The Common Program of the People's Republic of China 1949-1954

Article 39 of the Common Program

In 1949, the new regime inherited a colossal hyperinflation from the GMD regime. The GMD had tried to stop this inflation by introducing two times fiat paper money. Both times the interference failed. Both currency had lost more than 99.999% of their initial values. The Fabi existed for 13 years, the Gold Yuan only 10 months. In 1935, when the silver standard was suspended, Fabi was introduced. (The circulation of silver dollar coins was prohibited, and private ownership of silver was banned.) In 1948, the Gold Yuan replaced the Fabi and all use of foreign currency was declared illegal. The gold yuan was nominally set at 0.22217 g of gold. However, the currency was never actually backed by gold, and hyperinflation continued. In a last attempt to stop the inflation the Silver Yuan was introduced in 1949.
Fig. 39.1: Inflation
* the total quantity of money in circulation (currency and demand deposits) in billion yuan
**December 1941 ***December 1946 /1947 ****July 1948 *****August 1948 introduction of Gold Yuan ******December 1948 *******April 1949
Due to its rapid depreciation, Gold Yuan was effectively taken out of circulation and replaced by silver, foreign currencies and goods-for-barter in July 1949.
In December 1948, the People’s Bank of China (PBC) issued the Renminbi (Chinese Yuan), which was fiat money. The CCP undertook a different approach to control inflation. "The new money’s resistance to inflation was rooted not in the planned system, but in the Communist state’s ability to peg the value of the renminbi to a basket of key commodities at the disposal of state commercial and industrial organs. This new approach was essentially an institutional innovation the Communists brought along from their experiences of economic struggles in predominantly rural agrarian economies in the revolution bases, in particular, pre-1945 Shandong and the Manchuria area during the Civil War."
The PBC was founded on December 1, 1948, by merging three Communist-controlled Regional banks namely, the Northeast Bank, the Northern Sea Bank, and the Northwest Farmers Bank into a single bank. The predecessor of the PBC was the National Bank of the Chinese Soviet Republic established by the CCP in November 1931. The PBC sought advice from foreign and former GMD financial experts. The PBC became the bank for issuing currency, making monetary policy, and granting short-term credit and loans to both public and private commercial enterprises after 1949. In 1953, the State bank charged different interest rates on loans. State industrial enterprises were charged 0.45 -0.48%; State commercial enterprises were charged 0.69% and agricultural collectives 0.75%. The interest rate differential between agricultural loans and loans to state enterprises constitutes a state subsidy to industry through its monetary policy. However, in 1955, the rate of loans for agricultural collectives decreased to 0.60%. The old Bank of China was a joint state-private bank. Nan Hanchen became the new president of the PBC from December 1948 to September 1954. A smooth takeover of the branches of the Bank of China was made possible because several employees had joined the CCP and protected the bank properties.
"To the great dissatisfaction of the Nationalist government, the Hong Kong branch of the Bank of China held onto its large capital reserves as it awaited the formation of the new government. As soon as the manager of the Hong Kong branch, Zheng Tieru, learned that Chiang Kai-shek had ordered the transfer of all national art treasures and funds to Taiwan, he invested most of the bank's capital in real estate and local businesses.....These investment projects prevented the Nationalist government from transferring the branch's capital to Taiwan. The action of the Hong Kong branch strongly influenced other overseas branches to recognize the new government. By calling on overseas branches to accept the People's Republic of China, the Hong Kong branch restored its business quickly."
The conversion rate between Renminbi and the Gold Yuan was 1:100,000. The adaptation of the new currency proceeded smoothly, because the Gold Yuan had lost value and credibility. Within a week 53% of the total amount was changed and destroyed.
Peng (2007) mentions several reasons for the failure of the GMD to stabilize its currency. The GMD was challenged by the CCP and Warlords who refused to surrender their power to the central government. In fact, the government controlled the surroundings of Shanghai and some other large cities. "Second, the purpose of KMT’s intervention in the mainland banks, especially its interference in bond business and note issue, was not for economic growth, but was mainly for increasing government revenue and then for wasteful military drives. It was suggested that part of the bond revenue ‘went for troop provision, part to buy weapons, part to buy the loyalty of troops, and part into the private purses of Chiang Kaishek and T.V. Soong" Additionally, the corruption became systemic, civil servants lacked the skills and motivation to formulate and implement economic policies. The Central Bank did not exercise as a central bank should, Peng (2007) continues "no real policy bank which could provide professional advice and targeted services to strategic industries or special economic activities was established."

