Chapter 2553 - The Full Story
"Elder Ren and I have been watching this paper cotton business since it first appeared," Chu He said. "We even visited the Qingyun Teahouse—that primitive futures exchange. Comrade Wu Mu also planted a few people inside, though his concern wasn't financial risk. He suspected a conspiracy lurking beneath the surface."
"In the end, there's nothing special about this affair. It's simply a bizarre creature born from the collision of market volatility and human greed. Fascinating, really. Quite valuable for research."
Li Shan's patience was wearing thin. This man's rambling knows no bounds!
Chu He explained that the paper cotton incident had origins predating the International Market's opening by a considerable margin—it had begun at the start of the year.
"The trigger was deceptively simple. Rising demand for cotton cloth drove prices up, which triggered a chain reaction through cotton yarn and raw cotton."
Ever since the Senate had liberated Guangzhou, demand for cotton cloth had expanded year after year. With the successive occupation of Guangdong and Guangxi and the continuous establishment of government organs, agencies and factories—both relocated and newly built—were expanding rapidly. The naturalized citizen class was growing at pace. Demand for uniforms had surged.
Originally, this growth had been gradual. But the emergence of the Nanyang Company changed everything.
The Nanyang Company's flagship endeavor was the Southern Yue Development Plan—the largest expeditionary operation since Operation Engine. They intended to send over twenty thousand migrants to the Southern Yue region, followed by ten thousand more each year for the next five years.
The food and materials required for migration on this scale could only be described as oceanic. Cotton cloth, that most basic necessity, was in particular demand. Though the Nanyang Company had adopted a strategy of small, frequent purchases to avoid destabilizing the market, cotton cloth prices still rose in response. Once they began climbing at the start of the year, they never stopped.
To be honest, Li and Zou's optimism about the cotton textile industry had been significantly shaped by this bull market.
"These are figures from the Commercial Monthly Report published by the Statistics Department since last October. We've extracted the statistics relating to the cotton textile industry—I should note that the numbers aren't perfectly precise, but they paint a rough picture. Cotton yarn transaction volumes were too small to count, but prices and transaction volumes for both cotton and cloth have climbed month by month. The increases this year have been even sharper. Using last October's average price as a baseline: November, December, and January each saw monthly increases exceeding five percent. By February, it became a runaway horse. Cotton cloth rose over seven and a half percent monthly, reaching ten percent by March. Had we not increased Songjiang cotton cloth imports, the price increases would have been far steeper. Even so, this May's cotton cloth prices show an average increase exceeding fifty percent compared to last October. That's an alarming figure."
The reasons were twofold. First, the Nanyang Company had accelerated its overseas development and needed to stockpile more clothing, tents, and other cotton products. Second, the Two Guangs campaign was entering its final phase. The hastily organized National Army required comprehensive reorganization, and the Bobo Army needed rest and recovery. Their uniforms all needed replacing—military supplies alone involved over a hundred thousand sets.
Beyond the military, the Nanyang Company, and scattered government procurement, there was another crucial factor: inflation.
Since the Senate had issued new currency in Guangzhou, Silver Dollar Certificates had been continuously increasing in circulation. The fiscal and financial system had maintained basic credit for these certificates through various means. Yet inflation was not a force that bent to human will. Prices crept upward across society.
Fortunately, basic necessities in this era were limited. Through its unique long-distance communication and transportation capabilities, the Senate could quickly grasp grain situations across regions and rapidly stabilize grain prices, maintaining overall stability.
"So the surge in cotton products is actually tied to inflation as well..."
"Precisely." Ren Youzi nodded. "Supply-demand imbalance is one factor; inflation is the other. Put simply: the current market prosperity and high prices are hollow. If you examine the relevant reports, you'll see that the Senate itself is the market's biggest customer right now. And this kind of bulk purchasing won't continue indefinitely. The Nanyang Company has already begun reducing its purchase volume this month, and Joint Logistics' purchases will shrink as well. In the long run, the cotton textile market will experience a recession. For new growth, the only real option is cotton cloth exports."
"Crushing Indian cloth and Songjiang cloth."
"Exactly. The current cotton shortage exists precisely because those two behemoths are still alive and kicking, intercepting raw cotton upstream." Chu He gestured. "But let's return to the main thread."
