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No Inflation in China

Long-Term Stability of ”Renminbi”

by Wang Ping

[This article is reprinted from Peking Review, #21, May 23, 1975, pp. 18-21.]

This is the last of three articles explaining why there is no inflation in China. The first two appeared in Nos. 19 and 20. —Ed.

RENMINBI, the unified currency used in China, is one of the world’s few stable currencies. Its long-term stability is evidenced by the fact that while prices have long remained stable and retail sales of commodities in society have been growing by wide margins, urban and rural people’s savings deposits have risen tremendously. Stability is also reflected by its exchange rates with foreign currencies—the value of Renminbi is not affected by the devaluation or revaluation of foreign currencies. An increasing number of countries and regions are using Renminbi quote prices and settle accounts in foreign trade and other international economic dealings. Renminbi enjoys ever-growing prestige at home and abroad. Its stability has created the necessary conditions for carrying out socialist revolution and construction in a planned way.

Why has the Renminbi been able to keep its long-term stability free from the influence of the capitalist world’s financial and monetary crises? Generally speaking, this is because we have brought into full play the superiority of the socialist planned economy and established an independent and unified monetary system under the guidance of Chairman Mao’s revolutionary line.

Independent Monetary System

Politically, militarily and economically, semi-colonial and semi-feudal old China depended on imperialism. Having seized many privileges in China, imperialist countries controlled the Chinese customs and foreign trade, dumped large quantities of commodities on the Chinese market and used cheap Chinese raw materials and labour power to build many factories. Moreover, they also established banks in China, put their currencies in circulation in the Chinese market and controlled China’s banking and finance through investments and loans. When the reactionary Chiang Kai-shek government adopted the monetary system of the silver yuan standard, the exchange rate of the yuan was decided by the silver price in the British and the U.S. markets. As a result, Chinese silver yuan flowed out of the country in huge quantities and their extreme shortage in the Chinese market depressed the market and dealt heavy blows to national industry and commerce. Instigated by U.S. and British imperialism, the reactionary Kuomintang government went off the silver standard and adopted the fapi system in 1935. The exchange rate of fapi was successively pegged to the British pound and U.S. dollar, thereby making fapi dependent on them.

Following price rises in the United States and Britain, prices in China also went up by big margins between 1935 and 1937. Prices in Britain rose 22 per cent in this period while those in China climbed 34 per cent. In the 12 years from 1937 to 1949 when the reactionary Kuomintang regime collapsed, the amount of bank notes issued by it zoomed more than 140,000 million times in China and prices soared 8,500,000 million times. Fapi notes and later other bank notes issued by the reactionary Kuomintang regime became a means by which imperialism and bureaucrat-capitalism exploited the Chinese people and plundered their wealth, resulting in untold misery for China’s working people.

What the revolutionary base areas did was entirely different from the reactionary Kuomintang government. To smash the economic blockade imposed by the Kuomintang reactionaries, these areas under red political power led by the Chinese Communist Party established the first people’s bank and issued bank notes as early as 1928 during the Second Revolutionary Civil War. Later, during the War of Resistance Against Japan (1937-45) and the Third Revolutionary Civil War (1945-49), the revolutionary base areas established banks and independently issued bank notes to meet the needs of the revolutionary war. This played an important part in preventing plunder by the reactionaries’ currencies, eliminating the influence of inflation in areas occupied by the Japanese invaders and puppet forces, developing the economy in the liberated areas and supporting the revolutionary war.

The liberated areas expanded rapidly and were gradually linked up to cover a vast area on the eve of the founding of the People’s Republic of China. To develop the economy, support the revolutionary war and greet the nationwide victory of the War of Liberation, the People’s Bank of China was established in December 1948 and started issuing the Renminbi.

After its founding, New China immediately confiscated the bureaucrat-capitalist enterprises and banks, abolished all imperialist privileges in China, took over complete control of the customs and foreign trade and established independent banking and monetary systems.

