Last Updated on August 27, 2024
The Renminbi translates to “people’s currency” and is the currency issued by the Communist Party of China.
The term Renminbi refers to the name of the currency in the broad sense, while yuan is the name of one unit of currency.
The Renminbi was first issued towards the end of the Republic of China in Communist controlled areas before becoming the nation’s money when the CCP took control of the country.
As the Renminbi becomes increasingly important in global finance and as it looks like there might be changes to the global monetary system, a historical understanding of the Renminbi would be helpful.
Money in China before 1949
The Chinese Communist Party took power from the Republic of China in 1949. The Republic had been established in 1912 at the fall of the Qing dynasty.
The monetary system in China during the Qing dynasty was disjointed.
China was on an informal silver standard but there were significant problems. China did not mint its own coins. Instead uncoined silver, known as the tael circulated alongside silver fragments and foreign silver coins.
One of the early actions of the Republican government under Yuan Shikai was to attempt to bring some order and control to the monetary system.
In 1913 he established the silver yuan and stipulated that it would be 0.72 of an ounce with 89% purity, the remainder being copper.
In a system known as “free banking” private banks were able to issue paper money but this paper was convertible to silver. Silver was still the main currency and the informal reserve standard. The paper notes were issued by the banks themselves and depended on the creditworthiness of the bank.
However despite these efforts the reforms were largely ineffective and the attempt to centralise control of the money supply failed. The Chinese government did not have effective control of the country, which was fragmented and ruled by rival warlords, and therefore did not have the strength to impose its will.
The tael still circulated as did other silver fragments, copper coins and both foreign and domestic bank notes.
Things changed in 1927 when the Nationalist Government emerged. One of their aims was to bring an end to free banking and bring the money supply under the control of the central government.
In 1928 a national conference explored considered this reform and decided to replace the silver tael with a silver dollar or yuan with the hope of eventually moving to a gold-exchange standard.
Also in 1928 a central bank along western lines was set up – the State Bank of the Republic of China. Although at that stage it did not yet have monopoly power over the money supply.
This change from silver tael to silver yuan took place in 1933 with the yuan standardised at 26.697g as the currency of the entire country. This moved China from an informal silver standard to a formal silver standard. Private banks were still able to issue their own banknotes backed by the silver yuan.
Jin Xu, in the book The Empire of Silver, explains the significance:
“It was a small step in China’s currency system, but a great leap in Chinese history. More than 2,000 years after the king of Lydia minted gold and silver currency, China finally bade farewell to the tael and began its own coin-minting era with the yuan. The conversion to the dollar meant that the backward silver tael system had finally retreated from the historical stage, and this greatly facilitated the integration of the national market.”
China was unique in being the only country on the silver standard. The world had moved towards a gold standard from the 1870s which had the effect of demonetising silver and lowering its price.
This was detrimental in lowering the wealth of the nation, although the devaluation did help Chinese exports.
During the Great Depression as countries abandoned the gold standard the prices of both gold and silver dropped. Between 1928 and 1932 international silver prices fell by 50%. But in China prices were higher than the international market, therefore this led to an enormous inflow of silver, which helped China weather the storm of the Great Depression.
In 1934, in order to support domestic producers, the US passed the Silver Purchase Act where the US government committed to purchasing vast quantities of silver. They would continue to do so either until the market price reached a certain point, $1.29 oz, or until the monetary value of silver stock held by the Treasury reached one-third of the monetary value of the gold stock.
This had the effect of sending the silver price soaring and triggered deflation in China. Higher prices on the international market meant silver now flowed out from China and the money supply contracted.
On top of this, Japan had invaded Northern China in 1931 and the threat of war lingered over the Chinese government.
Under these circumstances in 1935 the Chinese government took over control of the banking sector. It abandoned the silver standard replacing it with an unconvertable paper currency i.e. a fiat currency, known as the fabi.
While the original plan had been to move from a silver standard to a gold standard, changing events in the world and the decision of other countries to abandon gold prompted the Chinese to go straight from silver to paper.
The fabi was designated as legal tender and all silver dollars and uncoined silver had to be handed over and exchanged for fabi. The authority to issue currency was only allowed to the central bank and the two largest pseudo state banks who were nominally independent but in which the government had forcibly taken a majority shareholding.
The fabi was initially pegged to the British Pound, while US Dollars, purchased with silver, were the reserves.
In 1937 Japan extended its attack to the rest of China. The Chinese Communist Party and the Nationalist government, who had been engaged in a civil war, were forced to put their differences apart and come together to resist the Japanese.
The new unified currency extended the power of the Chinese government and helped to finance the war effort. But a monopoly issued paper currency, unconvertable into hard money, comes with the risk of inflation.
While initially the takeover of the banking sector and issuance of the new currency had been to curb deflation it was not long before the ill of inflation took hold, which would ultimately lead to the downfall of the Nationalist Government and the victory of the communists.
