Chinese Hyperinflation
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The Chinese hyperinflation was the extreme inflation that emerged in
China China, officially the People's Republic of China (PRC), is a country in East Asia. With population of China, a population exceeding 1.4 billion, it is the list of countries by population (United Nations), second-most populous country after ...
during the late 1930s, extended to
Taiwan Taiwan, officially the Republic of China (ROC), is a country in East Asia. The main geography of Taiwan, island of Taiwan, also known as ''Formosa'', lies between the East China Sea, East and South China Seas in the northwestern Pacific Ocea ...
after the
Japanese surrender The surrender of the Empire of Japan in World War II was announced by Emperor Hirohito on 15 August and formally signed on 2 September 1945, ending the war. By the end of July 1945, the Imperial Japanese Navy (IJN) was incapable of condu ...
in 1945, and concluded in the early 1950s. In the 1935 currency reform, the
Nationalist government The Nationalist government, officially the National Government of the Republic of China, refers to the government of the Republic of China (1912–1949), Republic of China from 1 July 1925 to 20 May 1948, led by the nationalist Kuomintang (KMT ...
of China abandoned the traditional
silver standard The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians 3000 BC until 1873. Following t ...
, in response to deflation caused by rising silver prices, and introduced its own
paper currency Paper money, often referred to as a note or a bill (North American English), is a type of negotiable promissory note that is payable to the bearer on demand, making it a form of currency. The main types of paper money are government notes, which ...
, the
Chinese National Currency The Chinese National Currency (CNC), often transliterated as fapi or fabi or translated as Legal Tender Note, was the currency of China between 1935 and 1948. Introduced in the 1935 currency reform, the currency was initially issued by the Central ...
(CNC). However, this currency was issued without sufficient credit or reserve backing. The Nationalist government's reliance on
deficit spending Within the budgetary process, deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit, the opposite of budget surplus. The term may be applied to the budg ...
led to unchecked monetary expansion, resulting in rapid currency depreciation. This situation was aggravated by the financial burden of the
Second Sino-Japanese War The Second Sino-Japanese War was fought between the Republic of China (1912–1949), Republic of China and the Empire of Japan between 1937 and 1945, following a period of war localized to Manchuria that started in 1931. It is considered part ...
and the subsequent
Chinese Civil War The Chinese Civil War was fought between the Kuomintang-led Nationalist government, government of the Republic of China (1912–1949), Republic of China and the forces of the Chinese Communist Party (CCP). Armed conflict continued intermitt ...
. To control the price hike, the government tried to introduce a new currency, namely the
Chinese gold yuan The Chinese gold yuan (also known as golden round, golden yuan, among others) was a legal tender currency of China between August 1948 and 1949. It was a method used by the Republic of China government to accumulate gold from its citizens in prep ...
(GY) in 1948, along with price and wage controls, which proved infeasible due to extensive corruption and administrative failures. The hyperinflation eroded popular support for
Nationalists Nationalism is an idea or movement that holds that the nation should be congruent with the state. As a movement, it presupposes the existence and tends to promote the interests of a particular nation, Smith, Anthony. ''Nationalism: Theory, Id ...
across China, contributing to the collapse of the
Republic of China Taiwan, officially the Republic of China (ROC), is a country in East Asia. The main geography of Taiwan, island of Taiwan, also known as ''Formosa'', lies between the East China Sea, East and South China Seas in the northwestern Pacific Ocea ...
on
Mainland Mainland is defined as "relating to or forming the main part of a country or continent, not including the islands around it egardless of status under territorial jurisdiction by an entity" The term is often politically, economically and/or demogr ...
. In contrast, the Communists' ability to control it, aided their rise to power on
Mainland China "Mainland China", also referred to as "the Chinese mainland", is a Geopolitics, geopolitical term defined as the territory under direct administration of the People's Republic of China (PRC) in the aftermath of the Chinese Civil War. In addit ...
. On
Taiwan Taiwan, officially the Republic of China (ROC), is a country in East Asia. The main geography of Taiwan, island of Taiwan, also known as ''Formosa'', lies between the East China Sea, East and South China Seas in the northwestern Pacific Ocea ...
, the Nationalists eventually restored financial stability using the Chinese gold they took to the island during their retreat from the mainland and American financial support.


Origins

In 1905, the Imperial Chinese government founded the Hubu Bank, granting it the authority to issue banknotes. At the time, Chinese leaders, whether conservative or revolutionary, believed that increasing the issuance of banknotes would allow them to outspend their revenues. Although subsequent republican governments sought to unify the national currency, progress was slow by 1937 due to internal conflicts and concerns about foreign intervention, as the plan potentially required substantial foreign loans. As a result,
silver bullion Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes from t ...
still dominated the market, circulated and exchanged in various forms and weights without fixed ratios.