The independent Renminbi is China’s sole currency in circulation. No foreign currencies are allowed to circulate in China and neither can Renminbi be taken out of or brought into the country. All China’s economic dealings with foreign countries must be settled through the state bank which has the sole right of handling the exchange of foreign currencies. All this severs the direct link between the domestic market and foreign money markets, prevents foreign currencies from affecting our market or purchasing Chinese commodities for speculation, and provides the conditions for the state’s planned release of currency according to the needs of our domestic market.

The exchange rates between the Renminbi and foreign currencies are independently established by China. Our country does not join any international money blocs, nor does the Renminbi maintain a fixed parity with any foreign currency. Its policy is to keep the value of Renminbi stable. When capitalist countries are hit by financial and monetary crises and adopt floating rates, sometimes revaluating and sometimes devaluating their currencies, the Renminbi still maintains its stable value and its exchange rates with their currencies are adjusted accordingly. For instance, compared with the exchange rates on December 18, 1971, those of the currencies of major Western capitalist countries showed various changes at the end of November 1974. The Swiss franc was revalued upward while the Japanese yen, the British pound and the U.S. dollar all were devalued. In this period Renminbi’s exchange rates with these currencies were adjusted accordingly. This keeps the value of Renminbi stable consistently and frees it from the influence of the floating rate of any foreign currency.

We have adopted the principle of separate price-setting for domestic and international trade. In spite of the price changes in the international market, imported or exported commodities handled by the foreign trade departments are quoted and their accounts settled in the home market according to unified stable prices set by the state. This cuts direct price connections between the domestic and the international markets, effectively frees domestic prices from the influence of sharp international price fluctuations and preserves the long-term stability of the value of Renminbi and prices.

The establishment of an independent momtary system signifies a great victory for the Chinese people in their century-long anti-imperialist struggles. This important achievement since the founding of the People’s Republic of China results from implementing the principle of “maintaining independence and keeping the initiative in our own hands and relying on our own efforts,” defending national independence, safeguarding state sovereignty, resisting blockades, embargoes, sabotage and trouble-making by imperialism and social-imperialism, and building socialism through hard struggle. It is also an extremely important condition for maintaining the long-term stability of the value of Renminbi.

Centralization and Unification

Under the reactionary rule of imperialism, bureaucrat-capitalism and feudalism, old China was economically fragmented and backward and its money market was in confusion. Currencies circulating in the market not only included bank notes issued by banks representing the interests of the four big families of Chiang Kai-shek, T.V. Soong, H.H. Kung and Chen Li-fu, but also local currencies, issued by feudal warlords and landlords as well as currencies and bills issued by private commercial establishments. Not only did the U.S. dollar, the British pound and the Hong Kong dollar circulate freely in the market, but gold, silver and silver yuan as well. These currencies often constituted a speculative force that disrupted the market and raised prices, and were used by the exploiting classes to oppress and exploit the working people.

The People’s Bank of China has been charged with the unified issuance of Renminbi since the founding of New China. The currencies issued by the revolutionary political power in@ the liberated areas were successively withdrawn and bank notes issued by the reactionary Kuomintang government in the newly liberated areas were exchanged within a fixed period. Thus Renminbi became the only legitimate currency in circulation throughout the nation, bringing about the unification of currency in the country—something China had not been able to achieve for a long time.

Centralization and unification of the Renminbi find expression mainly in the following respects. It is uniformly used for quoting prices, payment and settling accounts in the market throughout the nation and in economic dealings among the various branches of the national economy. No bills, securities, gold, silver or foreign currencies are allowed to circulate in the market. The right of issuing Renminbi is centralized in the Central People’s Government and the unified issuance is handled by the People’s Bank of China according to state-approved plans. State regulations require that except for small amounts of payments which can be made in bank notes, accounts of all other economic dealings between state enterprises, public undertakings, government organs and P.L.A. units must be settled through local branches of the People’s Bank. Apart from a small amount for minor payments, all their cash income must be deposited in the People’s Bank in time. They can draw cash from the bank only when they pay wages to the workers and staff members or when the commercial departments purchase farm and side-line products from rural people’s communes and commune members. Thus the circulation of Renminbi is limited within a definite scope, making it possible for the state to issue currency in a planned way according to the circulation needs of the market.

