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Unremitting Effort to Stabilize Shanghai Foreign Exchange Market (1939 - 1941)


 

Soon after the break out of the Anti-Japanese War, funds escaped from Shanghai to overseas and foreign exchange demand soared. In mid-November 1937, tendency of foreign exchange evasion became even more violent and foreign exchange market supply could hardly keep pace with the demand when Shanghai, Nanjing and Hangzhou were occupied by the Japanese. Foreign exchange supply of the Central Bank, Bank of China and Bank of Communications reached GBP 0.5 million per week for the first half of November, which surged to GBP 1.5 million per week in the latter half of the month.

China Joint Preparatory Bank, established by North China Puppet Government, issued inconvertible banknotes and then banned circulation of legal tender within a given deadline, making this part of notes and bills flood into Shanghai. The government carried out import foreign exchange management by promulgating Measures for Foreign Exchange Purchasing Application and Verification, as well as Regulations for Foreign Exchange Purchasing Application and Verification to prevent exchange arbitration by the Japanese. Under these provisions, the Central Bank was in charge of verification and supply of all commercial foreign exchange on the basis of weekly approval, except for foreign exchange used by government offices which would be approved by the Ministry of Finance. The Central Bank strictly executed the approval criteria for foreign exchange, with only 18% of the application amount being approved in May, 8% in June and 3% in July. Importers and speculators turned to the market for purchasing, which caused repeated shrink of Shanghai foreign exchange market. On June 13, the listed sterling exchange on HSBC was eight pence, which dropped by 45% compared with the legal price.

Bank of China took active measures to maintain the exchange rate of legal tender.

I. Advance payment of foreign exchange made to balance the foreign exchange market.

The government required Bank of China and Bank of Communication to participate in the purchase and sale in Shanghai foreign exchange market to regulate the supply and demand in order to balance the foreign exchange market. As an international exchange bank, Bank of China undertook the major responsibility of balancing foreign exchange market. Bei Zuyi, deputy general manager of Bank of China, was in charge of this business in Hong Kong according to the instructions made by Chairman T.V. Soong. Based on the changes of foreign exchange market, Bei Zuyi arranged Shanghai branch and Hong Kong branch to participate in purchase and sales of foreign exchange on their respective market and close out at the right moment to strike speculation and stabilize the foreign exchange market. From February 1939 to August 1941, Bank of China made the payment of foreign exchange amounting to GBP 7.97 million and USD 14.42 million for balancing the foreign exchange market.

II. Undertaking and advancing payment of the balancing fund interest.

To restrain excessive variation in the ratio between the legal tender and GBP and maintain the credit of the legal tender, China and Britain co-established a China-UK Currency Balance Fund for Remittance and Exchange of GBP 10 million which was equally shared by two parties with the undertakers of Bank of China, Bank of Communication, HSBC and the Standard Chartered Bank. The GBP 5 million advanced by two British banks was subject to an annual interest rate of 2.75% which was valid until April 1, 1943. Bank of China advanced eight terms of interest of GBP 330,000 and shared balance funds of GBP 3.25 million, which totaled GBP 3.58 million, or 118 million yuan's legal tender. It also shared stabilization fund of USD 6 million, or 112 million yuan's legal tender.

III. Coordination with Stabilization Committee in eliminating black market of legal tender in Hong Kong.

In order to stabilize foreign exchange rate of legal tender and promote the trade among three countries, China, U.S. and UK announced the establishment of a stabilization fund in late April 1941. A total of USD 110 million was pooled, in which USD 50 million was contributed by U.S., GBP 10 million by UK (including the balance fund of GBP 5 million borrowed previously), and USD 20 million by Central Bank of China, Bank of China and Bank of Communication. The Stabilization Fund Committee was founded in Chongqing in August 1941.

After the Anti-Japanese War broke out, large amount of legal tender flooded into Honk Kong where black market of legal tender emerged. To strike the black market, Hong Kong government issued Supplementary Regulation for National Defense Finance on November 6, which stated that no legal tender can be transferred in cash to and from Hong Kong without Hong Kong Government's permission since November 14. The Stabilization Fund Committee purchased legal tender in Hong Kong with the balance of original funds to prevent legal tender price from further decline since that day. The accounting work of Stabilization Fund Committee was finished in November 27. Bank of China, entrusted by the Stabilization Committee and the Balance Foundation, would continue implementing the work in Hong Kong. From November 27 to December 5, Bank of China purchased legal tender of 20.4 million yuan.

It was an important part in the monetary war between China and Japan during the Anti-Japanese War to balance Shanghai foreign exchange market, as well as the Nationalist Government's main method to maintain legal tender circulation in Japanese occupied areas and consolidate the creditability of legal tender. The effort of balancing Shanghai foreign exchange market conformed to the requirement of the Anti-Japanese War as it was a strong support for the long term fight, but a portion of foreign exchange was arbitraged by the invader.

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