Jay Habegger explains:
“The currency reform destroyed the private banking system which had served the Chinese economy well, and placed control of the currency in the hands of a corrupt and inept government. Inflation began almost immediately. Eventually, the inflation became so severe that it helped bring about the collapse of the Nationalist regime. Thus, monopoly power over the currency proved fatal to the Chinese economy, since the inflation that [Finance Minister] Kung was “determined to avoid” occurred with a severity and length unparalleled in history. “
During the early part of the war of resistance against Japan the fabi remained fairly stable but soon enough the government resorted to money printing to keep the war effort alive. The fabi tipped into inflation and later hyperinflation.
In 1937 at the start of the war the money supply was 3.6 billion fabi. By the end of the war in 1945 it was 1506.6 billion fabi.
Prices rose astronomically, fueled by money printing, wartime shortages and price controls.
The restarting of the Civil War with the Communists brought about an even worse inflation. The money supply continued to increase, reaching 399,091.6 billion fabi by July 1948.
In August 1948 the government replaced the fabi with the jinyuanquan also known as the gold yuan. The new currency was backed 40% by gold, silver and foreign currency and 60% with negotiable securities.
Private ownership of gold, silver or foreign currencies was prohibited and needed to be exchanged for the new currency.
Wages, salaries and commodity prices were all frozen and the stock market was also closed.
Writing in October 1948 J.R. Kaim notes:
“General Chiang succeeded in making it clear to pro- Government elements that this was the last card the Kuomintang could play; he also showed his adversaries that the failure of the new currency could destroy the power of a government they wanted to displace.”
This proved prophetic as the new currency failed. The government kept the printing presses running and the new currency suffered the same fate as its predecessor. The suffering wrought on the middle class by the hyperinflation destroyed the last bastion of Nationalist support and morale collapsed.
Richard Ebeling explains:
“It would be an exaggeration to say that China’s Great Inflation was the primary cause for the defeat of the Nationalist government and the victory of the Chinese communists. The Nationalist Party was dictatorial in its structure, notorious for its corruption and abuse of political power, and often as ruthless as the communists in its use of military force. But it is nonetheless true that whatever basis of popular support Chiang’s government might have had against the communists was undermined by the inflation. It destroyed the wealth of the Chinese middle class and drove some segments of the rural population into severe poverty.”
By the end of 1949 the Nationalist Government had retreated to Taiwan and the Communist Party won the civil war.
The Emergence of the Renminbi
Towards the end of the civil war the Communist Party decided to implement their own currency in the northern areas that they controlled.
In December 1948 the North China Bank, the Beihan Bank and the Northwest Peasants’ Bank were merged to form the People’s Bank of China, who issued the Renminbi. It was not tied to a specific weight of gold or silver.
After winning control of the country in 1949 The Communist Party managed to bring the inflation that was inherited from the Republic of China under control. In 1955 there was a second issue of Renminbi and its exchange rate to the US Dollar was fixed at 2.46 yuan to the dollar.
Up until 1978 when China began opening her economy after Mao’s death, the economy was centrally planned. Therefore the People’s Bank of China did not function like a central bank in the Western sense. Instead it was a central bank, a specialised bank, an ordinary bank and a nonbanking financial institution all in one.
Mao’s successor Deng Xiaoping began liberalising and opening up China’s economy in the late 1970s and the 1980s.
Between 1979 and 1983 monetary policy was still managed along command economy lines. However in 1984 the People’s Bank of China adopted the role of a western central bank and changed to macroeconomic regulation, abandoning the central planning system.
The Renminbi had been significantly overvalued under the command economy and a series of six devaluations between 1983 and 1993 aimed to bring the value of the currency more in line with market realities. This was necessary to engage in international trade. Over that time the Renminbi fell from 2.8 yuan the dollar to 5.32 yuan to the dollar.
In 1994 the Chinese government devalued the currency further to 8.72 yuan to the dollar, raising the ire of the United States. The People’s Bank of China set a range within which it would allow the Renminbi to float.
In response to the 1997 Asian Financial Crisis the Renminbi was pegged to the US Dollar at 8.28 yuan to the dollar.
In the early 2000s under Federal Reserve Govenor Alan Greenspan, the US began its policy of ultra low interest rates in an attempt to prevent deflation.
Jim Rickards argues this sowed the seeds of a currency war that would later emerge between the US and China as both countries sought to keep the value of their currency low.
In 2005 China ended the peg to the US Dollar and revalued the Renminbi to 8.11 yuan the dollar.
The ending of the US Dollar peg did not mean the Renminbi was a freely floating currency. Instead the Chinese government managed it against a basket of currencies that include the dollar, euro and yen.
Subsequent revaluations after 2005 brought the Renminbi up to 6.40 yuan to the dollar by 2011 in what could be described as a managed float.
The Renminbi As A Reserve Currency
In 2016 the Renminbi was added to the IMFs basket of reserve currencies that make up its Special Drawing Right (SDR).