Silver outflow in the 1930s

In 1933, China was the only major country to use a
silver standard The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians 3000 BC until 1873. Following t ...
. The use of silver protected China from the initial impact of the
Great Depression The Great Depression was a severe global economic downturn from 1929 to 1939. The period was characterized by high rates of unemployment and poverty, drastic reductions in industrial production and international trade, and widespread bank and ...
in 1929, as it primarily traded with gold-standard countries, which saw a reduced silver price, effectively
debasing A debasement of coinage is the practice of lowering the intrinsic value of coins, especially when used in connection with commodity money, such as gold or silver coins, while continuing to circulate it at face value. A coin is said to be debased ...
the Chinese currency. Nevertheless, the rising global silver prices in the early 1930s, primarily due to the silver purchase policies in the West, led to significant deflation in China, which discouraged Chinese exports and resulting in continuous
trade deficit Balance of trade is the difference between the monetary value of a nation's exports and imports of goods over a certain time period. Sometimes, trade in services is also included in the balance of trade but the official IMF definition only consi ...
. Cheap agricultural produces flooded into China while silver flowed out.


1935 currency reform

In 1935, the Nationalist government imposed a reform to replace the
silver standard The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians 3000 BC until 1873. Following t ...
with the foreign exchange standard, in which a new paper currency, namely
Chinese National Currency The Chinese National Currency (CNC), often transliterated as fapi or fabi or translated as Legal Tender Note, was the currency of China between 1935 and 1948. Introduced in the 1935 currency reform, the currency was initially issued by the Central ...
(CNC), was created. The government pledged to establish an independent
Central Bank A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
to act as the reserve bank and to create a supervisory committee with responsible members from the business community to oversee the money supply. However, none of these promises was fulfilled. Instead it paved ways for the government to expand money supply without constraints. The initial inflation after abandoning the silver standard was moderate. In Shanghai, wholesale prices dropped 23% from 1931 to 1934, then fell another 1% by 1935, but rose 24% over the following two years. However, in 1937, with the outbreak of the
Second Sino-Japanese War The Second Sino-Japanese War was fought between the Republic of China (1912–1949), Republic of China and the Empire of Japan between 1937 and 1945, following a period of war localized to Manchuria that started in 1931. It is considered part ...
, government spending surged for war efforts. The paper standard and inflation weakened the Chinese as they had to deplete silver reserves, which could have been used for war financing, for maintaining the currency.


