China Merchants used grain-tribute monopoly to fund price war

By the 1870s, foreign steamship lines backed by treaty privileges and deep capital — Jardine Matheson's Union Steam Navigation, Russell & Co.'s Shanghai Steam Navigation — controlled China's coastal and river shipping outright. A purely private Chinese shipping firm had neither the capital nor the official standing to win the contracts or the credit that mattered, and a purely state-run bureau had neither the commercial discipline nor the funding to compete on the water.

Li Hongzhang's answer was to build a company that was neither: a joint-stock firm capitalized mostly by private Chinese merchants, run day-to-day by merchant managers, but chartered and backed by the state — which handed it the empire's grain-tribute shipping contract, a guaranteed several-million-picul cargo with no competitive bidding. That captive revenue did something a subsidy alone would not have: it gave the company a cash cushion deep enough to underprice foreign lines on the competitive routes without going bankrupt.

Handed the company a monopoly on shipping the empire's grain tribute, guaranteeing revenue that funded loss-making price wars on open routes where foreign lines competed.

Guaranteed grain-tribute revenue covered fixed costs regardless of competitive losses.

Cash cushion let the firm sell space at a loss on contested routes.

Foreign rivals lacked equivalent captive revenue and couldn't sustain the price war.

State's contribution was a procurement decision, not a subsidy, so cost was low.

To seed a domestic competitor against entrenched incumbents, hand over a guaranteed non-competitive contract that covers fixed costs, enabling a price war without a cash subsidy.

The company grew from 6 to 16 ships within two years, and in 1877 it bought out Russell & Co.'s entire Shanghai fleet after the American firm concluded it could no longer profit against subsidized competition. Unable to dislodge China Merchants, its remaining foreign rivals, Jardine Matheson and Butterfield & Swire, signed cartel-style freight-pooling agreements with it three separate times over the following decades rather than keep fighting on price.