At the end of 1947, the CCP was capable of keeping the values of its currencies stable. The GMD regime, as seen above, had less control. The main instrument of the CCP was to minimize private speculations. The authorities, in the CCP controlled areas, kept the daily necessities at low prices by dumping materials from state stores into the free market.
"However, the bureau officials soon recognised the disadvantages of such a policy, as hot money was unexpectedly more flexible and easily mobilised than materials. Bureau officials realised that a change in policy was urgently required. 21 In the later half of 1947, Harbin Trade Bureau officials found a way to circumvent the market via direct transactions with peasant households through the CCP’s powerful rural grassroots organisations. In the classic case of cotton cloth, the procurement agents in Harbin simply supplied the raw material, cotton, to the weaving women in the countryside, and collected the finished products directly from them to secure a cheap supply later. 22"
This policy meant controlling both raw materials and finished products and, consequently, decreased private trade. However, the situation in Shanghai was complicated, the renminbi replaced the Gold Yuan, (the Silver Yuan could not be exchanged for renminbi) but the replacement of silver, gold and foreign currencies proved more difficult. The renminbi lost within 2 weeks 91% of its value of silver coins and prices increased by 170%. Speculation severed the situation. On 10 June 1949, the Shanghai Exchange closed. Speculators changed their targets to materials (grain, coal, and cotton). The CCP stroke back, they transported grain and cotton from all controlled areas to the major urban markets. This action stopped the speculation and prices became stable in March 1950. "...aided by vigorous promotion of bond sales that appear to have funded more than one-half of the budget deficit in the first half of 1950.1 The bond purchases by the private sector were apparently not entirely voluntary, however, and, after being 'asked to subscribe to their full financial capacity. . . Cheap sale or sale below cost was the last resort for most businessmen to raise funds...' "
Huang (2013) observes "As the currency took hold in the urban market, market exchanges in rural heartlands in central and southern China were still primarily based on silver coins and various money substitutes, whereas some remote markets even went back to barter trade. The renminbi had to penetrate the rural market in order to survive the first few months. In most Regions, party committees sent hundreds of work teams to the countryside to persuade the peasants to exchange their primary goods and silver coins with the renminbi.41"
Military of the Fourth Field Army bought necessary goods at low prices in the north and deposited the goods at state-owned stores in the south. The logistic department of the PLA bought these goods with renminbi to convince the farmers to follow suit. The policy of anti-speculation and price stabilization could only be a success if excess cash was reduced. The main objective was to convert cash to deposits, preferably long-term fixed deposits. "...the National People's Bank which backed up the Co-ops' efforts in Unified Purchase (see Article 38)) with preferential interest rates available to peasants making deposits of money received by selling surplus grain to the state. The rates were very attractive: 1.5% per month on deposits of one or two months; 2% per month on deposits from three months to six months. Six months was to be the maximum term of deposit, and only money from grain sales was to be accepted."
Fig. 39.2: Velocity Index
Money stock: the total volume of money held by the public at a particular point in time. NNP Netto national Product Real money Balance measure the purchasing power of the stock of money. The index is 100.
"This velocity represents the average number of times the currency changes hands over the year. Each time the currency changes hands and is spent, still more upward pressure is added to prices and so rising velocity only exacerbates the extent to which too much money is chasing too few goods." One remedy to solve the problem of rapid velocity was the introduction of the ‘parity deposit system’, the deposits were indexed to consumption commodities used by the local consumers.

