vate trade were
transferred to the Company's treasury at Canton in return for bills of exchange payable
in London. In the period mentioned above, the Company derived roughly a third of its
funds for Canton purchases from the country trade.
The Lady Hughes incident, plus the Chinese explanation that the sentence was light
because it only demanded o'he life for two, shocked the foreign community into a
seizure of terror. Foreigners feared for their personal safety in future cases and deeply
resented the Chinese practice of holding the supercargo or community chief responsible
for crimes com­mitted by others. Moreover, the harshness and apparent inhumaneness
of Chinese sentences, the lack of a proper trial according to European justice, and the
capricious stopping of trade or refusal of clearance to departing ships in order to force

Canton System of Trade 9

 the surrender of the guilty—such irritants to the foreign sensibilities produced great
anxiety and endless protest against the Canton authorities.

Attempts to Change This System

Since both the Macartney and Amherst attempts at peaceful negotia­tion had failed, the
British throne faced three alternatives of action: (i) abandon the China trade, (2) submit
to the Chinese treatment, or Ç3) change the situation by military means. For Britain, the
most power­ful state on earth and the ruler of the seas, the first two courses were un­‐
thinkable, leaving only the third alternative—force. On Chinas part, the disrespect
displayed by Amherst was utterly intolerable and wholly in­compatible with its claim to
universal overlordship. Emperor Chia-ch’ing even considered severing relations with
Britain and stopping the Canton trade altogether, but was dissuaded from it by the
governor-general at Canton, who feared reprisals and possible war with Britain. The
time was fast approaching for a showdown between the two countries.

Meanwhile, the Canton trade had been undergoing a drastic metamor­phosis in

character as a result of the rapid growth of the private and country trade and the
phenomenal rise of opium-smuggling from India to China.

Many of the private trad­ers, to avoid the Company's intervention, secured consulships
of other European countries, and managed to stay in Canton and expand their
business. They served as agency houses for firms in London and India and engaged in
the lucrative illicit traffic of opium-smuggling at “outside” anchorages, such as Lintin and
Hong Kong, making transactions with
“outside” (i.e. non-hong) merchants for quick profit. So powerful had the private traders
become that they began to agitate for the abolition of the Company's monopoly. By
1820 the complexion of the Canton trade had changed: private trade had surpassed the
company trade, and opium had superseded regular articles as the chief item of import.
These two devel­opments contributed to the breakdown of the outworn Canton system
and precipitated the long-delayed clash between Britain and China.

Canton System of Trade 10