Chapter 143: The Raw Silk Business

However, the most crucial task was to prepare the funds for the upcoming raw silk season.

The raw silk business actually had little to do with the China Merchants’ Bureau’s operations. Zhao Yigong was using the tailwind of the Japan trade to raise funds. The raw silk business was extremely capital-intensive, and he couldn’t possibly manage it alone with his current limited funds.

Now that the Colonial and Trade Department had opened up the main trade routes to Japan and Southeast Asia, the conditions were ripe for Lingao’s trading companies to export raw silk on a large scale. Si Kaide had sent several telegrams inquiring about Zhao Yigong’s raw silk preparations. They had a contract with the Dutch, and although Guangdong also produced raw silk, its quality and output couldn’t compare to the Jiangnan region. They had to replenish their stock from Hangzhou.

In the past, they had purchased Jiangnan raw silk through agents in Guangdong. Going through agents inevitably meant being skimmed off the top. Si Kaide was now eager to have his own people involved in this channel.

From the 17th century until the early 20th century, raw silk was China’s largest export commodity. The pace of the Fanhaijin’s industrialization was accelerating, and the scale of investment was constantly expanding, deepening their dependence on imported capital and raw materials. A large part of this deficit had to be covered by raw silk exports.

However, Zhao Yigong was very cautious about directly intervening in the raw silk trade. Raw silk was a huge industrial chain in Jiangnan, with countless people relying on it for their livelihood and fortune, from upstream to downstream. Pulling one hair could affect the whole body. If handled poorly, it could become a second Leizhou sugar war.

The power of the gentry in Jiangnan was immense, and well-connected gentry were everywhere. Although he had established some connections through the Catholic system and by courting Zhang Pu’s Restoration Society, once his raw silk business touched their interests, it would inevitably provoke a strong backlash. This was not Leizhou, where the special reconnaissance teams could arrive overnight. Once a hostile force counterattacked, Zhao Yigong, a mere Guangdong scholar, could be killed and buried without a trace at any moment.

Now was not the time for a showdown with the Jiangnan gentry. Lingao had matters to deal with on all fronts, with the infiltration of Guangdong being the top priority. Therefore, in Jiangnan, he could only operate with a relatively low profile.

Zhao Yigong could only approach the raw silk business by picking the softest persimmon first. He decided to start with the silk reeling process.

Most sericulture households in Jiangnan were integrated producer-sellers. They raised their own silkworms and produced their own silk. The traditional method of silk production was extremely cumbersome. Zhao Yigong had once asked Wang Siniang’s mother and daughter to demonstrate it for him. It started with boiling the cocoons, then reeling the silk, followed by “twisting the silk” and “beating the silk.” It then had to be sent to a special workshop for scouring and dyeing, and for the weft threads to be twisted into warp threads. There were also processes called “warping” and “threading the loom,” and finally “joining the ends.” Only then did it become raw silk that could be used for weaving.

Not only was the process tedious, but each step consumed a large amount of labor. The efficiency was pitifully low, and the quality of the finished product was not high. It had no advantage compared to semi-mechanized or mechanized silk reeling factories.

If semi-mechanized silk reeling was adopted, cocoons would go in one end of the machine and silk would come out the other, directly usable as raw silk. There would be no need for “beating the silk” or “threading the loom.” All the workshops in this trade would have to close down, and the artisans would, of course, lose their jobs. More seriously, in the rural areas of Jiangnan, almost every household had a silk reeling wheel. Women, old and young, relied on this as a sideline to supplement their family income. If this reeling wheel became useless, it would truly lead to a situation where “silk devours people.” Zhao Yigong could also imagine the ensuing consequences: a scene of widespread misery.

However, since most of the people engaged in the silk reeling industry were from poor families, although numerous, they could not make their voices heard. Touching their interests was the least risky move. Even if some unrest occurred, the gentry, who only cared about their immediate interests, would not care, and the pressure he faced would be relatively small. After these people lost their jobs, they would naturally become the reserve workforce for the new silk reeling and textile enterprises he was preparing to open.

His current effort to raise capital for the China Merchants’ Bureau was also intended to expand his base of common interests. After all, a large-scale “popular uprising” would not be so easy to suppress. Without the gentry as a protective umbrella, it would be easy for others to use the situation to their advantage.

In the confidential folder on his desk was the approval he had received just yesterday from the Ministry of Finance and the Planning Commission for his proposed share allocation plan for the China Merchants’ Bureau.

The total share capital of the planned China Merchants’ Bureau was set at two hundred thousand taels. Zhao Yigong himself, as the nominal investor, would hold 51% of the shares. Of the remaining ninety-eight thousand taels of share capital, the Shen Tingyang family planned to contribute ten sand ships, valued at forty-eight thousand taels, for a 24% stake. The remaining 25% of the shares, valued at fifty thousand taels, would be offered to the gentry for subscription.

