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Money and Finance 1950-1951

Mar 20, 2017 © Ulrich Theobald

During the Anti-Japanese War and the following Civil War, the KMT financed their military activities by printing money. During the twelve years of the war, the volume of currency increased 140 billion times, and commodity prices by over 8,500 billion times (Prybyla 1970: 79). In 1947, the price index in Shanghai rose rom 74,000 to 108,000 (1931=1; ibid.). Rates on interest loans in 1949 rose from 24-30 per cent o 70-80 per cent (ibid.). Unfortunately, the KMT's advisors for monetary policy recommended reducing the interest on bank deposits which aggravated the situation because the banks had not funds enough. In November 1947 therefore, the daily output of the printing press was $40 billion CNC (Prybyla 1970: 80).

In two steps, the financial administration was reformed, first with the Tax Conference (XXX) in November 1949 and then the Financial Conference (XXX) a year later. The financial apparatus was restructured, expenditure cut, the tax system reformed, and the Government Treasury (Zhongyang jinku 中央金库) separated from the administration. The monetary and financial recovery was the result of a range of successful measures.

Currency Stabilization

The regime was able to curb inflation by government control of key commodity prices, offering commodity-indexed "double-guarantee" bank deposits, and the introduction of a "parity unit" (XXX) based on the prices of grain, coal, oil, salt and fabric, and calculated every ten days. If the composite price of the commodities in terms of which the cash value was expressed went up, the deposits' cash value followed, yet it remained stable in case the composite commodity price went down. The measures proved successful in March 1950. The state finance sector was settled by exchange of the old currency at a rate advantageous to the state, acquisition of capital and property of "class enemies" and foreigners, compulsory handing over of precious metals and foreign currency, the issuance of indexed Victory Bonds (Renmin shengli zheshi gongzhai juan 人民勝利折實公債劵), the execution of austerity campaigns, and the institution of local taxes in kind.

On March 1, 1955 the first Renminbi currency was converted into a new one, with an exchange rate of 10,000 old Yuan : 1 new Yuan. Prices had remained stable, also in face of the raising expenditure during the Korean War (c. 2.3 billion Yuan p.a., Prybyla 1970: 83) and as support for Vietnam. Expenditure could be covered from the current income, in particular taxes on private enterprises, and special levies or "fines" directed against private firms which had profited from the boom after 1949.

Figure 1. 10,000-Yuan bill from Jan 20, 1950
Size: 140×75mm. Source: Zhongguo renmin yinhang huobi faxingsi 1993: 59.
Figure 2. 1-Yuan bill from Mar 1, 1955
Size: 150×67.5mm. Source: Zhongguo renmin yinhang huobi faxingsi 1993: 71.
Figure 3. Victory Bond from 1950
http://www.hwph.de/historische-wertpapiere/losnr-auktnr-pa30-913.html
Size: 179x79mm. Source: HWPH Historisches Wertpapierhaus.

Rebalancing the State Budget

The revenues of the young PRC consisted of . Part of the agricultural tax represented rent formerly paid to landlords and rich peasants. To these came urban taxes on enterprises, turnover commodity taxes, salt taxes (see the importance of salt tax in traditional China), and customs duties. The importance of agricultural tax decreased in the first years relatively to income form the profits generated by state enterprises. In 1950 it accounted for 29.3 per cent of the total revenues (income by state enterprises just 13.3 per cent), yet in 1952, agricultural taxes made out only 15.4 per cent, and the profits from state-owned enterprises had risen to 32.6 per cent of the total revenue of the PRC. In the same time, taxes on private business remained relatively stable in relation to the total revenue (35-40 per cent), but increased absolutely from 1.9 billion Yuan in 1950 to 3.46 billion in 1952. Private enterprises were fleeced during the Five-Anti Campaign (wufan yundong 五反运动) in 1952.

Other revenue was gained from the issuing of the Victory Bonds. They were expressed (not denominated) in real commodity units, like certain amounts of rice, flour, cotton muslin, or coal. The conversion rate was re-calculated every ten days. The bonds, amounting to 260 million Yuan in 1950 (Prybyla 1970: 81), carried an annual interest rate of 4 per cent, over five years (ending in 1956). Its purchase was compulsory for private traders and "bourgois elements". It can be seen that these reforms included also social aspects to initiate the restructuring of the society.

Accordingly, expenditure was also used to create a new economy. The funds alloted for economic construction rose from 25.5 per cent in 1950 to 45.4 per cent in 1952 (Prybyla 1970: 83). State investment made then out 12 per cent of the national gross product (ibid.).

The Banking System

The banking system was reformed not just by centralization, but also by tighter control and eventual abolishing of the 450-odd major private banking houses. The first step was the foundation in 1948 of the People's Bank of China (Zhongguo renmin yinhang 中国人民银行, PBC), created by merging several local communist banks in the "liberated zones". Its authority was spread through the whole country in 1949. Government funds deposited in private banks were withdrawn and placed under the control of the PBC. Within six months, about half of the private banks disappeared from the market. In a next step, private banks owned by "bureaucrat capital" (i.e. family members of the former KMT regime) and by foreigners were confiscated. The remaining banks were ordered to increase their capitalization. Such not able to do this, went bankrupt. The thus surviving banks were arranged in five banking groups, each under a unified administration. Their heads were appointed by the PBC. These five groups in November 1952 again merged to one single banking group. After that date, private banking was non-existing.


Sources:
Burdekin, Richard C.K. (2008) China's Monetary Challenges: Past Experiences and Future Prospects (Cambridge: Cambridge University Press), 12, 57-58.
HWPH Historisches Wertpapierhaus AG (http://www.hwph.de/historische-wertpapiere/losnr-auktnr-pa30-913.html).
Zhongguo renmin yinhang huobi faxingsi 中国人民银行货币发行司, ed. (1993). Zhonghua renmin gongheguo huobi tulu 中国人民共和国货币图录 (Beijing: Zhongguo da baike quanshu chubanshe).