Yet the Renminbi is still not utilised as a global currency in proportion to China’s status as the world’s second largest economy. This is something that the Chinese Communist Party wants to change and they are gradually working to increase the internationalisation of the Renminbi in a slow and gradual decades long process.
The inclusion in the SDR basket was possible because of a range of reforms the Chinese government undertook that satisfied the IMF. However, it still has further reform necessary in order to actually fulfil the role of a global reserve currency.
Key to this is the Chinese government’s unwillingness to allow the Renminbi to freely float at a market exchange rate. The IMF may include the Renminbi in its basket but that doesn’t necessarily mean the rest of the world will automatically accept it as part of their reserves, although central banks do hold small amounts of Renminbi denominated assets.
China will also need to fully open its capital account, strengthen its financial markets, improve its regulatory framework and improve its political and legal transparency if the world is to have the confidence to accept the Renminbi as a global reserve currency.
Eswar Prasad explains what China needs to do in the financial sphere:
“Investors in a country’s sovereign assets must have faith in its commitment to low inflation and sustainable levels of public debt, so the value of the currency is not in danger of being eroded… A country must have broad, deep, and liquid financial markets so that international investors can access a wide array of financial assets denominated in its currency… The recent growth and opening-up of China’s debt markets suggest that the pace of the country’s financial market development is consistent with its intention to gradually increase acceptance of its currency as an international currency. Moreover, to satisfy their demand for relatively safe RMB-denominated assets, foreign investors—both official and private—will eventually need to be given greater access to China’s debt markets if the RMB is to become a significant reserve currency.”
He also explains why the lack of political reform is holding them back:
“While the Chinese leadership is pursuing financial liberalization and limited market-oriented economic reforms, it has unequivocally repudiated political, legal, and institutional reforms. China’s government has, if anything, rolled back freedom of expression, the rule of law, and the independence of key institutions from government interference. In short, while the RMB has the potential to become a significant reserve currency, it will not attain “safe haven” status in the absence of far-reaching reforms to China’s institutional and political structure. Such reforms are apparently not in the cards.”
What happens to the Renminbi in the future will partially be down to possible further reforms made by the Chinese Communist Party. However, it will also be largely down to how the international monetary system develops over the next few decades.
It’s a very commonly held view amongst hard money commentators that the current system of US Dollar dominance is unsustainable and will need to change.
Just what that change is going to be is still to be worked out. Some suggest that gold may be remonetised with a return to the gold standard.
Potentially the market will choose Bitcoin as a new monetary standard.
Others suggest that there will be multiple reserve currencies, with the Renminbi having a significant role to play in that scenario.
Jim Rickards is critical of the multiple reserves view, arguing that multiple reserve currencies wouldn’t work without an anchor to gold or an anchor to a dominant reserve currency that itself is anchored to gold.
China has been buying up significant amounts of gold over the last decade. And it is suspected that they own much more than is officially published. Yet while the US is still the holder of the largest gold reserves in the world, the larger China’s position in gold the more influence she will have in the shape of any developments in the monetary system
What history does show is that when the global reserve currency does change, it is not something that happens overnight but is a slow process that takes place over decades. The old system is often maintained for a while even as economic power in the world shifts and then the monetary system catches up to meet the new reality. This is what happened with the pound sterling handed over the reigns to the US Dollar.
So the story of the Renminbi is yet to unfold fully. How it plays out in the future is uncertain. But one thing is highly probable – the rise of the Renminbi will coincide with the declining status of the Us Dollar.
Conclusion
China had a long history of silver as money and had experienced several paper currency disasters, the most recent being the inflationary experience of 1935-1949 that contributed to the downfall of the Nationalist government.
The Renminbi came into existence late in the Chinese Civil War in Communist Party controlled areas and became the national currency when the CCP took power.
The Renminbi has changed and developed over time as Communist China has moved from a command economy to a more market based economy. It has changed again as China has become a dominant economic power and has risen as a global power.
Right now we are still in the process of China trying to internationalise the Renminbi and have it accepted as a global reserve currency.
How successful they are at that and the future path of the Chinese currency remains to be seen.
Image Credits
Silver Yuan is licensed under CC-BY-SA 3.0
Fabi is in the public domain
Gold Yuan is in the public domain
100 Yuan by Eric Prouzet on Unsplash
Sources
Kaim, J.R. “China’s New Currency.” Institute of Pacific Relations 17, no. 20 (October 20, 1948): 238–41. https://doi.org/10.2307/3022213.
Quddus, Munir, Jin-Tan Liu, and John S. Butler. “Money, Prices, and Causality: The Chinese Hyperinflation, 1946–1949, Reexamined.” Journal of Macroeconomics 11, no. 3 (June 1989): 447–53. https://doi.org/10.1016/0164-0704(89)90070-0.
Rickards, James. Currency Wars. New York: Penguin Group, 2011.
Xu, Jin. Empire of Silver: A New Monetary History of China. New Haven: Yale University Press, 2021.
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