S08: China’s Destiny
Business History of Modern China
October 1, 2025
Place: Nanjing and Shanghai
The Song sisters — Song Qingling, Song Ailing, and Song Meiling — and their husbands became among China’s most significant political figures of the early 20th century.
Key Questions
- How did China exit the silver age and introduce its fiat currency fabi?
- Was inflation the precursor to Nationalist collapse, or the cause of it? Why couldn’t they get a grip on inflation, even after WWII?
- Bureaucratic / crony capitalism: What was the relationship between the Nationalist and the private entrepreneurs? Did corruption cause its downfall?
Nation building during Nanjing decade (1928-1937)
- Under single power center for the first time since 1911
- Single-party government under the leadership of one man: Chiang Kai-shek
- Incomplete unification: Regional powers co-opted, but not removed
- Ongoing tensions with CCP, Soviet advisors, and the GMD left
Discuss: Chiang Kai-shek
- What are Chiang’s economic principles?
- What are the causes of China’s backwardness? How can it develop its economy?
- How is Chiang’s plan different from laissez-faire capitalism and Marxism?
- Will his plan work? Why (or why not)?
Building on developmental state
- Development of national economy (domestic market for industrial goods)
- Development of military-oriented heavy industry
- Construction of national infrastructure: ports, waterways, highways, railroads
- Unsystematic and limited to Manchuria, east coast, and lower Yangtze
China’s First Economic Plan
National planned economy:
- National Economic Council (1931)
- National Defense Planning Council (1932)
- Three-Year Plan for Industrial Development (1936, cut short by Sino-Japanese War)
- Work units (1940s)
The Nanjing Decade: An ambivalent period
Insecure dictatorship with many security threats – and large spending needs:
- Communist uprisings
- Unyielding warlords
- Japanese invasion in 1931
How can the Nationalist party under Chiang Kai-shek fund its ambitions?
China’s Money Problem: Silver
The Qing ran on a bimetallic system.
Silver Age in China: Story of Arbitrage
- Arbitrage between gold and silver exchange rates in China and Europe drove silver flow.
- China’s gold-silver ratio was consistently higher than Europe’s.
- European ratios were generally 1:14 to 1:10; China around 1:10 or 1:12; Japan 1:8.
- Silver production in colonial America widened the gap between Asian and Western ratios, leading to steady inflow and monetization of China’s economy in the Ming and Qing.
China: The World’s Last Silver Frontier
Map of world currency systems, 1907. Countries with a gold standard are highlighted in yellow, countries with a silver standard are highlighted in blue, countries with a bimetallic standard are highlighted in green.
Exchange Rate Risk: Boxer Indemnity
- The Boxer Indemnity (450 million taels) was calculated as a gold debt, meaning the Qing government bore exchange rate risk.
- The Qing dynasty shifted most of the debt burden to provincial governments, who increased taxes to cover the payments.
- Lower silver prices would lighten the Qing dynasty’s burden.
US: Silver Exporter on Gold Standard
The US struck gold in the mid-19th century (with Chinese labor) and adopted the Gold Standard. But it also became the world’s leading silver exporter following the discovery of the Comstock Lode in Nevada in 1858.
Silver Mines, Financial Power
- Falling silver prices negatively impacted commerce, making trade unpredictable and diverting attention from core business activities.
- By late 1902, a global coalition of officials and merchants sought US assistance to stabilize exchange rates between gold and silver-based economies.
- Mexico argued that declining silver prices increased import costs from the US and reduced the gold value of American investments in Mexico.
Discuss: Silver Reform Challenges
- Could and should the Qing adopt the gold-exchange standard?
- Did a low price of silver benefit or harm China?
- How could China implement currency reform to create a national money in the context of political decentralization?
- How could China reform without compromising sovereignty?
Silver – or Gold? – of Chinese Capitalism
- Silver prices were high after World War I, reaching $1.32/ounce in January 1920.
- However, silver prices declined throughout the 1920s, hitting a low of 25 cents/ounce in January 1933.
- The falling price of silver was a “golden age” for Chinese capitalists: Remittances and investment from abroad increased; Interest rates dropped and credit expanded.
Inventing fabi
- Amid rising silver prices from 1933-1935, China’s Nationalist government abandoned the silver standard for a managed currency called the fabi in November 1935.
- The fabi was backed by foreign currency and not pegged to any specific monetary unit.
