The onset of the British Imperial retreat from China: Evidence from the Chinese sovereign bond market in London

Abstract

This study explores the British Empire's retreat from China through the lens of London investors in Chinese sovereign bonds (1898–1938). Using structural break analysis on weekly spreads between Chinese bonds—secured by British-controlled customs and salt revenues—and British Consols, it identifies key shifts. Spreads surged over 70% during the Northern Expedition (1926–1928), coinciding with Britain's shift from ‘gunboat diplomacy’ to concessions, signalling investor perceptions of declining imperial oversight. A subsequent break at the Expedition's conclusion saw spreads narrow by 24% to 54%, not due to a resurgence of British influence, but to the Nationalist Government's split from the Communist Party and Bolsheviks and its pledge to honour existing debts. However, in the post-Expedition era, perceived risk in Chinese bonds rose, reflected in a sharp increase in bond return volatility and a heightened co-movement between London and domestic bond returns. Realising their government could no longer guarantee the credibility of Chinese bonds, London investors adjusted their strategy, closely tracking developments in China.