Desire for stability at heart of renminbi's foundation

PUBLISHED : Thursday, 20 October, 2011, 12:00am
UPDATED : Thursday, 20 October, 2011, 12:00am


The history of how the renminbi came to be China's official currency is a telling example of why the leaders in Beijing, even today, strive so hard to maintain stability.

Before the establishment of the communist-led government, the nation hadn't used one currency in more than a century, according to financial textbooks.

By the last years of the Qing dynasty (AD1644-1911), the government was too penniless to claim any central control over money. As a result, the nation's markets had become flooded with all types of currency - some issued by local banks, some by private money lenders and some from overseas.

There were around two dozen types of silver coins - so-called eagle coins, dragon coins, big-head coins (with faces of leaders) and boat coins (made by the Kuomintang government), as well as coins from provincial banks and even some foreign countries.

It was a time of financial disintegration for the country, and it would only get worse in the following years.

The KMT government's attempt at currency reform in 1935 was soon interrupted by the Japanese invasion.

And to finance one war after another, the government kept printing more money. So much money was printed that, the government later said, from August 1948 to May 1949, the price of some basic goods such as rice soared by 6.4 million times. The highest currency denomination at the peak of the hyperinflation was a six-billion-yuan note , issued by the Xinjiang Provincial Bank in 1949.

The failure of the economy played a major role in the downfall of the KMT regime, coupled with military losses in the northeastern and northern provinces.

By that time, foreign money dominated the domestic market. As about US$300 million in US dollars was circulating in large cities, more than half a billion Hong Kong dollars were being used in the southern provinces, or almost half of Hong Kong's total currency issued then.

Naturally, with an ambition to build a brand-new China, the communists were not just charging ferociously on the battlefields.

In October 1947, an internal party document proposed the preparation of a 'unified bank' under the name of the 'People's Bank of China'.

As a young and determined political force, the communists acted swiftly. A year later, in December 1948, the central bank became a reality. By merging what was originally three smaller banks in the 'liberated zones', they began to issue a unified currency called the 'people's money' which was known in Putonghua as 'renminbi'.

From the first day it was issued, the goal of the currency, as defined by the bank, was to ensure stability.

But that stability didn't come easily. In order to facilitate the national conversion to the people's money, including purchasing all of the silver coins and foreign currencies from the market, the new communist regime had to bite the bullet of high inflation.

The task was basically completed within a couple of years, with the help of a closed-door financial system and tight control over foreign exchange.

From then on, the renminbi served as the only legal tender in China, as the largest nation in the world began its planned economy.


This is how many Hong Kong dollars were circulating in China's southern provinces in the late 1940s, as a result of financial chaos