- Currency in circulation: from 453 million yuan in 1935 to 1,477 million in 1937
- The stage was set for wartime inflation.
Song Ziwen and Kong Xiangxi
Who were these two men? What role did they play in the Nationalist government’s economy and diplomacy?
Bureaucratic Capitalism – or Crony capitalism?
- Bureaucratic capitalism lacked ideology or a plan, driven by political figures seeking personal wealth through modernization resources.
- They favored quick profits in commerce, finance, and light industry, competing with private entrepreneurs.
- Song Ziwen and Kong Xiangxi, Chiang Kai-shek’s brothers-in-law and ministers of finance, held their positions because of their personal connections to Chiang and led this system.
The Blue Shirts
- The Blue Shirts were a series of overlapping, clandestine groups led by Whampoa graduates.
- They aimed to reshape Chinese state and society in a hierarchical manner based on the modern military model.
- Following Chiang Kai-shek’s patronage in 1932, the Blue Shirts grew rapidly, reaching up to 500,000 members by 1938.
The Blue Shirt’s Vision
- The Blue Shirts aimed for total national rebirth through military self-defense.
- They advocated for state-directed heavy industrial development to address unequal profit accumulation and worker exploitation.
- They believed that modern military power relied on laboratories and basic research in the natural sciences.
- They aimed to develop domestic coal, iron, steel, and petroleum industries, which were still under foreign control.
War against Japan: Losing Ground
- By late 1938, Nationalists lost key economic areas: - Battle for North China: Beijing and Tianjin (1937); Shanghai (1937); Nanjing Massacre (Dec 1937 - Jan 1938); Wuhan (1938)
- Tax revenues fell sharply while military costs stayed high.
- Printing money was used to cover the deficit, but inflation galloped.
“Burn all, kill all, rob all”: Symbols of atrocities
Forex War: Attacking Fabi
- Foreign banks moved large amounts of hard currency out of China after the Marco Polo Bridge Incident in 1937: e.g. Japanese authorities accumulated fabi and converted it to hard currency.
- The Nationalist government initially maintained the fabi’s convertibility to foreign currencies at a fixed rate, but burned through its foreign exchange until March 1938.
- Foreign banks continued to evade controls.
Budget Crisis in 1938
- Nationalists lost key economic areas to Japan by October 1938.
- Tax revenues decreased while military costs stayed high.
- By 1941, expenses greatly exceeded income.
- Printing money covered the difference but was only a temporary fix as it began to lose value.
Advice to Chiang
- How to fund the war?
- How to tame inflation?
- Can America help? If so, how?
From lone war to global war
- Pearl harbor (Dec 1941) internationalized China’s war of resistance
- Conflicts among allies:
- “Asia first” vs. “Europe first”
- Personal antagonism between Joseph Stilwell and Chiang Kai-shek
China as great power
- End of unequal treaties
- China as one of the Big Four and founding member of the UN
- Beginning of decolonization in post-war world
Three Currency Regimes after WWII
After the war, China had three separate currency regimes in occupied areas. Exchange controls existed between areas, and commodity prices varied significantly.
- Central China used Central Reserve Notes.
- North China used Federal Reserve Notes (issued by collaboration government).
- The Northeast used the Bank of Manchukuo’s currency.
Black Market
- China maintained a high official exchange rate for the yuan at the end of the war, despite the yuan weakening in the black market.
- Chiang Kaishek resisted devaluation for national prestige reasons.
- The exchange rate further hindered foreign investment in China.
- Most businesses who exported did so by smuggling out and then selling foreign exchange on the black market.
Effects of hyper-inflation
- While hyperinflation only affected a minority of the people in China – most were living on subsistence and did not use GMD’s fabi currency – it significantly impacted Nationalist government employees and military personnel due to the declining value of their wages.
- Poor pay, corruption, and inadequate supplies led to low morale, desertion, and ineffectiveness within the Nationalist military during the Civil War.
Discuss: What went wrong?
- Why wasn’t the Nationalist Party able to get a grip on inflation, even after the war’s end?
- Was hyperinflation a precursor of military failure by the Guomindang or a cause of that failure?
- How much responsibility did men like Kong Xiangxi and Song Ziwen bear?
From WWII to Civil War
Gold is Back
Rally in precious metal driven by concerns over government debt levels, inflation, and the status of the US dollar as a reserve asset.
Central Bank: Uncertain Independence
