After the fall of the Qing dynasty in 1912, China underwent a period of instability and disrupted economic activity. During the Nanjing decade (1927–1937), China advanced in a number of industrial sectors, in particular those related to the military, in an effort to catch up with the west and prepare for war with Japan. The Second Sino-Japanese War (1937–1945) and the following Chinese Civil War caused the retreat of the Republic of China and formation of the People's Republic of China.Sun Jian, pp. 616–18
The Republican era was a period of turmoil. From 1913 to 1927, China disintegrated into regional warlords, fighting for authority, causing misery and disrupting growth. After 1927, Chiang Kai-shek managed to reunify China. The Nanjing decade was a period of relative prosperity despite civil war and Japanese aggression. The government began to stabilize tax collection, establish a national budget, sponsor the construction of infrastructure such as communications and railroads, and draw up ambitious national plans, some of which were implemented after 1949. In 1937, the Japanese invaded and laid China to waste in eight years of war. The era also saw boycott of Japanese products. After 1945, the Chinese Civil War further devastated China and led to the withdrawal of the Nationalist government to Taiwan in 1949.
Civil war, famine and turmoil in the early republic
After the collapse of the Qing Dynasty during the 1911 Revolution, efforts to establish a republic failed. Military strongmen and landlords became the effective rulers in most parts of China. The Warlord era of 1916-1927 was a period of major economic distress for Chinese peasants.
The collapse of central authority caused the economic contraction that was in place during final Qing decades to speed up, and was only reversed after China reunified in 1927 under the rule of Nationalist Generalissimo Chiang Kai-shek.Sun Jian, pp. 613–14
Development of domesticated industries
Chinese domestic industries developed rapidly after the downfall of the Qing dynasty, despite turmoil in Chinese politics. Substantial modern industrialization did not occur until World War I, which saw a great increase in demand for Chinese goods, which benefitted China's industries. In addition, imports to China grew drastically after total war broke out in Europe. For example, China's textile industry had 482,192 needle machines in 1913, while by 1918 (the end of the war) that number had gone up to 647,570. The number increased even faster to 1,248,282 by 1921. In addition, bread factories went up from 57 to 131.Sun Jian, pp. 894–95
The May 4th movement, in which Chinese students called on China's population to reject purchasing products not made in China, in other words, boycotting foreign goods, also helped spur development. Foreign imports fell drastically from 1919 to 1921 and from 1925 to 1927.Sun Jian, p. 897
Despite the outbreak of the Great Depression in 1929, Chinese industry continued to grow and develop into the 1930s. This era is now known as the Nanking decade, a time period seen as commencing when the KMT under Chiang Kai-shek re-unified most of China, bringing a level of political stability not seen in decades. Under Chiang Kai-shek's Nanking based government, China's economy enjoyed unprecedented growth from 1927 to 1931. By 1931 however, the effects of the Great Depression began to badly impact the Chinese economy, a problem compounded further by Japan's invasion and occupation of Manchuria in the same year. Consequently, China's overall GDP, dropped to 28.8 billion in 1932. A period of stagnation and decline followed with GDP falling to 21.3 billion by 1934, after which prosperity began to return with GDP rising to 23.7 billion in 1935 as Chinese industrial output commenced a rapid recovery surpassing 1931 levels by 1936.Sun Jian, pp. 1059–71
Due to China's semicolonial status, in the pre-war period foreigners benefitted from extraterritoriality and foreign companies dominated the country's treaty ports.
The rural economy of the Republic of China
The rural economy retained much of the characteristics of the Late Qing. While markets had been forming since the Song and Ming dynasties, by the Republic era, Chinese agriculture was in largely geared towards producing cash crops for foreign consumption, leaving it vulnerable to the say of international markets. Key exports included glue, tea, silk, sugar cane, tobacco, cotton, corn and peanuts.Sun Jian, pp. 934–35
The rural economy was hit much harder by the Great Depression, when domestic overproduction of agricultural goods as well as an increase in foreign imports (as agricultural goods produced in western countries were "dumped" in China) led to a collapse in food prices. In 1931, imports of rice in China amounted to 21 million bushels compared with 12 million in 1928. Other goods saw even more staggering increases. In 1932, 15 million bushels of grain were imported compared with 900,000 in 1928.Sun Jian, p. 1088 This increased competition caused massive declines in Chinese agricultural prices (which were cheaper) and thus the income of rural farmers. In 1932, agricultural prices were 41 percent of 1921 levels.Sun Jian, p. 1089 In some rural areas, incomes had fallen to 57 percent of 1931 levels by 1934.
Communist areas In 1931, the Communist Party consolidated a number of base areas into a state, the Chinese Soviet Republic. The CSR had a central government as well as local and regional governments and issued currency. The CSR was funded primarily by tax income on grain and rice. It also received voluntary contributions from its core political constituency, the peasantry. During the period 1931 to 1934, the CSR issued three series of government bonds to further finance its operations.
