It's easy to see why Lujiazui in the Pudong New Area is China's banking capital. Banks and financial institutions tower next to each other here - a frenetic treasure house and close-knit home for 662 financial institutions.

It's easy, too, to forget that Shanghai's financial success started with qianzhuang (small money shops) some 170 years ago when Shanghai's opening as a treaty port brought earthshaking changes to an age-old industry, laying the foundations for Shanghai's later commercial and financial development.

Qianzhuang were small, private institutions that were licensed but not closely controlled by the government. Most qianzhuang had no branches elsewhere in the country - it was not until late in the 19th century that some of the large qianzhuang in South China opened branches beyond their cities of origin. Qianzhuang can be traced back to the Ming Dynasty (1368-1644,) but it was in the Qing Dynasty (1644-1911) that they began expanding, mainly in South China, especially in the provinces of Zhejiang and Jiangsu.

Financing business

Businessmen from Zhejiang Province, especially operators from Ningbo, moved their qianzhuang to Shanghai to finance their businesses back home. By 1776, during the later years of the reign of Emperor Qianlong, qianzhuang owners in Shanghai established an association in the Yuyuan Garden, with 106 members admitted.

The original function of qianzhuang was to exchange money for set rates for the currencies then in use: gold taels, silver taels, silver and copper dollars were used in different regions in China. Northern bean and crop dealers, for example, had to exchange their silver taels, which were used in North China, for copper dollars to do business in Shanghai. As well as changing money, qianzhuang also provided issued promissory notes, opened personal savings accounts and offered loans to local shipping, salt and crop companies.

When Shanghai opened its port in 1843, European merchants found that trading with their Chinese counterparts wasn't easy. It wasn't easy for China's conventional and highly exclusive trading markets to accept foreign players; and, on the other hand, Westerners didn't trust their Chinese counterparts and couldn't agree on a standard currency to use. Because of this, the traditional qianzhuang took on a new role as intermediaries between Chinese and Western merchants.

As most Chinese companies at that time lacked capital and didn't have the ability to pay for foreign goods in advance, qianzhuang issued a type of promissory note called zhuangpiao which was a guarantee for payment. Chinese companies could pay foreign merchants with zhuangpiao and the merchants could redeem the notes from qianzhuang between five and 20 days later.

Zhuangpiao proved a boon for foreign and Chinese companies - and qianzhuang as well. Chinese companies then had capital flow to buy foreign goods and could pay qianzhuang later with their earnings; foreign companies could sell their products without risking too much - Shanghai's qianzhuang were generally reputable and they made their profits on the interest they charged. It was reported that at that time more than 80 percent of all the imports were paid with zhuangpiao. Most foreign banks accepted zhuangpiao, and foreign companies could deposit them directly into their banks.

A vital role

Qianzhuang played a vital role at a period when most Chinese businesses lacked the capital to buy imports from foreign companies, and they boosted Shanghai's financial market. The value of Shanghai's imports increased from 210 million taels of silver in 1912 to 590 million in 1926, and the value of exports increased from 160 million taels of silver to 360 million in the same period.

Western banks had not then spread to the Chinese interior and when they first entered China in the late 1860s, they began to work with qianzhuang using compradors (local Chinese managers working in foreign companies). Qianzhuang received "chop loans" from foreign banks and in turn lent this money to Chinese merchants who used it to purchase goods from foreign firms. By 1888, all of Shanghai's 62 major qianzhuang, then found mostly on Ningbo Road and Tianjin Road, were receiving chop loans from foreign banks, worth millions of taels of silver. A newspaper of the time commented that the prosperity of Shanghai's qianzhuang resulted from the credits they got from the foreign banks.

Supported by these funds, the qianzhuang's financial leverage increased exponentially. It became common for a qianzhuang to make loans worth several times its capital. A qianzhuang with only 20 to 40 thousand taels of silver in capital often made loans worth several hundred thousand taels. In one case, in 1907 Shanghai's Fukang Qianzhuang had only 20,000 taels of paid-up capital but held more than 1 million taels in loans. The qianzhuang presence was so pervasive that almost all of the Chinese merchants then engaged in Shanghai's foreign trade relied on qianzhuang loans. The original money exchange function of qianzhuang had become much less important.

