CHINA: THE 1000 YEAR OBSESSION WITH SILVER THAT GAVE BIRTH TO WORLD TRADE

……………..an insight into how Chinese Export Silver became a 150 year phenomenon

1571 is the year world trade was effectively born. It was also the year Manila, in the Philippines, came into being; the Spanish having created the last link in a maritime network between the Americas and Asia, previously dominated by their arch rivals the Portuguese. As with world trade, silver was the main cargo and China was the final destination.

The Dutch and English East India Companies have, for centuries, had us believing that it was Europe that fired the engine of Asia. The reality was exactly the reverse. Had China’s unquenchable thirst not existed, neither would these two companies. To compound matters, China produced luxury items the West couldn’t get enough of, namely porcelain, silks, tea, paintings, lacquerware, metalwork and ivory. Since its inception, world trade has always had potentially unfortunate side effects, trade imbalance being one of them.

Towards the late 16th century and into the early 17th century, the exchange rate for gold against silver in Spain was between 1:12 and 1:14. In China the rate was between 1:5 and 1:7. This clearly demonstrates that silver had an intrinsic value double that of Europe within China. Such a divergent value of a single commodity creates exceptional prospects for what is known as “profitable arbitrage trade”; trade that profits by exploitation of price or value differences of identical or similar financial instruments on different markets or in different forms. In some ways, China was utilising a financial strategy that is not a million miles from what we recognise as a “hedge fund” strategy today!

Mexico tried in vain to limit the amount of silver being shipped to China trying to keep it in the region of 150 tons annually. They more or less achieved this, however it is generally estimated that in excess of 300 tons annually was managed to be smuggled out and onwards to China. Manila was shipping 50 tons annually. To put this into some perspective, fifty tons of silver is approximately the average annual exports to Asia by Portugal, the Dutch and the English East India Companies combined in the 17th century.

Perspective is something one constantly has to have when trying to make sense, in hindsight, of the Chinese silver phenomenon. Had it not been for the ever increasing need for more and more silver by China, nations that might otherwise have remained sleepy, almost backwater, countries were propelled at great speed into being major mercantile and economic forces. China’s voracity was equalled by the frenzy to meet the demand to the point where it became difficult to determine which fuelled the other. This, in turn, created a very interesting trade dynamic; as supply countries [whether it be source or simply conveyors] became rich and affluent, they then craved luxury products only China could supply. More importantly, for China that is, payment had to be made in silver!

The silver phenomenon literally reached frenzy point. Silver couldn’t be mined fast enough, tens of thousands of ships were built to ship it, cities were created where cities had never previously existed, China was the dragon with an insatiable appetite. The richest silver mine in the world was 15,000 feet up in the Andes at Potosi, a two and a 2 week journey by pack animal from Lima. Potosi rapidly grew from nothing to a population of 160,000 – equivalent to the populations of London and Paris at the time!

One cannot help wondering how different the picture might have been had the once Ming maritime fleet not come to an abrupt halt when it did. The Dutch and the English East India Companies might not have come into being!

The Spanish monarchy was to reap the most benefits from New World silver mining by imposing an initial 20% tax on the gross value extracted at source. They then levied further taxation on precious metals entering Seville of 27%. Mining profits provided the fiscal foundation for the Spanish Empire. Without China’s incessant need for ever-more silver, Spain would not have been able to finance a series of wars [some simultaneously] with the Ottomans, Protestant England and Holland, France, the New World as well as Asia, not to mention against the indigenous population in the Philippines. China, unwittingly, changed the balances of power within Europe simply by its hunger for silver.

The amount of silver pouring into the Ming treasury was in the region of $190 billion in today’s values. The Ming dynasty was responsible for over 30% of the entire world’s GDP.

But New World silver was not the only source of raw silver for China. A succession of Emperors had been adamant that apart from silver, the West could offer nothing to China. Not only did they not import anything, but sucessive Emperors insisted that in order to trade with China for the luxury items the West sought payment could only be made using what have become known as Trade Dollars.

Trade Dollars were the eventual catalyst that gave birth to Chinese Export Silver. The coins were melted into sycee – this became a reliable raw material. and the reason why almost all Chinese Export Silver is .90 fine

1571 is the year world trade was effectively born. It was also the year Manila, in the Philippines, came into being; the Spanish having created the last link in a maritime network between the Americas and Asia, previously dominated by their arch rivals the Portuguese. As with world trade, silver was the main cargo and China was the final destination.

The Dutch and English East India Companies have, for centuries, had us believing that it was Europe that fired the engine of Asia. The reality was exactly the reverse. Had China’s unquenchable thirst not existed, neither would these two companies. To compound matters, China produced luxury items the West couldn’t get enough of, namely porcelain, silks, tea, paintings, lacquerware, metalwork and ivory. Since its inception, world trade has always had potentially unfortunate side effects, trade imbalance being one of them.

Towards the late 16th century and into the early 17th century, the exchange rate for gold against silver in Spain was between 1:12 and 1:14. In China the rate was between 1:5 and 1:7. This clearly demonstrates that silver had an intrinsic value double that of Europe within China. Such a divergent value of a single commodity creates exceptional prospects for what is known as “profitable arbitrage trade”; trade that profits by exploitation of price or value differences of identical or similar financial instruments on different markets or in different forms. In some ways, China was utilising a financial strategy that is not a million miles from what we recognise as a “hedge fund” strategy today!

