Chinas Inflation From Mid 1960s To 1970s


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Chinas Inflation From Mid 1960s To 1970s

  1. 1. Inflation in China Dr. Zhu Jia Ming WS 2008 Kathrin Gajda, Julia Ritirc It‘s the economy, stupid! The economic system during the cultural revolution and its impacts
  2. 2. <ul><li>The Adjustments, 1961-1965 </li></ul><ul><li>High Tide of the Cultural Revolution 1966-1976/78 </li></ul><ul><li>Resumption of Systematic Growth, 1970-1974 </li></ul><ul><li>Gang of Four 1974-1976 </li></ul><ul><li>Foundations of the Chinese Monetary System (Ciccia) </li></ul><ul><li>The People‘s Bank (ciccia) </li></ul><ul><li>Savings and loans (ciccia) </li></ul><ul><li>Price System (Julia) </li></ul><ul><li>Question </li></ul>
  3. 3. The Adjustment, 1961-1965 <ul><li>Readjustment </li></ul><ul><li>Consolidation </li></ul><ul><li>Reinforcement </li></ul><ul><li>Improvement </li></ul>
  4. 4. The Adjustment, 1961-1965 <ul><li>AGRICULTURE </li></ul><ul><ul><li>Material incentives for workers and peasants: </li></ul></ul><ul><ul><li>Support for agriculture </li></ul></ul><ul><ul><li>Decentralization of production decision making and income distribution within the commune structure </li></ul></ul><ul><ul><li>Technological advancement in agriculture </li></ul></ul><ul><li>INDUSTRY </li></ul><ul><ul><li>Planning rather than politics guided production decisions, material rewards </li></ul></ul><ul><ul><li>Employment in industrial sector curtailed </li></ul></ul><ul><ul><li>Industrial investment in branches that support agricultural sector </li></ul></ul><ul><ul><li>10.6% average growth of industrial output </li></ul></ul><ul><ul><li>Reviving plants that operated below capacities after economic collapse </li></ul></ul><ul><ul><li>Spread of rural, small-scale industries </li></ul></ul>
  5. 5. High Tide of the Cultural Revolution, 1966-1976/78 <ul><li>Agricultural production stagnated </li></ul><ul><li>Disruption of transportation </li></ul><ul><li>Shortages of raw materials </li></ul><ul><li>Lack of skilled personnel </li></ul>
  6. 6. Rate of changes of Price, Money Supply, Real National Income and Nominal Wage in China (All in Percentage) Yi Gang, Money, Banking, and Financial Markets in China. Westview Press, San Francisco/Oxford, 1994, S.149.
  7. 7. Resumption of Systematic Growth 1970-1974 <ul><li>1970-74 </li></ul><ul><ul><li>Leadership of Premier Zhou Enlai, balanced development </li></ul></ul><ul><ul><li>Foreign contacts were expanded </li></ul></ul><ul><ul><li>imbalances in the capacities of different industrial sectors </li></ul></ul><ul><ul><li>need for increased supplies of modern inputs for agriculture </li></ul></ul><ul><ul><li>increase in investment, </li></ul></ul><ul><li>-> Industrial output grew at an average rate of 8% a year </li></ul>
  8. 8. Some Production Data (in million metric tons unless otherwise specified) Gurley John G, China's Economy and the Maoist Strategy. Monthly Review Press, New York/London, 1976, S. 235.
  9. 9. Gang of Four, 1974-1976 <ul><li>Primacy of nonmaterial, political incentives </li></ul><ul><li>Radical reduction of income differences </li></ul><ul><li>Elimination of private farm plots </li></ul><ul><li>Strengthening of central planning </li></ul><ul><li>Denouncement of foreign technology </li></ul>
  10. 10. China's Exports, Imports, and GNP For Selected Subperiods (in millions of U.S. dollars) Gurley John G, China's Economy and the Maoist Strategy. Monthly Review Press, New York/London, 1976, S. 163.
  11. 11. Inputs and outputs of China's agriculture Gurley John G, China's Economy and the Maoist Strategy. Monthly Review Press, New York/London, 1976, S. 248.