Second Sino-Japanese War


Nationalist China

Starting in July 1937, the Japanese military advanced through northern and eastern China, forcing the
Nationalist government The Nationalist government, officially the National Government of the Republic of China, refers to the government of the Republic of China (1912–1949), Republic of China from 1 July 1925 to 20 May 1948, led by the nationalist Kuomintang (KMT ...
to retreat inland and abandon significant manufacturing and agricultural regions, as well as key transport hubs for imports and exports. This retreat, combined with Japanese blockades of Chinese transport routes, led to immediate price surges in Free China. Each successive Japanese victory exacerbated the situation. For instance, the fall of
Wuhan Wuhan; is the capital of Hubei, China. With a population of over eleven million, it is the most populous city in Hubei and the List of cities in China by population, eighth-most-populous city in China. It is also one of the nine National cent ...
and
Guangzhou Guangzhou, Chinese postal romanization, previously romanized as Canton or Kwangchow, is the Capital city, capital and largest city of Guangdong Provinces of China, province in South China, southern China. Located on the Pearl River about nor ...
in late 1938 caused import prices to rise by 72%. The Japanese invasion of Guangxi in late 1939 nearly doubled import prices in
Chongqing ChongqingPostal Romanization, Previously romanized as Chungking ();. is a direct-administered municipality in Southwestern China. Chongqing is one of the four direct-administered municipalities under the State Council of the People's Republi ...
. In contrast, locally produced goods, including food and agricultural raw materials, maintained stable prices until 1938, supported by a robust harvest in
Sichuan Sichuan is a province in Southwestern China, occupying the Sichuan Basin and Tibetan Plateau—between the Jinsha River to the west, the Daba Mountains to the north, and the Yunnan–Guizhou Plateau to the south. Its capital city is Cheng ...
that year. However, from 1939 onwards, the prices of both imported and local goods began to rise in tandem as around five million refugees moved westward into Free China. Since the start of the war, the Chinese government began funding its efforts through the issuance of
war bond War bonds (sometimes referred to as victory bonds, particularly in propaganda) are Security (finance)#Debt, debt securities issued by a government to finance military operations and other expenditure in times of war without raising taxes to an un ...
s, which initially enjoyed strong public support. By late 1938, government spending expanded not only for the war effort but also for reconstruction and the development of inland industries and transport infrastructure. This expansion aimed to reinforce infrastructure and sustain the war effort within the remaining Chinese-controlled territories. Consequently, government spending increased by 33%, despite the administration now managing only about half of the country. However, public confidence in war bonds waned, leading to a decline in bond sales since 1938. Additionally, the limited new taxes, which were not introduced until late 1939, failed to offset the government's excessive spending. As a result, the budget deficit continued to grow unchecked. With limited tax revenue from occupied regions and no bond market, China relied on banking institutions to fund deficits, leading to monetary expansion. Inflation, previously moderate, surged after the
Pacific War The Pacific War, sometimes called the Asia–Pacific War or the Pacific Theatre, was the Theater (warfare), theatre of World War II fought between the Empire of Japan and the Allies of World War II, Allies in East Asia, East and Southeast As ...
began. After the Japanese
attack on Pearl Harbor The attack on Pearl HarborAlso known as the Battle of Pearl Harbor was a surprise military strike by the Empire of Japan on the United States Pacific Fleet at Naval Station Pearl Harbor, its naval base at Pearl Harbor on Oahu, Territory of ...
in 1941, Japan quickly seized the whole of
Shanghai Shanghai, Shanghainese: , Standard Chinese pronunciation: is a direct-administered municipality and the most populous urban area in China. The city is located on the Chinese shoreline on the southern estuary of the Yangtze River, with the ...
and, in 1942, cut off the
Burma Road The Burma Road () was a road linking Burma (now known as Myanmar) with southwest China. Its terminals were Lashio, Burma, in the south and Kunming, China, the capital of Yunnan province in the north. It was built in 1937–1938 while Burm ...
, a crucial supply route for China. This led to a 50% decrease in imports in 1942 compared to the previous year. Despite efforts to compensate with
The Hump The Hump was the name given by Allies of World War II, Allied pilots in the Second World War to the eastern end of the Himalayan Mountains over which they flew military transport aircraft from British Raj, India to Republic of China (1912- ...
air transport route over the Himalayas, by 1944, China was only receiving 6% of the total imports it had in 1937. Additionally, rice production in southern China faced unfavourable outcomes, although wheat and barley production in Henan and Hebei saw slight increases. Due to administrative failures, the Nationalist government struggled to enforce price control measures, despite issuing decrees to this effect. None of the government's strategies addressed the need to curb its own budget deficit, which continued to generate inflation. Although American shipment of gold to China played a critical role in reducing inflation, China's insistence on the official exchange rate of CNC created serious tension with its major ally, the United States. The US Department of the Treasury was also unhappy with the Chinese government's handling of the sale of gold that the United States had supplied to China. American military operations in China also added to the financial difficulty of China. Besides providing food and lodging for US forces, China was responsible for constructing and maintaining military airfields, including costly
B-29 bomber The Boeing B-29 Superfortress is a retired American four-engined Propeller (aeronautics), propeller-driven heavy bomber, designed by Boeing and flown primarily by the United States during World War II and the Korean War. Named in allusion to ...
bases, which far exceeded initial budgets, costing C$79.9 billion CNC. In 1943, the US offered to cover some expenses in US dollars at an official 20:1 exchange rate, but as the Chinese currency devalued sharply, the agreement became unsustainable. By 1945, the currency's value dropped to 1/2,500 of its pre-war level, with even more severe inflation at major bases like
Kunming Kunming is the capital and largest city of the province of Yunnan in China. The political, economic, communications and cultural centre of the province, Kunming is also the seat of the provincial government. During World War II, Kunming was a Ch ...
. This led to the eventual abandonment of the 20:1 rate for payments to US forces. Payments from the US ceased after a final US$45 million settlement for late 1944, forcing China to cover expenses, which accounted for 15%–22% of its fiscal spending. From 1942 to 1945, China disbursed C$246 billion for US military aid, about 7% of its total military expenditures.