The centralized and unified issuance of Renminbi has ended the confusion in the money market of the past and provides the prerequisite for financial and economic unification and currency stability throughout the nation.

Comprehensive Balance

To keep the Renminbi value stable, it is necessary to establish an independent and unified monetary system. More important, it is necessary to carry out socialist planned economy and preserve the balance between the various branches of the national economy. These ensure the normal circulation of money. The following balances have a direct bearing on the stable value of currency.

First, the balance between the state’s total supply of commodities and social purchasing power. Under socialist conditions in China, the means of production are either owned by the whole people or collectively owned by working people, and the important means of production are basically under planned and unified allocation and distribution by the state. Only consumer goods and part of the agricultural means of production are supplied at stable prices in a planned way by state commercial stores and supply and marketing co-operatives. All of the following are arranged according to a unified plan: the number of workers and staff members and the amount of wages to be added each year, the quantity of farm and side-line products to be sold to the state by rural people’s communes and commune members and the amount of money they will get, the amount of state funds to be invested in the rural areas for agricultural development, and the annual amount of agricultural means of production and consumer goods to be produced and supplied by the state. The state carries out the planned supply of grain, edible oil, cotton cloth and other major necessities for daily use, Workers and staff members as well as rural people’s communes and commune members are thus ensured of buying the commodities they need at stable prices with their wages or money income. At the same time the state always holds in its hands commodities several times the value of the money in the market and can withdraw money from circulation at any time by selling commodities, thereby making the quantity of money and that of commodities in circulation in the market conform with each other.

Second, the balance between state revenue and expenditure. On the basis of developing the national economy, our state revenue and expenditure have steadily increased over the past two decades and more. At the same time we have implemented the principle of balancing revenue and expenditure and arranging expenditure according to revenue. We will absolutely not make up financial deficits by issuing bank notes, let alone resorting to the methods used in old China of floating huge domestic and foreign loans and issuing bank notes to balance financial deficits. Financially, this eliminates the factor causing inflation.

Third, the balance between state bank loans on credit and its funds for such loans. The People’s Bank of China is the state’s sole organization for issuing loans on credit. These loans mainly meet the needs of industrial and commercial enterprises for short-term funds and the needs of the collective economy of the rural people’s for funds in developing production. The sources of the bank’s funds for credit loans consist mainly of deposits by enterprises, government organs and the collective economy, savings deposits by urban and rural people and accumulations by the bank itself. The amount of loans issued by the bank basically conforms to the needs of production development and expanded circulation of commodities. If the funds for credit loans fall short of the loans needed, the state will allocate a sum to keep the balance between loans and their funds.

Under our socialist system, credit loans, settlement of accounts and large amounts of cash payments are exclusively handled by the state bank. Borrowing and lending, sales on credit and forward payment cannot be handled by the enterprises themselves. Loans are limited to meet the needs of short-term turnover in the process of production and circulation and are issued and repaid continuously. Enterprises are not to use loans for capital construction and purchases of equipment which have a long-term turnover. By holding deposits of the various branches of the national economy and issuing loans to them, the bank continually releases money and withdraws it from circulation. This ensures, by and large, a consistently proper ratio between the amounts of money and commodities circulating in the market.

Fourth, the balance of international payments. China has trade relations with more than 150 countries and regions on the principle of equality, mutual benefit and exchanging what one has for what one does not have. Our foreign trade has developed tremendously. We have followed the principle of developing the national economy by maintaining independence and keeping the initiative in our own hands and relying on our own efforts, carried out domestic construction without relying on foreign loans, and implemented the principle of balancing imports and exports in foreign trade. As a result we have achieved a long-term balance in foreign exchange income and expenditure and ensured the state’s ability to pay abroad and the Renminbi’s international prestige.

Guided by Chairman Mao’s revolutionary line, our socialist construction soon will enter a new stage of development and our socialist economic system, including the financial and monetary systems, will certainly promote the development of all kinds of construction in a still better way.

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