In the PLA controlled areas, all private banks are placed under control of the PBC, and they required to deposit 30 % of their reserves in the PBC. Private banks were not allowed to issue loans up to 50% of deposits, to hold stocks in commercial enterprises, and they were prohibited to speculate in commodities. Until 1952, the state banking system and private banks coexisted, and owners of private banks who had fled to Hong Kong were encouraged to return to Shanghai. For example, Zhou Zuomin, who went to Hong Kong in 1949 but returned in August 1950 and became the vice president of the national joint state-private bank in December 1952.
The CCP classified Shanghai banks into 3 types. The first type was owned by bureaucratic capitalists, like the big 4 families. (see Article 1) They were immediately confiscated. Likewise, all "bureaucratic capitalist" owned industries and commercial firms were confiscated and nationalized without compensation.
The second type was the joint state-private bank; these were inherited from the GMD. A new chairman was appointed for each bank and there were put limitations on its private role and the majority of the shares were in the hands of the new administration. "With respect to the joint state-private banks, the new government inherited all official shares of the old government and verified the legitimate rights of private shareholders. In carefully planning the takeover process, the Financial Division of the Military Control Committee assigned former underground Communist Party members in each bank as special officers in charge of coordinating the transition of old joint banks."
The third type was privately owned small and medium-sized commercial banks and native banks. These private banks were permitted to continue their business after they registered with the new administration. The government set a minimum capital requirement, this way eliminating small banks or forcing them to merge. In Shanghai, all twenty-eight existing native banks, fifteen private banks, and three trust companies consolidated into four joint banking groups. At the end of 1951, only 10 percent of native banks and other private banks were still independently operating. The PBC received 90% of private deposits and 100% of public deposits. All transactions of governmental institutions, public schools, state owned enterprises are done by the PBC. The PBC had more or less a monopoly on banking and financing. "On December 1, 1952, Shanghai achieved the socialist transformation of banking and finance. All state banks, private banks, and native banks had been united into a General Administration of Joint State-Private Banks"
Ji (2003) notes "The nationalization of banks in Shanghai reduced the number of financial institutions and their staffs. About 2,000 former bank staff and 4,500 of their family members were sent to the farthest reaches of northwest China to support socialist construction in those areas. Other private bankers and staff were allocated to various financial and economic planning departments of state-owned enterprises and commercial firms."
Foreign banks were allowed to stay after registration, most left the city. The Chartered Bank of India, Australia, and China, The British Mercantile Bank, the Banque de l'Indochine, the Banque Belge pour l'Etranger, the Moscow National Bank, and Hong Kong and Shanghai Banking Company (HSBC) remained in business in part because the UK government established diplomatic relations with the PRC. Before 1939, the HSBC had 14 branches in China; only five branches remained open after 1949; Shanghai, Tianjin, Beijing, Shantou, and Qingdao. Shanghai and Tianjin were in full operation, the other branches were, in fact, out of business and resumed open to settle ongoing business. In March, 1950, the HSBC management could report to its shareholders that 1949 had been a good year for the bank and would pay the same dividend as previous year. "There had been no catastrophic change since the inception of the Socialist regime, and the turmoil in mainland China was largely compensated for by increasing Hong Kong trade and by the transfer of Shanghai’s business in the colony.15"
Fig. 39.3: Trade China with Hong Kong 1949-1954
The US decision to impose an embargo on trade and the decision to freeze all PRC assets in 1951 caused big difficulties for the bank. The bank management decided to close the Shanghai office, however, "The Chinese authorities reacted with surprise to HSBC’s threat to quit mainland China in 1952, and the Bank of China began to cooperate actively with HSBC to reduce the cost of maintaining its branches. For example, Chinese authorities permitted, at last, in December 1954, the closure of the Tianjin office.41"
The Guangdong private banking system, which is an important player in commercial and financial trade with Hong Kong and other capitalist countries, was preserved after the takeover. This policy was called: “three years of recovery, then ten years of development.” "All private banks in Guangdong now came under the supervision of the People’s Bank but were permitted to continue independent operations, making loans to local merchants and collecting deposits from Chinese citizens and businesses. Particular emphasis was placed on local bank support for commercial trading activity with Hong Kong and for handling incoming money remittances sent by overseas Chinese back to relatives in war-tom China. Speculative banking activities, such as stock and land purchases, were proscribed." Like all private banks in the PRC, these banks are required to maintain a capital level of 600 million yuan. Other requirements specified the maximum ratio of loans to deposits, a limitation on total loans, a minimum level of liquidity, and the maintenance of required reserves in the PBC.
It should be noted "Even at best, the Chinese currency only supplemented and never superseded the role of Hong Kong dollars as de facto standard money in south China" During Sanfan and Wufan the staff of private banks were heavily targeted. "And yet the Chinese government authorities continued to follow a pragmatic policy in Guangdong for several years after 1949 in order to preserve the vital trade links through Hong Kong to the West. This critical link allowed the import of critical capital goods as well as the collection of financial capital from exports and overseas remittances after 1949."

In 1950, the GAC decided that all foreign exchange holdings, including those of overseas Chinese, foreign travelers, and foreign embassies and missions, be deposited with the Bank of China, the only bank authorized to deal in foreign exchange. The renminbi was virtually inconvertible. The official exchange rate in 1952 - 1954 was the Yuan per US dollar: 2.617.
Fig. 39.4: Exchange value rmb against $, £ and HK$
The renminbi depreciated by 100% against the US dollar, by 106% against the pound sterling, and by 115% against the Hong Kong dollar between January and March 1950.
In Guangdong, large amounts of European and American currencies circulated in the local economy. The PBC became the only legal institution in Guangdong that holds foreign currency deposits. "This action forced local Chinese banks to discontinue currency trading and speculation (a major source of income), and mandated that private foreign currency deposits in local banks be transferred to the BOC. A few local banks were still authorized to act as foreign currency dealers by the BOC but were severely restricted from trading foreign currencies outside of BOC oversight." Private citizens were permitted to hold only two ounces of gold and four ounces of silver, they were not allowed to transfer or trade these metals without special authorization. The remainder of precious metals had to be exchanged at the PBC for renminbi.
Shao (1991) notes "It was not until July 1950 that the Bank of China was able to establish a single unified foreign exchange rate for the whole nation; the next year Shanghai's foreign exchange was abolished, and foreign currencies as well as gold were removed from the sphere of free transaction. "
In 1949, the PRC allowed 2 Stock Exchanges to exist. Tianjin Stock Exchange was officially opened on June 1, 1949 and abolished on July 21, 1952. On January 30, 1950, the reformed Beijing Stock Exchange is reopened and closed October 1952. The Tianjin Stock Exchange traded 10 stocks; the Beijing Stock Exchange traded 6 stocks. They included companies like; Qixin Cement, Kailuan Coal Mine, Dongya Wool Spinning, Renli Wool Spinning, and Yaohua Glass. The Shanghai Stock Exchange was closed in 1949.