Zhao Yigong’s so-called 51% investment was actually a paper transaction. The only funds he could currently mobilize were the twenty thousand taels of silver recently transferred to him by Delong. Although the profits from the Japan trade were considerable, he had no authority to use them himself. He was already very satisfied that the Ministry of Finance could allocate him twenty thousand taels.

Although the Fanhaijin gave the impression of being “rich” to the naturalized citizens and natives, in reality, the Fanhaijin’s funds were very tight. If not for the Fanhaijin’s far superior efficiency in capital utilization and allocation compared to this era, their capital chain would have long since broken.

Although Zhao Yigong was the person in charge of the Jiangnan region, seemingly a powerful branch leader, the resources he could obtain from Lingao were limited. Not only could he not get many resources, but he also had to quickly transfuse blood back to the main family.

Thus, the fifty thousand taels of share capital raised would be crucial for the operation of the new enterprise, especially since he would need a large injection of funds to purchase cocoons next.

These days, his managers, like Mao Sansheng, were running around for him, and he himself had personally visited some of the gentry and large households in Hangzhou. The fundraising was going very smoothly. The recent Japan trade trip had made many large households envious. Shen Tingyang had even sent a special letter asking him to reserve a certain number of shares—many people were secretly asking him to let them invest.

Raising capital was much easier than he had expected. Not only was the first phase of fifty thousand taels mostly secured, but raising another fifty thousand would probably not be a problem.

However, things were not that simple. As a modern silk reeling factory, it only needed cocoons. But the sericulture households, after their hard work raising silkworms, were mostly unwilling to sell their cocoons directly—the profit was too low. In the agricultural society of the Middle Ages, the value of labor was very low. It was a common phenomenon to exchange a large amount of labor for a meager cash income. The sericulture households in Jiangnan generally produced their own silk for sale, forming a sizable rural sideline industry.

If most of the sericulture households were unwilling to sell their cocoons, the silk reeling factory that Zhao Yigong was currently rushing to build would face the dilemma of having no raw materials. This was his biggest worry.

Besides this, he had a second concern. He couldn’t directly touch the small amount of cocoons that were sold directly—he didn’t have a “license” from the silk cocoon guild. Logically, he couldn’t buy cocoons directly from the farmers; he could only buy from the silk cocoon guilds. And the silk cocoon guilds were monopolistic trade associations, with a reputation for ruthless business practices. They operated solely to maximize their own profits. It was impossible for an outsider like him to buy enough cocoons from them without being exploited. Exploitation was one thing; considering the low operating costs of the silk reeling factory, a slightly higher price was acceptable. But once the silk reeling factory started operating, anyone could understand the importance of a continuous supply of cocoons. Given the business practices of the merchants at the time, it was impossible that they wouldn’t take the opportunity to exert control.

How to ensure the security of the cocoon supply had always been a key consideration for Zhao Yigong. In the old timeline, the most direct solution was, of course, to directly acquire a cocoon guild or use connections to get a “license” from the Ministry of Revenue and open his own purchasing business.

However, this would inevitably subject him to the constraints of the trade association. According to the intelligence they had gathered, the silk cocoon industry’s trade association had uniform prices for the purchase and wholesale of cocoons and raw silk, which would greatly hinder his business activities. If he ignored this, he probably wouldn’t be able to exist in this guild at all. Zhao Yigong had thoroughly studied the various problems the Leizhou sugar factory had encountered in Leizhou.

After much consideration, Zhao Yigong decided to start from scratch. He would directly control the production of cocoons from the source. To be precise, it was a model similar to the Leizhou agricultural cooperative, a cooperative of small producers.

Like sugarcane production, cocoon production also required credit. Except for a few wealthy households, ordinary sericulturists generally needed to rely on credit during the silkworm rearing process: buying silkworm eggs and mulberry leaves were significant investments. The principal and interest on loans were a necessary but extremely heavy expense for sericulturists. And the risk was high: a large-scale outbreak of silkworm disease could often bankrupt a sericulturist who had borrowed money to raise silkworms. Wang Siniang’s family was an example.

Zhao Yigong felt that as long as he could provide low-interest small loans, he could attract a considerable number of sericulturists. Once they were in debt, he wouldn’t have to worry about not being able to control the sericulturists’ production and products. Then, technical improvements and industrialized farming would follow naturally.

Once the cooperative was successful, his “Phoenix Mountain Silk Industry Union” would be an integrated entity, from raw materials to sales, with all channels in place. In the long run, it would inevitably create a demonstration effect, attracting more farmers to join the cooperative.

In this way, the role of financial institutions like banks became prominent. This kind of small-loan business was best handled by a professional institution. Thinking of this, he couldn’t help but recall what Mao Sansheng had reported to him a few days ago about the state of the silver and money industry in Hangzhou. It mentioned that the silk cocoon industry’s buyers, when they went to the countryside to purchase, often relied on loans from the silver and money industry—otherwise, they wouldn’t have enough cash to make the purchases. In the old timeline, Hu Xueyan’s successful manipulation of the raw silk export trade was largely due to his ownership of money houses, which allowed for flexible capital allocation.