Shanghai

Between 1937 and 1941,
Shanghai Shanghai, Shanghainese: , Standard Chinese pronunciation: is a direct-administered municipality and the most populous urban area in China. The city is located on the Chinese shoreline on the southern estuary of the Yangtze River, with the ...
remained prosperous, due to foreign protection. In Shanghai, international connections helped it recover quickly as a trade hub. By 1938, after initial setbacks due to the Sino-Japanese War, imports had rebounded from 3.76 billion yuan in 1938 to 34.1 billion yuan by 1941. Exports also rose from 2.22 billion yuan in 1938 to 19.29 billion yuan in 1941. However, the city constantly saw a shortage of
rice Rice is a cereal grain and in its Domestication, domesticated form is the staple food of over half of the world's population, particularly in Asia and Africa. Rice is the seed of the grass species ''Oryza sativa'' (Asian rice)—or, much l ...
. Traditionally sustained by the surplus from nearby
Zhejiang ) , translit_lang1_type2 = , translit_lang1_info2 = ( Hangzhounese) ( Ningbonese) (Wenzhounese) , image_skyline = 玉甑峰全貌 - panoramio.jpg , image_caption = View of the Yandang Mountains , image_map = Zhejiang i ...
and
Jiangsu Jiangsu is a coastal Provinces of the People's Republic of China, province in East China. It is one of the leading provinces in finance, education, technology, and tourism, with its capital in Nanjing. Jiangsu is the List of Chinese administra ...
provinces, Shanghai had to import more rice from
Saigon Ho Chi Minh City (HCMC) ('','' TP.HCM; ), commonly known as Saigon (; ), is the most populous city in Vietnam with a population of around 14 million in 2025. The city's geography is defined by rivers and canals, of which the largest is Saigo ...
due to conflicts in neighbouring areas. While rice prices stabilised when transport links with inland China were restored in 1938, they surged again in 1939 as the Japanese military began forcibly requisitioning rice from surrounding provinces. By 1940, Shanghai was entirely reliant on rice imports from
Southeast Asia Southeast Asia is the geographical United Nations geoscheme for Asia#South-eastern Asia, southeastern region of Asia, consisting of the regions that are situated south of China, east of the Indian subcontinent, and northwest of the Mainland Au ...
. The economic boom of wartime Shanghai was marked by speculative behaviour and a lack of regulation. People
hoard A hoard or "wealth deposit" is an archaeological term for a collection of valuable objects or artifacts, sometimes purposely buried in the ground, in which case it is sometimes also known as a cache. This would usually be with the intention of ...
ed rice and other materials, which led to daily inflation. By 1940, the price of fine rice had grown to four times the pre-war price. In 1939, stock market activity became uncontrollable, and trading of war-related commodities like cotton drove prices up. Cotton that sold for 1,000 yuan per bale in September 1939 doubled to 2,000 yuan by May 1940. However, the French surrender to Germany in June 1940 led to the collapse of inflated prices. This resulted in the overnight bankruptcy of over 50 import-export firms and steep declines in stock values. Although factories attempted to provide substitutes for workers, these efforts were insufficient to maintain a decent standard of living due to rampant price hikes of rice and rents. This led to a surge in protests, demonstrations, and violent crimes.
Labour movement The labour movement is the collective organisation of working people to further their shared political and economic interests. It consists of the trade union or labour union movement, as well as political parties of labour. It can be considere ...
s increased significantly, rising from 21 instances in 1938 to 282 in 1941. Following the Japanese capture of Shanghai in December 1941, inflation in the city further worsened, unemployment rose, and production declined, as a result of inadequate supplies under the Japanese rationing system.


