17th May.
A VALUED correspondent writes "T have seen your leader of 4th May, and am deeply obliged for your courteously dispelling the mystery of financial depression, But your explanation of the existing crisis is almost more than the ordinary—two-and-two-make-four sort of mind is able to digest all at once, 'I'here has been a loss in Hongkong and Shanghai investments of 20 to 80 million dollars, Much of the capital of these investments was borrowed from the banks and has never been paid back... The banks have been left with portfolios full of paper which no one knows the real value of to-day. hey are believed to have on their books long lists of debtors who will never be able to clear off their debit balances, but whom they do not like to bring to book for fear of aggravating the crisis.'
"What does all this exactly signify to the shareholders? If half or one-third of the losers of the 25 millions (to take an average) cannot pay, must the bank lose the amount of say 10 million dollars? If so the shares of that bank which is generally supposed to practically monopolise the business instead of being worth 100 per cent. premium would be worth about 20. per cent. discount, Which is absurd, "You explain that the present depression is a reaction from the previous inflation and promise a reaction from the reaction, but is this founded on a mere general principle of alteration, or does it rest on appreciable data? The stumbling-block to the bucolic mind is that assuming the shrinkage to be real and not fictitious, and that 10 millions of it are borne by the banks, and perhaps 5 millions by one single bank, how is the loss to be recovered, and if not recovered, will it be taken from reserved funds or out of the'next two years' dividends ""You value the goodwill of the Hongkong and Shanghai Bank at 50 per cent. of its capital, The ' goodwill' of a business I suppose to be the assumed value of its special power of earning money. A power of merely making losses would not be worth paying for, and it would be really a most important service to bond fide holders of shares in the bank if they could be shown on what, specific foundation their assumed power of making money now rests. "A magnificent business' is after what has passed and is now passing, not in itself a guarantee of a profitable business, and if by a little patient analysis you could show to those who ate obliged to look on from a great distances, and have no means of knowing what is below the surface, the specific sources of the bank's profits and. the grounds for believing that re~ gent experiences in Hongkong, Yokohama, Kobe, Shanghai, Singapore and elsewhere, will not be repeated, you would render a valuable service to very many non-speculative people who have been in the habit of investing all their savings in the bank's stock.
"Phe fall in silver is an occurrence which comes home toalmost, all foreigners in. China in one way or another, and its effect on the banks whose liabilities are in Gold and their assets in Silver needs explanation. What you say about the BankofChina on this head is not however particularly reassuring, as, if the directors declared a dividend of 8 per cent. while they had lost 16 to 17 per cent. not on their capital alone, but on all their Silver investments, by the depreciation of that metal, the question arises what will they do next? Auditors are known to be complaisant to directors, and they do not make protests without good grounds. What was the directors' motive then in provoking their auditors' protest and paying a dividend which not been earned? If it was merely lack of the moral courage to confess the truth to their shareholders what confidence can these be expected to have in future proceedings of the Board? By sending their holdings out to China for sale the London shareholders have shown that their estimate of the position differed greatly from that put forward by the Directors. Butso young an institution camlet be beyond hope of reform, and it would be an obvious advantage to all concerned to take the present opportunity of sifting the affairs of the Bank to the bottom. A few years hence when its roots have struck deeper und spread wider criticism will be gagged by the apprehension of touching hidden springs. Local committees will have acquired vested rights, and directors may have become dictators, against whom votes of shareholders will beat like waves on a solid rock. While the devil is sick seems a good time to make a saint of him, or try to!"
We may explain to our correspondent and to other anxious readers who are looking on from a great distance, that the shrinkage of 25 to 30 millions, is from the point of inflation, and that a great part of it is not money borrowed from the banks, but apparent profits when everything was "booming" that have now clesppearad: A large number of people in Hongkong and Shanghai and elsewhere have been stripped their savings in cash and on paper, which accounts for a large part of the shrinkage, and a large number have not only lost all their margins, which were at one time very large, but owe money to the banks beside. But these are not losses that itis necessary for the banks to realise. If their debtors are men in health and in work these debit balances will be made up sooner or later, and will be assisted when the inevitable reaction from the reaction comes; and the losses which the Hongkong and Shanghai Bank will have to face, including that by the defalcations of the compradore in Hongkong, will only absorb a portion of the reserve fund at the worst. The value of the goodwill of the Bank is unquestionable, for its earning power has not been impaired at all, and it will undoubtedly at the end of the present half-year show a fully sufficient profit on working to pay the customary dividend. Considering this earning power, and the amount of the available reserves, over 63 millions, it is certain that the shares are intrinsicelly worth 100 per cent. premium, which is about their quotation, even in the present crisis. It is unreasonable to expect another series of losses sult as those at the places our correspondent enumerates.
China in London the Chairman explain-At the last meeting of the Bank of
ed that the Directors thought there would be a reaction in silver, but he also announced that they were making provision for the worst; beginning, in fact, the reform which our correspondent recommends. It is the habit of humanity when things are going well to be over confident and to expect them to go still better, and when they go badly, to be over-despairing and expect them to go worse. Our object has been to show that there was no mystery about the present depression, and that there is no reason for despair. With patience and a little more confidence in the future, the present cri will pass away as others have done before, and our great local bank will come out stronger than ever through its trials.
Text read from the printed page and cleaned; old type leaves the occasional error.