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Bank of China Forced into Restructuring due to Financial Monopoly of the Nationalist Government (1935)


 

As early as in 1928, the Nanjing Nationalist Government put forward gradual establishment of a central bank management system under state control, and founded a central bank in November of the same year, marking the first step toward a financial monopoly system. In the 1930s when internal instability and external invasion created an increasingly tough financial environment, the government found itself unable to accelerate the financial monopoly.

After its foundation, the Central Bank developed at a fast pace, but with the strength weaker than Bank of China and merely the same with Bank of Communications, it was not able to control the overall financial situation. In late 1934, Bank of China enjoyed an absolute advantage over the Central Bank and Bank of Communications, accounting for 52% of total assets, nearly 51% of currency issuance, 49% of deposits and 55% of loans among the three. The Nationalist Government realized that to bring financial monopoly into reality, it must completely control Bank of China and Bank of Communications, especially the former.

The government started to conspire to seize power of Bank of China. Chiang Kai-shek, Kong Xiangxi and T.V. Soong conspired to issue government bonds worth 100 million yuan to increase capital of the three banks. In addition, they removed Zhang Jia'ao, the general manager, and Li Fusun, the Chairman of Bank of China and appointed T.V. Soong as the Chairman, in a bid to completely control Bank of China through share holding and personnel transfer.

After Kong Xiangxi and T.V. Soong conspired with Chiang Kai-shek and returned to Nanjing, they submitted a proposal of increasing government bonds issued by the Central Bank, Bank of China and Bank of Communications from the Ministry of Finance to the meeting of the Central Political Bureau on March 20, 1935. On March 24, some newspapers published the plan of distributing 100 million yuan of government bonds in the 24th year (1935) of the Republic of China, among which 30 million was to be used as funds of the Central Bank, 25 million to be allocated to Bank of China, and 10 million to be allocated to Bank of Communications. After implementing the plan, the government could completely control Bank of China. Out of the 25 million yuan's original capital of Bank of China, only 5 million yuan was attributed to the government and another 20 million yuan was commercial shares. After increasing the government shares by 25 million yuan, the government capital would be up to 30 million yuan, exceeding the commercial shares and holding the absolute advantage.

On March 28, 1935, Kong Xiangxi, the financial minister, announced a mandate to Bank of China, "... our survey shows that Bank of China has an original capital of 25 million yuan, including 5 million yuan of government shares, which shall be increased by 25 million yuan through issuance of government bonds in 1935... Once the government shares are increased, all the original regulations shall be revised correspondingly. It is hereby to publish all contents of the revised regulations..." On the same day, a government order was issued to remove Zhang Jia'ao from Bank of China and appoint him as the vice president of the Central Bank.

After receiving the mandate from the Ministry of Finance for capital increase and restructuring, Bank of China immediately held a meeting of board of directors on the second day and put forward the following objections:

I. How could share capital be increased by unlisted government bonds? Even if government bonds were listed, their price was far lower than market price of shares issued by Bank of China. Then how to explain to the original commercial shareholders?

II. The government should not increase shares arbitrarily. If it was to do so, the shares should be subscribed by shareholders preferentially.

III. The original Regulation for Bank of China were a deed based on joint stock between the government and commercial shareholders. How could it be revised without permission of the commercial shareholders?

IV. If the increased 25 million yuan of government bonds were sold on the market, it would be certain for the market price of government bonds to decline. Even if according to intent of the Ministry of Finance, the government bonds would not be circulating on the market but only be used for bank liability reserve, the bank creditability would be compromised for sure.

However, under the political pressure from the government, shareholders of Bank of China had to agree to increase the share capital with two conditions:

I. The total share capital was to be changed into 40 million yuan, equally divided into government shares and commercial shares. It was resolved to authorize the board of directors and the Ministry of Finance to settle.

II. It was agreed to increase the number of directors to 21, including 9 appointed by the Ministry of Finance representing the government and 12 representing commercial shareholders.

After knowing that the Ministry of Finance wanted to issue government bonds to increase government shares in Bank of China, Zhang Jia'ao was aware that it could not be resisted completely. So, he sent an urgent telegram to ask Chen Guangfu, the managing director of Bank of China, who was in an inspection visit, to return to Shanghai immediately and to consult with Kong Xiangxi for the above mentioned conditions of shareholders, because Chen Guangfu and Kong Xiangxi were good friends and both were members of the alumni of Chinese students studying in the U.S.. Kong Xiangxi accepted the conditions of shareholders in order to ease contradictions between directors and shareholders, and appointed T.V. Soong as the Chairman and Song Hanzhang as the general manager.

On April 16, 1935, the Regulation for Bank of China after final revision showed changes in the following several aspects compared with the version promulgated on October 26, 1928:

I. The voting right of government shares was expanded. Although the equity of the government was not expanded to 60% as expected, the fact that both government shares and commercial shares accounted for a half of the total showed that the government shares were not any weaker than the commercial shares. And with the revision of Article 20 of the Regulation, the government gained an absolute voice and voting right.

II. The role of directors of commercial shares was greatly impaired. Through struggle, the number of directors of commercial shares in the board of directors remained 12, but the proportion to the number of total directors decreased from 80% to 57%.

III. The way for choosing the general manager was changed from election to appointment. It was provided in the original regulation that the general manager was to be elected from the managing directors, but the revised version specified that the general manager was to be elected from directors through consultation by the chairman and the managing directors, and was to be appointed after submitting to the board of directors for permission. It meant that the general manager must be elected by the chairman.

IV. The general manager responsibility system was changed to the chairman responsibility system. After revision of the Regulation, the chairman became the master dominating all affairs, and the role of the general manager was changed from direct implementation of board resolutions to acting upon the chairman's order.

Through this round of restructuring, the share capital structure and personnel arrangement of Bank of China changed greatly. Having seized the substantial leadership of Bank of China, the Nanjing Nationalist Government started to make use of the financial capacity of Bank of China arbitrarily to make up for its fiscal deficit, basically monopolizing the domestic financial industry.

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