  12. 12. Foundations of the Chinese Monetary and Financial System I <ul><li>Control of Liquidities and credit Control (1949-1951) </li></ul><ul><li>1945 value of revolutionary currency was superior to that of the Guomidang </li></ul><ul><li>for healthier monetary situation created ist own apparatus: Creation of the People‘s Bank by merging three banks controlled by the CPC (Bank of Northern China, Bank of the North Sea and the Bank of the Peasants of the Northwest) accomplished in 1948! </li></ul><ul><li>in 1949 and 1950 People‘s Bank absorbed banks of the nationalist government (in particular Bank of China, Nanjing regimes central Bank!) </li></ul>
  13. 13. Foundations of the Chinese Monetary and Financial System II <ul><li>Measures to secure People‘s Bank I : </li></ul><ul><li>- 1949 Freezing of 20% of deposits at the People‘s Bank, limit approved credits ot 50% of the deposits, forbid withholding of participation in commercial or industrial societies, establish a minmum capital, fix rates of interest on deposits as well as on loans </li></ul><ul><li>- In 1950 Bank of China fell under direction of the People‘s Bank in order to undertake overseas financial transactions </li></ul><ul><li>- Control of circulation of currency through regulations, set in 1950: fix maximum amount of cash that nationalizied industries could withhold, order to deposit surplus with the People‘s Bank </li></ul>
  14. 14. <ul><li>Measures to secure People‘s Bank II </li></ul><ul><li>1948 regulation for private Banks: </li></ul><ul><li>No power for currency affairs, prohibition to buy or sell </li></ul><ul><li>foreign currency reserves, prohibition for market </li></ul><ul><li>speculations, silver or gold reserves must be stored at </li></ul><ul><li>People‘s Bank </li></ul><ul><li>From 1949 to 1950 private banks decreased from 1083 </li></ul><ul><li>to 213 banks </li></ul><ul><li>Shanghai f.e. deposits and savings on privat banks # </li></ul><ul><li>decreased from 1949 with 62,9% to 44% in 1950, 23% in </li></ul><ul><li>1951 and 0% in 1953 </li></ul>
  15. 15. The People‘s Bank <ul><li>Functions of the People‘s Bank: </li></ul><ul><li>- issuing department, State bank (not central bank because its controlled by the state and not an indipendent institution), a credit center for enterprises, system of financial compensation and an agency of economic and financial control </li></ul>
  16. 16. The People‘s Bank resources <ul><li>Consists of profits not paid to the State and of sums assigned to capital accounts </li></ul><ul><li>Profits from capital allocations and budgetary subsidies intended to finance loans for agricultural equipment </li></ul><ul><li>Resources from the issue of currency </li></ul><ul><li>Most important funds from deposits made by the state, public services and private individuals </li></ul><ul><li>Surplus from working operations is partly paid to the state in form of tax and the remainder is put into reserve or allocated to capital accounts </li></ul>
  17. 17. The People‘s Bank public services I <ul><li>Issuing departments, means printing notes, therefore responsible for circulating the means of payment throughout the country </li></ul><ul><li>Watches over monetary circulation and seeks to control savings and maintain the stability of money </li></ul><ul><li>_______________________________________ </li></ul><ul><li>Exchange operations are not carried out by the People‘s Bank but by the Bank of China which since 1950 is under the control of the People‘s Bank </li></ul><ul><li>The Bank of China further administers the assets of China in foreign currency and accounts of deposits of Overseas Chinese and distributes credit for export </li></ul><ul><li>Exterior financial relations are not directly dependent on the People‘s Bank but instead also on the Bank of China </li></ul>
  18. 18. The People‘s Bank public services II <ul><li>Holds accounts of administrative departments </li></ul><ul><li>Centralizes proceeds from taxes and funds paid by nationalized enterprises </li></ul><ul><li>It is NOT responsible for collecting taxes, which is carried out by specialized administrative departments. </li></ul><ul><li>Fixes regulations of commercial operations </li></ul>
  19. 19. Economic Functions of the People‘s Bank I <ul><li>Seeks to match the money supply to the quantity of available goods. </li></ul><ul><li>Arrangement of money supply is planned by exact examination of credit demands and systematic encouragment of individual saving </li></ul><ul><li>Controls financial situation of enterprises and returns of expenditures, ensures liquid holdings do not exceed forecast amount and that credit has been effectively utilized. </li></ul><ul><li>Bank has adviser role for enterprises </li></ul><ul><li>If expenditure does not correspond to forecasts, bank can demand immediate repayment of the granted credit </li></ul>