Occupied China

Despite its military success, Japan did not outline any specific plan for China until late 1938, when the Japanese premier declared the intent to establish a
New Order in East Asia The , also known as the GEACPS, was a pan-Asian union that the Empire of Japan tried to establish. Initially, it covered Japan (including annexed Korea), Manchukuo, and China, but as the Pacific War progressed, it also included territories in ...
. A key aspect of this New Order was currency control. However, Japan failed to allocate sufficient funding to support the issuance of stable, credible currencies that could gain broad acceptance. Additionally, the International Settlement of Shanghai, which was the banking centre of China, maintained its neutral status until 1941. This neutrality allowed a free currency market to continue operating independently of directives from
Tokyo Tokyo, officially the Tokyo Metropolis, is the capital of Japan, capital and List of cities in Japan, most populous city in Japan. With a population of over 14 million in the city proper in 2023, it is List of largest cities, one of the most ...
or
Chongqing ChongqingPostal Romanization, Previously romanized as Chungking ();. is a direct-administered municipality in Southwestern China. Chongqing is one of the four direct-administered municipalities under the State Council of the People's Republi ...
. Japan viewed
north China North China () is a list of regions of China, geographical region of the People's Republic of China, consisting of five province-level divisions of China, provincial-level administrative divisions, namely the direct-administered municipalities ...
as an extension of its homeland, planning to integrate its currency into the yen bloc. The Central Bank of Manchuria, established in 1932, issued
yen The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar and the euro. It is also widely used as a third reserve currency after the US dollar and the euro. T ...
-pegged yuan banknotes by 1935. In east
Hebei Hebei is a Provinces of China, province in North China. It is China's List of Chinese administrative divisions by population, sixth-most populous province, with a population of over 75 million people. Shijiazhuang is the capital city. It bor ...
, under a
puppet regime A puppet state, puppet régime, puppet government or dummy government is a state that is ''de jure'' independent but '' de facto'' completely dependent upon an outside power and subject to its orders.Compare: Puppet states have nominal sover ...
created by the He-Umezu Agreement of 1935, the Japanese circulated Bank of Chosen notes. These notes, used heavily from July 1937, depreciated due to overuse. To stabilise the situation, Japan's puppet the Provisional Government of the Republic of China established the United Reserve Bank in March 1938, issuing new notes that replaced the Bank of Chosen notes. The new notes depreciated due to overprinting, leading to inflation. Japanese businessmen also avoided the currency, as it was difficult to convert even to yen. By December 1938, the British Municipal Council of Tianjin, under Japanese pressure, banned the use of CNC. From 1938 to 1941, the note issuance grew by 450%, exacerbating inflation. The Japanese effectively attracted deposits to these puppet banks by offering higher interest rates. This allowed the Japanese to collect CNC for international trades. Additionally, from 1939 onwards, the Japanese Noborito Research Institute engaged in large-scale counterfeiting, producing approximately 4 billion yuan to bolster Japan's war efforts. In early May 1940, Chongqing gave up on efforts to maintain the value of CNC, following significant Japanese purchases of foreign exchange with CNC. By late 1940, the value of FRB notes had surpassed that of CNC notes. In 1941, FRB notes became the primary currency in occupied northern China. In central and
southern China Northern China () and Southern China () are two approximate regions that display certain differences in terms of their geography, demographics, economy, and culture. Extent The Qinling–Daba Mountains serve as the transition zone between ...
, no immediate effort was made to establish a new currency or banking system, as Japan aimed to treat central and southern China more like foreign territories, similar to
Hong Kong Hong Kong)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...
. The Japanese military used Military Yen. This currency lacked security and was not backed by reserves, but it was difficult to refuse when presented by Japanese forces. By mid-1940, over 100 million yen was reported to circulate, with estimates reaching up to 600 million. The first significant attempt to introduce a puppet bank was the Huaxing Commercial Bank in May 1939, but it lacked reserves and the currency saw limited use. It was only in 1941, under the
Wang Jingwei regime The Reorganized National Government of the Republic of China, commonly described as the Wang Jingwei regime, was a puppet state of the Empire of Japan in eastern China. It existed coterminous with the Nationalist government of the Republic of ...
, that serious efforts were made to introduce a new currency in central China. The Japanese military, reluctant to abandon the use of military yen, was slow to respond to
Wang Jingwei Wang Zhaoming (4 May 188310 November 1944), widely known by his pen name Wang Jingwei, was a Chinese politician who was president of the Reorganized National Government of the Republic of China, a puppet state of the Empire of Japan. He was in ...
's efforts. The depreciation of the CNC slowed in late 1940, giving the Wang regime enough time to secure funding for the new bank, which was eventually founded as the Central Reserve Bank (CRB) in January 1941. In response, Chongqing warned Shanghai businesspeople that accepting the currency would be considered
treason Treason is the crime of attacking a state (polity), state authority to which one owes allegiance. This typically includes acts such as participating in a war against one's native country, attempting to Coup d'état, overthrow its government, spy ...
.
Assassination Assassination is the willful killing, by a sudden, secret, or planned attack, of a personespecially if prominent or important. It may be prompted by political, ideological, religious, financial, or military motives. Assassinations are orde ...
attempts were made by both the Wang regime and the Nationalist government until CNC was fully banned and the Japanese government agreed to replace military yen with CRB notes, following the Pearl Harbor attack. Despite this, the Wang regime struggled to maintain the value of its currency, and was forced to ban exchanges with FRB notes in northern China, allowing currency transfers only through eleven official banks.


Communist China

The Communist-controlled areas suffered less from the inflation as they each issued their own currencies and had a self-sufficient economy. Prior to 1942, the Communist-controlled areas in Shandong primarily relied on CNC, which was exchangeable for
British Pound Sterling Sterling (symbol: £; currency code: GBP) is the currency of the United Kingdom and nine of its associated territories. The pound is the main unit of sterling, and the word '' pound'' is also used to refer to the British currency generall ...
and
US dollars The United States dollar (symbol: $; currency code: USD) is the official currency of the United States and several other countries. The Coinage Act of 1792 introduced the U.S. dollar at par with the Spanish silver dollar, divided it int ...
, with Communist-issued currencies pegged to CNC. However, following the outbreak of the
Pacific War The Pacific War, sometimes called the Asia–Pacific War or the Pacific Theatre, was the Theater (warfare), theatre of World War II fought between the Empire of Japan and the Allies of World War II, Allies in East Asia, East and Southeast As ...
in 1941, the Japanese authorities banned CNC in territories under their control. They dumped hundreds of millions of CNC to acquire essential war supplies, posing a risk of depleting valuable resources from Communist-controlled areas. In response, the Communists decided to prohibit CNC usage. In 1943, the Communist government in Shandong established the Bureau of Industry and Commerce to stabilise their own currency. By purchasing strategic materials and providing financial support to agricultural and industrial production, the Bureau effectively curbed price hikes. Faced with significant inflation, the Communists allegedly planted and sold opium to alleviate their financial difficulty, which supported their currency.