Fiat money is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal. [↩]
Huang (2013). Page 3 [↩] [Cite]
Hsu (1982). Page 649 [↩] [Cite]
"As the People’s Bank of China’s subsidiary and a special agency of the State Council, the Bank of China (established in 1912), as late as 1978 it still had some of its original shareholders and was only 66 per cent owned by the PRC government." (Those shares belonging to "war criminals" were confiscated. Since 1956 all private shareholders have only received "fixed dividends" at a rate of five per cent on the basis of their original investment. See Szuprowicz (1978). Pages 75–8.[Cite]
See RMRB 23-03-1950 "The Government Affairs Council of the Central People's Government issued an order to strengthen the supervision of the leaders of the Bank of China and designated Nan Hanchen and others as state-owned directors and supervisors." [↩]
Ji (2003). Pages 361-362. [Cite] In a Memorandum (December 2, 1949) by the Chief of the Division of Security (Nicholson) to Mr. Robert W. Barnett of the Office of Chinese Affairs it is noted that 2 ships arrived at San Francisco with 2 million dollars in United States currency. This money originated with the People’s Bank of China, but the transfer was handled through the Banque Belge Pour L’Etranger and the Banque De L’Indochine. See document 02-12-1949 Memorandum by the Chief of the Division of Security [↩]
Peng (2007). Page 91 [↩] [Cite]
Peng (2007). The Chinese Banking Industry [↩]
Huang (2013). Page 7 [↩] [Cite]
Huang (2013). Page 10 [↩] [Cite]
Shue (1976). Page 113 [↩] [Cite]
Burdekin (2008). Page 59 [↩] [Cite]
Ji (2003). Page 361 [↩] [Cite]
Ji (2003). Page 375 [↩] [Cite]
Ji (2003). Pages 377-378 [↩] [Cite]
Peruzzi (2017). Page 21 [↩] [Cite]
Peruzzi (2017). Page 32 [↩] [Cite]
Ritenour (2005). Page 3 [↩] [Cite]
Schenk (2000). Page 747 [↩] [Cite]
Ritenour (2005). Page 4 [↩] [Cite]
Ritenour (2005). Page 4 [↩] [Cite]
Shao (1991). Page 19 [↩] [Cite]
13-02-1950 Chen Yun Financial and economic personnel should raise their political awareness

01-03-1950 Provisional regulations on currency control
Regulations for the Central Treasury. March, 3, 1950.
Decree of the GAC on strengthening the guidance and supervision of the Bank of China. March 22, 1950.
Decision of the GAC regarding the enforcement of cash control in state organs. April 7, 1950.
25-12-1950 Regulation on the implementation of currency control
Directive of the Finance and Economics Committee regarding the “Measures for enforcement of monetary control” and “Measures for the preparation of the monetary receipt and disbursal plan.” December 25, 1950.
Measures for the preparation of the monetary receipt and dis¬bursal plan. December 25, 1950.
Provisions of the Finance and Economics Committee of the GAC regarding applications from United States enterprises and individuals for withdrawal of their deposits. January 14, 1951.
Measures prohibiting the movement of the nation’s currency into and out of the national territory. March 6, 1951.
Decree of the GAC recalling currencies issued for local circulation by the Northeast Bank and the People’s Bank of Inner Mongolia. March 20, 1951.
19-04-1951 Interim regulations on punishment for impairment of state currency
Decree of the GAC regarding the people’s money bearing notations in the Uighur language, issued in Sinkiang, and permission for its nationwide circulation. September 21, 1951
15-10-1952 Interim measures for prohibition against bringing negotiable instruments and securities in the state currency into and out of China
Measures of the GAC for the payment of nonreimbursed deposits made in banking houses before the liberation. February 20, 1953.
Measures for the registration of nonreimbursed deposits made in banking houses before the liberation. 1953.
Directive of the GAC regarding the establishment of the People’s Construction Bank of China. September 13, 1954.
Chapter 4 of Common Program