Qianzhuang methods and services suited Chinese business operations. They usually never asked for security for loans. In an emergency, a customer could even knock on the door of his qianzhuang and ask for cash at midnight - most provided banking services 24 hours a day. Qianzhuang would deliver cash remittances to homes or offices instead of requiring payees to come to collect cash.

The silk crisis

Three crises hit the qianzhuang in Shanghai in the late 19th and early 20th centuries. In 1883 the Zhejiang tycoon Hu Xueyan, whose business network covered most part of South China, went bankrupt after spending millions of silver taels buying raw silk, in an attempt to win the monopoly in the industry. He was then boycotted by foreign buyers and had to sell his silk below the prices he paid.

As a result, Hu couldn't pay the 560,000 taels of silver his company owed to 40 qianzhuang in Shanghai. The default resulted in most of these qianzhuang going bankrupt, and hundreds of Chinese companies folding because they could no longer get the loans they needed from these bankrupted outlets. The chain effect led to a major financial downturn. In 1876 there were 105 qianzhuang in Shanghai but by 1883 only 20 had survived.

The industry spent more than 10 years restoring itself, but another crisis struck in 1894. At that time many of the companies in China's lucrative opium business were willing to pay high interest rates for loans. To attract cash savings, some qianzhuang sold zhuangpiao at high interest rates ranging from 2 to 20 percent. Some qianzhuang even offered staggering 50 percent interest rates.

In 1894 several qianzhuang fraudulently declared themselves bankrupt as they were unable to pay the interest rates promised. More than 2 million taels of silver worth of zhuangpiao were rendered worthless and for many people, qianzhuang were considered disreputable and untrustworthy.

The rubber crisis in 1910 struck another heavy blow to qianzhuang as many had invested large sums in rubber companies, which were believed to be highly profitable. The shareholders of Zhengyuan Qianzhuang, Zhaokang Qianzhuang and Qianyu Qianzhuang invested all they had in the stock market and even borrowed money from foreign banks. Together they bought 13 million taels of silver worth of rubber stocks.

The total investment in rubber stocks amounted to 60 million taels of silver and one consequence was that there wasn't enough cash in the financial market. Many qianzhuang issued loans using rubber company stocks as security.

The price of rubber stocks hit a historical high in April 1910 but became almost worthless by July that year. More than 100 people in Shanghai committed suicide because they lost their savings in rubber speculation.

At the end of 1910, around half of Shanghai's 100 qianzhuang had shut up owing huge amounts. By February 1912, only 24 qianzhuang remained in business in Shanghai. The Qing government had to borrow money from foreign banks to bail the ailing industry out and tightened regulations so that qianzhuang managers were not allowed to open other businesses or use savings deposits for other purposes. The new rules ensured that a manager had to take the responsibility if a qianzhuang went bankrupt, and speculating was forbidden.

Weak foundations

The three crises illustrated the weak financial foundations of qianzhuang and their tendency to speculate with their funds but also showed that they could be resilient with government support.

As well as the crises, political movements and wars hampered the development of the qianzhuang industry. The Sino-French War (1883-85) sent hosts of people flooding to qianzhuang counters to withdraw savings, resulting to more than 10 businesses closing. The 1911 Revolution in China saw another batch of qianzhuang closing. The foreign banks decided to reclaim all the chop loans they had lent to qianzhuang and stopped transactions with them.

The fall of qianzhuang arrived with the late 1920s and early 1930s, when foreign banks and local banks, which both had reliable management systems and more capital, began competing fiercely with these traditional money shops. Their outdated operating systems, weak management and lack of capital led to their death, aggravated by the Great Depression in the 1930s. In 1933, the Republic of China government unified the currency, which meant that even money exchanging was no longer an option. Qianzhuang shareholders quit and turned to the modern banking industry, opening a new chapter in China's financial history.