The Communist Party undertook a radical program of land redistribution which destroyed the landlord-dominated political economy which had previously existed within the areas the CSR governed. It issued the 1931 Land Law of the Chinese Soviet Republic, which required:The property of rich peasants was also confiscated, although rich peasants were entitled to receive land of lesser quality if they farmed it themselves. By 1932, the Communist Party had equalized landholding and eliminated debt within the CSR. Although the 1931 Land Law remained the official policy in the CSR's territory until the Nationalists' defeat of the CSR in 1934, after 1932, the Communist Party was more radical in its class analysis, resulting in formerly middle peasants being viewed as rich peasants.
Foreign direct investment in the Republic of China
Foreign direct investment in China soared during the Republic's early years. Some 1.5 billion of investment was present in China by the beginning of the 20th century, with Russia, the United Kingdom and Germany being the largest investors. However, with the outbreak of World War I, investment from Germany and Russia stopped while the UK and Japan took a leading role. By 1930, foreign investment in China was more than 3.5 billion, with Japan leading (1.4 billion) and England at 1 billion. By 1948, however, the capital stock had halted with investment dropping to only 3 billion, with the US and Britain's leading.Sun Jian, p. 1353
Currency of the Republic of China
During most the Nanjing decade, China's currency was on the silver standard. It was necessary for the Nationalist government's expenses to be balanced by sales of government bonds, tax revenues, and other receipts.
In 1935, the Nationalist government issued a new fiat currency, the fabi, through the four government banks (the Central Bank of China, the Bank of China, the Bank of Communications, and the Agricultural Bank).
Particular effort was made by the ROC government to instill the fabi as the monopoly currency of China, stamping out earlier Silver and gold-backed notes that had made up China's currency. No separate institution existed to control the money supply, and therefore the political leadership of the Nationalist government was free to dictate the money supply. The ROC government used this privilege to issue currency en masse; a total of 1.4 billion Chinese yuan was issued in 1936, but by the end of the second Sino-Japanese war some 1.031 trillion in notes had been issued.Sun Jian, pp. 1234–36 When it came to military expenses, Chiang Kai-shek decided how much money he needed and ordered H.H. Kung to supply it. This trend worsened with the resumption of the Chinese Civil war in 1946. By 1947, some 33.2 trillion of currency was issued. This was done in large part as an attempt to close the massive budget deficits brought about by the war (taxation revenue was just 0.25 billion, compared with 2500 billion in war expenses). By 1949, the total currency in circulation was 120 billion times more than in 1936.Sun Jian, p. 1317
In the period immediately following the Japanese surrender in the Second Sino-Japanese War, the formerly occupied areas had competing currencies. Japan had never unified the currency systems in the areas it occupied, thus the Wang Jingwei regime, the Wang Kemin regime, and the Manchukuo puppet state all had separate currency systems. The Nationalist government attempted to replace these currencies with the fabi. For the currency of the Wang Jingwei regime, the Nationalist government set a minimal exchange rate of 200 yuan in regime currency to one fabi and required the regime currency to be exchanged within four months. This undervaluation made inflation worse as Chinese who formerly lived under the regime rushed to hoard goods rather than exchange for fabi which in turn drove price increases. Ultimately, the unrealistic exchange rate impoverished those who had lived under the Wang Jingwei regime and made economic revival of the area more difficult. The Nationalist government set more realistic exchange rates for the Wang Kemin and Manchukuo regime currencies.
In response to hyperinflation, the Nationalist government issued the gold yuan in August 1948. Despite the implication of "gold" yuan, the currency was not backed by gold. The gold yuan's value fell with greater speed than the fabi had as the money supply continued growing. The gold yuan regulations had required citizens to surrender their gold and silver. When these regulations were abandoned, people who had complied with the regulations suffered huge losses while those who had violated the regulations and hoarded gold and silver avoided this harm. As hyperinflation continued after the gold yuan's failure, Chinese increasingly avoided currency and increasingly exchanged goods via barter.
The Chinese war economy
The ROC had implemented income tax in 1914, but suspended it in 1916. It sought revised its income tax regulations in 1928, planned for implementation in 1929, but then put the regulations on hold. The ROC established another income tax system in 1936 and it remained in place (with some revisions) until the ROC's defeat in the Chinese Civil War.
After Japan's 1931 invasion of Manchuria, the Republic of China began state-led industrialization policies as a response to the risk of full-scale war with Japan. In 1932, it formed a clandestine industrial mobilization government agency, the National Defense Planning Commission (renamed in 1935 to the National Resources Commission). Chinese policymakers drew inspiration from economic models used by the Soviet Union, Japan, and Germany.