  20. 20. Economic Functions of the People‘s Bank II <ul><li>Since 1968 bank conducts policy of active encouragement of savings in order to limit increase in demand </li></ul><ul><li>Though interest rates relatively low, returns are tax free and stability of purchasing power has been secured since 1955 </li></ul>
  21. 21. Savings I <ul><li>State administrative departments, public institutions, enterprises under public control , since 1950 obliged to deposit funds beyond a certain cash holding at the People‘s Bank. </li></ul><ul><li>Self governing rural collectives, production groups, peoples commmunes are not under this regulation, free to total amount of cash </li></ul>
  22. 22. Savings II <ul><li>Commercial settlements between enterprises, payment of taxes and profits to the state are only made in form of transfer </li></ul><ul><li>Salaries, pension and certain agricultural revenues are paid in cash </li></ul>
  23. 23. Savings III <ul><li>Only possible form of investment for the people is a saving deposit at the People‘s Bank </li></ul><ul><li>Payments made with complete freedom concerning amount and frequency </li></ul><ul><li>Contrary to other communists countries chinese People are not obliged to put a percentage of their salaries, pensions or agricultural revenue into saving account - savings are furthermore transferable to heirs. </li></ul><ul><li>Banking secrecy is said to be guaranteed on all accounts </li></ul><ul><li>Due to the Great Leap Forward and the Cultural Revolution, savings between 1957 and 1973 show no crucial increase. </li></ul><ul><li>Interest rate is profoundly lower than in western countries </li></ul>
  24. 24. Loans I <ul><li>Provision made in 1950 and 1951 concerning financial organization of State enterprises remain essentially in use (information is based on literature from 1973!) </li></ul><ul><li>There do not exist shares, stocks or direct loans granted by enterprises to other production units. </li></ul><ul><li>All financial needs and industrial investments are directly controlled by the state budget </li></ul>
  25. 25. Loans II <ul><li>Industrial or commercial enterprises can receive capital for external expenditures, the acquisition of machines and the purchase of materials from the state budget </li></ul><ul><li>The People‘s Bank on the other hand can give out short term loans to cover transitory treasury needs for the acquisition of raw materials or the stock of finished products </li></ul><ul><li>Only enterprises dependent on the State or public collectives can obtain such credits. </li></ul><ul><li>Civil service departments, private enterprsies or private individuals cannot </li></ul>
  26. 26. Loans III <ul><li>In order to obtain a loan an enterprise must fulfill two conditions: </li></ul><ul><li>- its treasury plan must be approved by the Bank and its financial needs must then correspond to certain types of transactions </li></ul><ul><li>Loans to the agricultural sector represent only limited part of the credits of the People‘s Bank </li></ul><ul><li>- Loans from 1952 to 1962 for finance of less then 30% of an enterprise needs, during the Great Leap forward up to 100%, from 1973 on up to 70% </li></ul>
  27. 27. Price System <ul><li>Industrial sector dominated by state-owned enterprises </li></ul><ul><li>agricultural sector organized by communes </li></ul><ul><li>classification: rural and urban consumer </li></ul><ul><li>pricing bureaus </li></ul><ul><li>Resource allocation determined by administrative channels </li></ul><ul><li>Prices played limited role in resource allocation </li></ul><ul><li>Functions of planned price system in the CPE </li></ul><ul><ul><li>profitability of an enterprise </li></ul></ul><ul><ul><li>Income distribution: </li></ul></ul>
  28. 28. Price System <ul><li>Low prices: energy, raw materials and transportation sector </li></ul><ul><li>High prices: products of processing industries relatively high, prices of agricultural products low relatively to industrial products </li></ul><ul><li>Industrialization needed a huge amount of capital </li></ul><ul><li>exploitation of peasants -> main source of accumulation </li></ul><ul><li>Government monopolized buying and selling of agricultural products </li></ul><ul><li>Price level increase of only 0, 7% between 1952 and 1978 </li></ul><ul><li>-> difficult to respond to any external or internal shocks </li></ul>
  29. 29. Rate of changes of Price, Money Supply, Real National Income and Nominal Wage in China (All in Percentage) Yi Gang, Money, Banking, and Financial Markets in China. Westview Press, San Francisco/Oxford, 1994, S.149.
  30. 30. Discussion point <ul><li>1958-1978 : No domestic or foreign borrowings, foreign currency reserves </li></ul>