As cotton cloth prices rose, raw cotton prices rose with the tide. Supply grew tight. The cotton and cloth merchants who had been supplying the market found themselves unable to keep pace. Cotton-cloth merchants frequently encountered situations where they had buyers but no goods—supply came in fits and starts. To ensure their weavers had cloth to weave, cloth stores began paying in advance and purchasing warehouse receipts.
Initially, this advance payment practice was simply a commercial deposit. The buyer paid a deposit for a certain quantity of cotton. Upon delivery, they would settle the balance at the prevailing market rate minus the deposit and take possession. It was merely a way for buyers to secure their supply.
Gradually, some people spotted the speculative potential. Thus, the first full-payment advance purchase receipt was born. Unlike standard deposits, these receipts weren't settled at the delivery-time price. Instead, buyers paid in full at current market rates and received delivery when goods arrived.
This practice was essentially about hedging against future price increases or supply disruptions—common enough in commerce. The Dutch did it. Silkworm farmers in Jiangsu and Zhejiang had similar arrangements.
"By rights, this wasn't anything new—just betting on future expected price movements. But somehow, some clever soul came up with the idea of endorsable transfers." Chu He laughed. "I'd genuinely like to meet this person and ask how they conceived of it."
Once transfers became possible, these warehouse receipts acquired the properties of speculation and investment. With raw cotton prices only climbing—constantly rising—you could buy a receipt, mark it up, and flip it. Instant profit.
Once this quick money-making method was discovered, it became the focus of a speculative frenzy. Every cotton-cloth merchant began selling warehouse receipts.
"At first, these receipts were still quite standardized. They bore clear issuing firms, delivery dates, quantities, and grades of cotton to be delivered. When the various cotton-cloth merchants first started, they still exercised some restraint—they had a rough idea of how much they could actually deliver, so the number of receipts remained limited. But then everyone realized this was easy money requiring no capital..."
What followed grew increasingly chaotic. Originally, only cotton-cloth merchants issued receipts. As the speculative fever intensified, cloth stores, silk shops, embroidery shops—any establishment even tangentially related to textiles—rushed to issue cotton warehouse receipts. Soon cotton yarn receipts followed.
"Now there are even people who simply conjure a name without even having a physical shop, claiming to be 'XX Warehouse' or 'XX Firm,' and issuing warehouse receipts—and somehow they actually sell them! It reminds me of the Hainan Island real estate bubble in the nineties. Back then, a land transfer contract would change hands for profits of hundreds of thousands..."
"Save that for later!" Li Shan's patience had run out. These two had such a clear grasp of the situation, yet they'd stood by watching until now? He couldn't criticize them directly, so he deflected: "What should we do now?"
"Alright. In short, the situation escalated," Chu He said. "By this point, all participants knew that the cotton they were trading had nothing whatsoever to do with actual cotton—or even with textiles. It had become pure speculation, a game of pass-the-parcel. Everyone simply believed they wouldn't be the last one holding the bag."
"Does the Qingyun Teahouse closing mean the bubble has burst?"
"Very possibly." Ren Youzi nodded. "I don't know whether the Qingyun Teahouse owner will open for business again tomorrow, or what the paper cotton market will look like when he does. But its collapse is certainly imminent."
The first reason was the arrival of three ships carrying Indian cotton—spot goods that directly triggered a fall in spot cotton prices. Second, local new cotton would come to market in two or three months. Third, the northern cotton-growing regions—especially the Jianghuai area—were expected to have a poor harvest. Under the twin blows of military disaster and natural calamity, who there would plant cotton?
"By rights, the expected production decrease in northern cotton regions should have stimulated futures prices even higher. But everyone knows that the cotton local merchants can actually deliver mostly comes from those Jianghuai regions. If production there decreases, it means the cotton-cloth merchants simply won't have goods to deliver. That was the last straw." Ren Youzi paused. "Though speculators all know they're merely trading paper, once the illusory guarantee of 'future cotton' collapses entirely, market confidence crumbles with it."
Chu He continued: "The Qingyun Teahouse owner made a fortune in this speculative trade. His sudden closure very likely means he realized the game cannot continue. But the specifics will have to wait for Comrade Wu Mu's investigation."
"So..."
"Right. Having Mu Min send police to you was somewhat redundant. Guangzhou Political Security has been watching the Qingyun Teahouse for quite some time. He won't escape."
"That's reassuring. My biggest concern was disruption to financial order." Li Shan relaxed slightly. "But whether police or Political Security, neither can truly manage financial order. How do you think this crisis should be handled?"
(End of Chapter)