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Unrest of Government Bonds Appeased and Rectified (1932)


 

After the establishment of Nanjing Nationalist Government, sharp increase of military expense and consecutive financial deficit occurred, which were made up for mainly through issuance of treasury bills and government bonds. At the end of 1931, there were 30 kinds of government bonds and treasury bills due to repayment with total outstanding principal and interest of 1.128 billion yuan. Except for the outstanding amount of the Beiyang Government, the outstanding principal and interest of the Nanjing Nationalist Government was nearly 1 billion yuan, but the annual domestic revenue was only 550 million to 600 million yuan. In 1931, state tax was detained in succession in Guangdong, Guangxi and other provinces, causing constant decline of the bond market. The stock exchange was forced into suspension on January 15, 1932.

On December 15, 1931, Chiang Kai-shek was forced to resign and T.V. Soong also left his position. On the New Year's Day of 1932, Lin Sen stepped up as the President of the Nationalist Government. Treasury was empty, but the government needed 22 million yuan's monthly budget including 18 million yuan for military expense and 4 million yuan for party and government expense. The only available income across the country was monthly tax revenue of 7 million yuan from Shanghai and all other tariffs and duties were lent to other provinces. Sun Ke, the newly appointed premier of the Republic of China, gathered members of the Kuomintang Central Committee in Shanghai, claiming to stop paying principal and interest for domestic debts and to appropriate 34 million yuan of domestic debt funds for government expense within a term of 6 months. And he planned to report to the meeting of the Central Political Bureau for implementation after returning to Nanjing. The commercial and financial communities in Shanghai immediately visited Sun Ke for inquiry, but Sun Ke was speechless without denial. This triggered a round of unrest of government bonds.

Bank of China, jointly with the Inter-bank Association, applied to the government for maintaining the creditability of government bonds. Zhang Jia'ao, the general manager of Bank of China, consulted with Li Fusun, the president of the Government-Bonds Fund Committee and the Chairman of Bank of China, and Wang Xiaolai, the president of the Chamber of Commerce, reaching an unanimous agreement against this measure. Then they separately informed the Silver Association and the Money Association and the Chamber of Commerce to hold a meeting. The associations and the Chamber of Commerce were furious and immediately telegraphed the whole country. The stock exchange organized a bond holders committee consisting of major bond holders to take joint action. The Silver Association, the Money Association, the Chamber of Commerce and the bond holders committee in Shanghai separately telegraphed the government to protest the decision of ceasing payment for principal and interest of domestic debts, with unanimous response from relevant organizations all over the country.

The government realized the severity of the issue after receiving protesting telegrams from all circles, so they sent representatives to negotiate with the Silver Association, the Money Association and the Chamber of Commerce. Though the government decided to reduce government expense and military expense to 18 million yuan each month, with the available tax revenue in Shanghai of merely 7 million yuan, there was still a gap of 11 million yuan which needed help from the financial community. Banks stated that the government must revoke decision to stop payment of principal and interest of government bonds, otherwise they would not assume all the borrowings. Sun Ke agreed to compromise and informed all financial organizations in Shanghai in a telegram on the evening of January 17, 1932, "... now, the government decides to maintain the creditability of government bonds and treasury bills without ceasing payment of principal and interest...". The unrest of government bonds came to a conclusion.

Soon after the unrest of government bonds, the January 28 Incident occurred in Shanghai and caused public panic and market closure. Zhang Jia'ao, the general manager of Bank of China, thought it necessary to work out a method for rectifying the repayment of principal and interest of government bonds to stabilize the creditability of government bonds. Therefore, he consulted with Li Fusun to propose the government to conduct the second rectification of government bonds in the history of the Republic of China, and suggested delaying repayment of principal for government bonds and reducing the interest.

Details of the method were as follows:

A. Allocated funds should not be less than half of the original principal and interest, namely 8.6 million yuan per month, until the end of settlement of principal and interest.

B. Half of the principal of government bonds and treasury bills was to be paid and another half to be paid over an extended period. Interest of treasury bills was to be reduced to 5% per month, and annual interest of government bonds changed to 6%.

C. The Funds Trustee Committee was to be changed as the Management Committee for Funds of Treasury Bonds. Old bonds were to be replaced by new ones, which would be managed by the Management Committee for Funds. Concerning the original Boxer Indemnity and increased customs duty, all funds payable should be directly allocated to the Management Committee for Funds by the inspector general of the customs, and wholly managed by the committee. If the amount was not enough, the government would make up with a category of central tax.

D. After this round of interest reduction, the government would not compromise the treasury fund any more and modify the method determined this time regardless of difficulties in the future.

E. The government should conduct fully open and thorough fiscal rectification through a Fiscal Rectification Committee engaging all groups to determine estimated expenses within the income range, and should not borrow from any commercial groups to finance civil wars and government expenses any more.

Li Fusun and Zhang Jia'ao explained the method for rectifying government bonds to the reinstated financial minister, T.V. Soong, who immediately submitted it to the Executive Department of the Republic of China for discussion. On February 24, 1932, an Executive Department resolution was released by a government decree stating, "... this is the final decision for the government and people to maintain the creditability of government bonds and to adjust finance. It will be a permanent text once being implemented. ..." Thereafter, a notice of the Ministry of Finance, declaration of the minister T.V. Soong, announcement of the General Taxation Bureau and regulations of the Management Committee for Funds of Treasury Bonds were released.

This round of government bonds rectification played an active role to a certain extent in maintaining the financial order. It reduced the burden of the government, avoided more loss of the bond holders, protected interests of banks to some extent and stabilized the bond market and government bonds creditability.

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