Mexico tried in vain to limit the amount of silver being shipped to China trying to keep it in the region of 150 tons annually. They more or less achieved this, however it is generally estimated that in excess of 300 tons annually was managed to be smuggled out and onwards to China. Manila was shipping 50 tons annually. To put this into some perspective, fifty tons of silver is approximately the average annual exports to Asia by Portugal, the Dutch and the English East India Companies combined in the 17th century.

Perspective is something one constantly has to have when trying to make sense, in hindsight, of the Chinese silver phenomenon. Had it not been for the ever increasing need for more and more silver by China, nations that might otherwise have remained sleepy, almost backwater, countries were propelled at great speed into being major mercantile and economic forces. China’s voracity was equalled by the frenzy to meet the demand to the point where it became difficult to determine which fuelled the other. This, in turn, created a very interesting trade dynamic; as supply countries [whether it be source or simply conveyors] became rich and affluent, they then craved luxury products only China could supply. More importantly, for China that is, payment had to be made in silver!

The silver phenomenon literally reached frenzy point. Silver couldn’t be mined fast enough, tens of thousands of ships were built to ship it, cities were created where cities had never previously existed, China was the dragon with an insatiable appetite. The richest silver mine in the world was 15,000 feet up in the Andes at Potosi, a two and a 2 week journey by pack animal from Lima. Potosi rapidly grew from nothing to a population of 160,000 – equivalent to the populations of London and Paris at the time!

One cannot help wondering how different the picture might have been had the once Ming maritime fleet not come to an abrupt halt when it did. The Dutch and the English East India Companies might not have come into being!

The Spanish monarchy was to reap the most benefits from New World silver mining by imposing an initial 20% tax on the gross value extracted at source. They then levied further taxation on precious metals entering Seville of 27%. Mining profits provided the fiscal foundation for the Spanish Empire. Without China’s incessant need for ever-more silver, Spain would not have been able to finance a series of wars [some simultaneously] with the Ottomans, Protestant England and Holland, France, the New World as well as Asia, not to mention against the indigenous population in the Philippines. China, unwittingly, changed the balances of power within Europe simply by its hunger for silver.

The amount of silver pouring into the Ming treasury was in the region of $190 billion in today’s values. The Ming dynasty was responsible for over 30% of the entire world’s GDP.  

But New World silver was not the only source of raw silver for China. A succession of Emperors had been adamant that apart from silver, the West could offer nothing to China. Not only did they not import anything, but sucessive Emperors insisted that in order to trade with China for the luxury items the West sought payment could only be made using what have become known as Trade Dollars.

Trade Dollars were the eventual catalyst that gave birth to Chinese Export Silver. The coins were melted into sycee – this became a reliable raw material. and the reason why almost all Chinese Export Silver is .90 fine

These were silver coins issued by various countries solely for trading with China. The United States trade dollar was a high quality coin issued by the US Mint from 1873 – 1885.  Chinese merchants would stamp the coins to demonstrate [and guarantee] their weight and purity, as well as advertise their own businesses while doing so. Here [right] we see an 1874 American Trade Dollar carrying various stamps [chopmarks] of Chinese merchants.

Here [left] we see the original Mexican Trade Dollar of 1739, also known as the 8 Reales or, as we might know it more familiarly – Pieces of Eight.
Because of the Imperial decree that China wanted for nothing and that all Chinese products were to be bought with silver, it became impossible for the British to import the same low-value manufactured consumer products to China as they traded in India, and which the average Chinese person could afford to buy. Until about 1750, China’s demand for silver served as the engine for world trade!

There was an ever-growing demand for tea and other luxury goods in the United Kingdom and America, while acceptance of only silver in payment resulted in large continuous trade deficits. A trade imbalance came into being that was highly both unfavourable and intolerable for Britain. It is estimated approximately 270 million British Trade dollars were circulated in total. Mercantilist governments resented this perpetual drain of silver from West to East in payment for Oriental goods that were in high demand in the Occident, while facing low demand in the Orient for Occidental goods.

From the mid-17th century, more than 9 billion Troy ounces, or 290 thousand tonnes, of silver was absorbed by China from European countries in exchange for Chinese goods.

A solution had to be found. The Western world was haemorrhaging fast. And so began the Opium Wars, the eventual Treaty of Nanking, the birth of Hong Kong and the trade concessions within mainland China.

Ironically, today China is yet again the world’s largest buyer of silver, with imports standing in excess of 3.5million kg annually. While China uses some 40 million ounces of silver annually in high tech manufacturing industries – a figure predicted to hit 100 million ounces within 5 years.

Once upon a time, the Chinese government forbade ownership of precious metals. Now the ban is lifted and China has introduced silver bullion bars which the middle class are urged to invest in backed up by a state run China Central Television ad campaign. So silver, yet again, is being seen as a favoured investment. There is even talk of China having a sub-agenda of creating a geo-political crisis that would have massive consequences for the West, in particular America.

History repeating itself?
World trade began in 1571 – China started it.
2012 – China dominates world trade!