Civil War


Nationalist China

As the war came to a sudden end in August 1945, the Chongqing government was ill-prepared to make the transition to a stable peacetime economy and currency. The military failures of the late war period and the loss of much of its already inadequate income led to a rapid acceleration of hyperinflation. At the end of the war, the industrial output of non-occupied China had dropped to just over 12% of its prewar production. The rural economy was severely affected by manpower shortages, excessive taxes, and natural disasters. However, the Nationalist government continued high military spending to counter the Communist threat. This led to a budget deficit and an increase in currency circulation. From 1946 to 1948, military expenses made up about 60% of total government spending. Despite rising revenues, they fell far short of matching expenditure, leading to a growing deficit that doubled tax revenue after 1946. The shortfall was largely addressed by printing more money. The government's reliance on printing money to fund the war effort led to hyperinflation, with wholesale prices in Shanghai increasing fivefold from September 1945 to February 1946, and then thirtyfold the following year.


1948 currency reform

On 19 August 1948, a currency reform was implemented with the aim of achieving price stability by changing the currency standard. CNC was replaced by the Chinese gold yuan (GY), with an exchange rate set at GY 1 for every CNC$3,000,000. The currency was said to be pegged at four to one dollar, backed by actual government assets. The government advised their citizens to exchange their silver or gold holdings for the new currency. Additionally, commodity prices were frozen at their 19 August levels, requiring government approval for any changes. However, the government continued deficit spending, resulting in an excessive increase in money circulation. The loss of major cities, including
Tianjin Tianjin is a direct-administered municipality in North China, northern China on the shore of the Bohai Sea. It is one of the National Central City, nine national central cities, with a total population of 13,866,009 inhabitants at the time of the ...
,
Xuzhou Xuzhou ( zh, s=徐州), also known as Pengcheng () in ancient times, is a major city in northwestern Jiangsu province, China. The city, with a recorded population of 9,083,790 at the 2020 Chinese census, 2020 census (3,135,660 of which lived in ...
, and
Hankou Hankou, alternately romanized as Hankow (), was one of the three towns (the other two were Wuchang and Hanyang) merged to become modern-day Wuhan city, the capital of the Hubei province, China. It stands north of the Han and Yangtze Rivers w ...
, further lowered public morale. By October 1948, the circulation of the GY had reached nearly eight times the permitted maximum. The continued printing of money meant the reform failed to stabilise prices, leading to the new currency depreciating even faster than its predecessor CNC.


Failed price control attempt

Chiang Kai-shek's son was appointed to oversee the implementation of price controls. However, these measures were only applied in Shanghai and proved effective for just two months. The introduction of the Gold Yuan was accompanied by significant fanfare as a supposed solution to economic problems, but sceptics argued that it merely removed six zeros from the value of the CNC. Initially set at four GY per US dollar, the exchange rate quickly fell under the pressures of inflation and speculation, returning to the CNC level from August 1948 by May 1949.


Currency substitution

The inflation, depreciating exchange rate of Nationalist currencies, and political instability in China created ideal conditions for currency substitution. The US dollar was popular as a store of value, but the open border with Hong Kong and the stability of the
Hong Kong dollar The Hong Kong dollar (, sign: HK$; code: HKD) is the official currency of Hong Kong. It is divided into 100 cents. Historically, it was also divided into 1000 mils. The Hong Kong Monetary Authority is the monetary authority of Hong Kong an ...
(HKD) made it a preferred choice in port cities and southern China. The region's geography made it difficult to control the flow of people, goods, and currency between Hong Kong and China, especially since Hong Kong authorities were hesitant to impose restrictions that could impact their trade hub status. HKD was backed by foreign exchange reserves through a currency board, maintaining stable prices until late 1949. Around two-thirds of the increase in Hong Kong's note issue between 1945 and 1947 thus flowed into China.


