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At the height of the timber boom Sandakan was said to have the world’s greatest concentration of millionaires. It was perhaps an extravagant claim, but the area has always been renowned for luxury goods such as pearls, sea cucumbers and bird’s nests, and so attracted trade from the nearby Philippines and as far away as China.

In the 18th century Sandakan came under the suzerainty of the sultan of Sulu, who ruled the southern islands of what is now the Philippines. In the early 1870s the Scottish adventurer and arms dealer William Clarke Cowie managed to obtain permission to start a settlement at Pulau Timbang, in Teluk Sandakan. The township quickly became known as Kampung German due to the large number of German traders who emigrated here.

In 1879 the settlement relocated to its current position and the city of Sandakan was established by then British Resident William Pryer. The port quickly boomed, and many modern advances were seen here even before Hong Kong or Singapore. In 1883 Sandakan became the capital of British North Borneo, a status it held until WWII. Allied bombing and Japanese retaliation in 1945 virtually destroyed the town, and in 1946 the capital was moved to the equally devastated Jesselton, now called Kota Kinabalu.