Between 1841 and the end of World War II, more than 35 strategic locations within China became "foreign concessions" or "treaty ports," areas controlled by Western powers or Japan. Imperial China didn't willingly surrender these territories; in many cases, they were forced to give them up as a result of losing military confrontations, such as the Opium Wars with Great Britain, or the Boxer Rebellion. The latter ended in 1900 with the Eight-Power Expedition to relieve foreign diplomats and missionaries beseiged in Beijing. Many Chinese call the period from the middle of the 19th century until the Communist victory in 1949 "the century of humiliation."
The foreign concessions were administered by foreign civil servants for the benefit of foreign businessmen. The latter enjoyed the benefits of extraterritoriality, meaning they could not be arrested by the Chinese authorities or brought before Chinese courts; Britons, Americans and others were subject only to their own nation's laws, not the laws of the country in which they were living. Within these zones, Chinese citizens had few rights. Most notoriously, they were barred from certain parks.
What many Chinese believe
Even now, many people in the People's Republic of China and Taiwan will tell you it's a fact that Chinese in Shanghai were kept out of parks, and that there were signs which boldly stated: "No dogs or Chinese." (Some sources, presumably written by individuals who aren't native speakers of English, have the wording as "No dogs and Chinese.") They'll say they learned this at school, or saw it in a movie, likely the 1972 Bruce Lee vehicle Fist of Fury.
In that film - which is set in early 20th-century Shanghai - Lee is blocked from entering a park in the International Settlement (Shanghai's main foreign concession, governed by a British-led administration) by a Sikh soldier (the British used Sikhs to police their concessions in China; the French used Vietnamese personnel). The Sikh points out the sign ("No dogs and Chinese allowed," shown above), enraging Lee. He assuages the hurt feelings of the Chinese people by beating up a Japanese man and shattering the signboard.
As recently as 2003, Xiao-bin Ji, in the reference work Facts About China, seemed to harbor absolutely no doubts about the story: "Formerly the Municipal Gardens and built by the British, [Huangpu Park] once displayed this notorious sign: 'No dogs and Chinese allowed.'" Ji is a history professor originally from China. He now works at Rutgers University, one of the USA's top-ranked universities, so he presumably knows what he's talking about.
Searching for proof
Surprisingly, given there were plenty of cameras in Shanghai in the first half of the 20th century, not one genuine photo showing "No dogs and/or Chinese" wording on a sign has been found. Various images can be found on the internet, but more often than not, they're stills from Fist of Fury, or pictures of replica signs displayed in Chinese museums. According to John Ross in his book You Don't Know China: Twenty-two Enduring Myths Debunked, the only photo in existence of park regulations dates from 1917. Ten rules are listed, of which no. 1 states the Public Gardens (as the park was then known) is reserved for the use of the foreign community, while no. 4 prohibits admission to dogs and bicycles.
The rules went through several revisions. The 1913 edition has the word "exclusively" in the sentence about the foreign community. In 1903, the rules explicity stated that no Chinese were to be admitted, except for "servants in attendance upon foreigners."
Accounts of life in Shanghai's International Settlement in the 1920s and 1930s give the impression that exclusion from the park was more a matter of class than race. Members of the Chinese elite - the kind of people the British and other Western businesspeople wished to maintain good relations with - had no problems getting in, nor did Japanese in Western attire or traditional Japanese garb. It seems, therefore, that there's some truth in the "No dogs or Chinese" tale - but it was far from the apartheid-style race bar some believe it to have been.
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Why 'No dogs or Chinese' is so hurtful
One of the most engrossing sections in You Don't Know China: Twenty-two Enduring Myths Debunked explains why being compared to dogs upsets many Chinese. Keeping pet dogs has become more popular in recent years as urban areas have begun to enjoyCredit: Creative Commons affluence, yet even now relatively few Chinese regard canines are man's best friend. Some appreciate dogs for their meat, not their compansionship. Also, the Chinese language is rich in canine-themed insults - "running dog" is one which has made its way into English.
The "No dogs or Chinese" issue still resonates within China. In 2008, during anti-French protests sparked by pro-Tibet activists' efforts to disrupt the carrying of the Olympic torch through Paris, at least one Chinese taxi driver added a bilingual banner to his vehicle: "Refuse to carry Frenchmen and dogs."