Taiwan

During the Second Sino-Japanese War, Taiwan, as a Japanese colony, had to purchase Japanese debts through the purchase by the
Bank of Taiwan The Bank of Taiwan (BOT; ) is a commercial bank headquartered in Taipei, Taiwan. It was established in 1897-1899 as a Japanese policy institution or "special bank", similarly as the Nippon Kangyo Bank (est. 1897), Hokkaido Takushoku Bank (est. ...
. In 1945, the bank offered significant advance payments to the Japanese government, which contributed to the wartime inflation. In November 1945, Taiwan was handed over to the Nationalist government of China. The government attempted to create isolate the former Japanese-controlled areas, such as Taiwan and
Manchuria Manchuria is a historical region in northeast Asia encompassing the entirety of present-day northeast China and parts of the modern-day Russian Far East south of the Uda (Khabarovsk Krai), Uda River and the Tukuringra-Dzhagdy Ranges. The exact ...
, from the mainland, with new currencies. Therefore, they authorised the
Bank of Taiwan The Bank of Taiwan (BOT; ) is a commercial bank headquartered in Taipei, Taiwan. It was established in 1897-1899 as a Japanese policy institution or "special bank", similarly as the Nippon Kangyo Bank (est. 1897), Hokkaido Takushoku Bank (est. ...
to issue a new currency called Taiwan dollar, to replace the existing Japanese currency, yet without reserve backing, in May 1946. The bank soon became a key financier for the
Taiwan Provincial Government Taiwan Provincial Government is the nominal government of Taiwan Province in the Republic of China. Since 2018, its functions have been transferred to the National Development Council (Taiwan), National Development Council and other ministries ...
and gave unsecured loans to state enterprises, which led to stead inflation in 1947 and early 1948. In late 1948, the inflation on Taiwan spiked, as a result of the currency reform on the mainland. Despite the weakening of the Chinese gold yuan, the exchange rate with the Taiwan Dollar remained unchanged, attracting significant capital inflows that inflated the money supply. Adjusting the exchange rate caused an eightfold rise in capital outflow by November 1948, but December saw deflation at 9.01%. The Nationalists' weakening position on the mainland led to capital flight and resource transfers to Taiwan. By November 1948, the limit on gold yuan issuance was lifted due to rising deficits. Economic decline on the mainland further fuelled capital movement to Taiwan, shifting a November outflow of 23,277 million Taiwan Dollars to a major inflow of 214,495 million in December, representing 73.4% of that month's currency increase.


Manchuria

After Japan's surrender in 1945, the Communists focused on making Manchuria their base. In November 1945, they issued their own currency in Manchuria, which later competed with the Nationalist-backed currencies during the Chinese civil war. By late 1947, the Communists gained control by keeping their currency stable, unlike the Nationalists. A major factor behind their success was the prevention of private speculation through the sale of essential goods at controlled, low prices. The General Trade Bureau in Harbin, the only main city they controlled before 1948, helped keep prices steady by releasing goods like cotton cloth into the market.


Communist China

As the Communists advanced, the
renminbi The renminbi ( ; currency symbol, symbol: Yen and yuan sign, ¥; ISO 4217, ISO code: CNY; abbreviation: RMB), also known as the Chinese yuan, is the official currency of the China, People's Republic of China. The renminbi is issued by the Peop ...
replaced the gold yuan as the legal currency at an exchange rate of 100,000:1 on October 1, 1949. Military expenditures in 1949 drove significant renminbi issuance, contributing to high inflation, although not as extreme as in the Nationalist China. By March 1950, stabilisation efforts were underway, despite wholesale prices being over 200 times their mid-1949 levels. Fiscal data for 1949 was fragmented, as there was no unified national budget, with budgetary details only available for regional administrations. In northern China, 69.5% of April 1949 expenditures came from deficit spending, with money issuance exceeding stable levels by 14-16 times. Fiscal pressures increased as the Communists pushed in the south. Manchuria reported a balanced budget, while Shanghai had severe deficits, peaking at over 87% of expenditures in mid-1949. National estimates for the 1949 deficit suggest it was substantial, ranging from 47.74% to as high as two-thirds of total spending. To combat inflation, the Communist regime used a variety of strategies focused on indexation, state-controlled trade, and fiscal consolidation.


Commodity control

Introduced in April 1949, the parity deposit system indexed bank deposits to a commodity unit representing local consumption patterns. This protected the real value of deposits from inflation and helped stabilize the velocity of money, reducing the pressure of panic spending. To ensure real wages kept up with inflation, the government implemented a wage parity system in 1949, later replacing it with "wage points" in 1950. These points represented shares of a basket of goods, linking wages to the cost of essential items like food, cloth, and fuel. State Trading Companies were central to controlling inflation by manipulating the supply of key commodities like grain, cotton, and coal. The state trading companies purchased goods through taxes, state enterprises, and private sector output, and used these resources to intervene in urban markets. By doing so, they sought to lower prices, withdraw currency from circulation, and combat speculation. While their operations were complex and often met with resistance, especially in rural areas, they did help stabilize urban prices to some extent.


Capital control

On May 28, 1949, the Shanghai Military Control Commission declared the Renminbi as the only legal currency. The decree required all financial transactions, tax payments, and contracts to use the Renminbi, banning silver yuan, gold yuan, and foreign currencies for settlements. The conversion of gold yuan to Renminbi began on May 30 at a rate of 1 Renminbi to 100,000 gold yuan and concluded by June 5, with over 35 trillion gold yuan converted, effectively eliminating it from Shanghai. Speculation on the silver yuan surged as many businessmen doubted the Renminbi's stability and expected it to fail like the gold yuan. Between June 1 and June 10, 1949, the black market price of the Yinyuan tripled, sparking inflation. At its height, silver yuan trading was widespread, and the Renminbi was either rejected or only partially accepted in the wholesale market. To stabilise the Renminbi, Mayor Yi Chen's government released 410,000 silver yuan into the market on 5–6 June, but this did not reduce prices. On 10 June, stricter measures were implemented: authorities seized the Securities Exchange Building—an epicentre of speculation—and arrested over 1,000 dealers, with more than 200 receiving punishment. The silver yuan price dropped rapidly, and speculation ceased.


Budget control

Despite the state trading companies' role, the government's fiscal policies were crucial. The March 3, 1950 fiscal consolidation helped control government spending, which had been inflated by military costs and public sector wages. By constraining spending and balancing the budget, the government aimed to reduce inflationary pressures, leading to a gradual stabilisation of the currency and prices by mid-1950. In March 1950, a government decree required state organs and military funds to be deposited in state banks, limiting unnecessary spending and curbing the velocity of money. This measure, combined with a sharp drop in private bank deposit turnover, helped reduce inflation and prevent further price hikes.


Aftermath


Communist revolution of China

Wartime inflation was particularly challenging for salaried individuals like teachers, bureaucrats, and military officers. However, the severity of the issue escalated significantly in the final stages of the war. For those with fixed incomes, survival often led to corruption. Hyperinflation also undermined the appeal of modern banking, as people chose to hold tangible assets such as gold, silver, jewellery, foodstuffs, and foreign currencies to safeguard against the worsening inflation. These severe economic conditions eroded the support of the Nationalists, especially among the urban middle class, which had traditionally been its base. As inflation worsened, disillusionment with Chiang Kai-shek's economic policies grew, leading to widespread hostility or indifference toward the Nationalists. The government's attempt to control inflation through administrative measures only worsened the situation, making the Nationalist policies extremely unpopular and causing it to lose credibility and support.
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...
noted that bureaucracy, corruption, and poor financial management, which caused the collapse of the money market and hyperinflation, were significant factors in the Nationalists' defeat in the civil war. The severe hyperinflation in China, coupled with the Communists' ability to control it, aided their rise to power. During the inflation in the 1960s and late 1980s, the Communist leaders exhibited significant aversion of inflation.


Restoring financial stability on Taiwan

Starting in late 1948, Chiang Kai-shek covertly moved China's gold reserves from Shanghai to Taiwan, estimated at 113.6 to 115.2 tonnes, as his government gradually lost the civil war. British journalist George Vine witnessed the transfer on 2 December 1948 from her room at the
Peace Hotel The Peace Hotel () is a hotel on The Bund in Shanghai, China, which overlooks the surrounding areas. The hotel has two different buildings. The Sassoon House, originally housed the Cathay Hotel and is today the Fairmont Peace Hotel run by Fairmo ...
. Although his account was met with scepticism, it sparked a nationwide
bank run A bank run or run on the bank occurs when many Client (business), clients withdraw their money from a bank, because they believe Bank failure, the bank may fail in the near future. In other words, it is when, in a fractional-reserve banking sys ...
. Later, the
New Taiwan dollar The New Taiwan dollar (code: TWD; symbol: NT$, also abbreviated as NT), or simply the Taiwan dollar, is the official currency of the Republic of China (Taiwan). Usually, the $ sign precedes the amount, but NT$ is used to distinguish from othe ...
was introduced, replacing the old Taiwan dollar at an exchange rate of one to 40,000. The estimated 800,000 taels of gold, along with US$10 million brought from Shanghai, provided essential stability to a nation that had experienced severe hyperinflation since 1945. Due to the relocation of the central government to Taiwan at the end of 1949, the Bank of Taiwan had to make even more advance payments for the central government agencies. Despite the reform on Taiwan dollar, the budget deficit continued to worsen, placing even greater pressure on prices. Yet, the outbreak of the Korean War on 25 June 1950 led to the immediate resumption of US aid to Taiwan. This assistance allowed the Nationalist government to reduce the budget deficit and ultimately bring an end to the hyperinflation.


See also

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Chinese Communist Revolution The Chinese Communist Revolution was a social revolution, social and political revolution in China that began in 1927 and culminated with the proclamation of the People's Republic of China (PRC) in 1949. The revolution was led by the Chinese C ...
*
Economic warfare Economic warfare or economic war is an economic strategy used by belligerent states with the goal of weakening the economy of other states. This is primarily achieved by the use of economic blockades. Ravaging the crops of the enemy is a classic ...


References


Citations


Sources

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Further reading

* * * {{Chinese Civil War Hyperinflation China in World War II Chinese Civil War Economic history of China Economic history of Taiwan Economic warfare Aftermath of World War II in China Economic history of World War II Chinese Communist Revolution