During the Second Sino-Japanese War (1937–1945), China suffered greatly from the Japanese invasion through economic turmoil, and significant population loss and shifts. Following the capture of major coastal cities, the Nationalist government, along with millions of refugees, fled inland. The Nationalist government continued the war effort through efforts such as the Chinese Industrial Cooperatives (CIC), which decentralized manufacturing to support the civilian population and its National Revolutionary Army (NRA).
China was given international assistance and volunteer forces to bolster its war effort. Prior to 1938, Germany provided military training and equipment to the NRA, but withdrew all support after signing the Tripartite Pact with Japan. Afterwards, the Soviet Union became China's primary supporter, supplying aircraft and munitions whilst sending its own volunteer pilots until it too withdrew after the signing of the Soviet–Japanese Neutrality Pact. Following the implementation of an oil embargo against Japan and the outbreak of the Pacific War, the major Allied powers of the United States and United Kingdom delivered significant logistical, financial, and military aid. This included joint intelligence operations, commando training, and the deployment of volunteer aviation units such as the Flying Tigers. Additionally, overseas Chinese communities supported the war effort through contributions in financial and manpower.
The war led to social changes throughout Chinese society. Displaced civilians were forced to abandon traditional household structures, leading unprecedented numbers of women to enter the workforce. Women served in agricultural, medical, and educational sectors, with some participating directly in combat, espionage, and political leadership. Religious minorities, notably Chinese Muslims also supported the war effort. Muslim generals of the Ma clique led cavalry divisions against Japanese forces in the northwest, while Muslim scholars conducted diplomatic tours across the Middle East to secure Islamic support for the Chinese government.
During their invasion, the Imperial Japanese Army and Imperial Japanese Navy committed widespread war crimes, resulting in the deaths of millions of Chinese civilians and prisoners of war. Japanese forces engaged in mass killings through the Three Alls Policy and committed massacres, such as the Nanjing Massacre. Women faced systemic sexual violence and hundreds of thousands of them were forcibly conscripted as comfort women. Additionally, covert military divisions, such as Unit 731, conducted lethal human experimentation and used biological and chemical weapons against both Chinese military and civilian targets alike.
Economy Nationalist-controlled China Industrial cooperatives
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. 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.
The Second Sino-Japanese War had quickly harmed China's economy, with one of the earliest attacks being the Battle of Shanghai in 1937. With Shanghai, being a major industrial and foreign relations port for the Chinese and now under Japanese control, the Chinese economy industry took a big hit. The Japanese Air Force carried out systematic and often indiscriminate bombings of Chinese cities. Nationalist forces applied a "scorched earth" policy in response to the invasion; destroying the productive capacity of areas they had to abandon in the face Japanese military advances.
The war brought about a massive increase in government control of industries. In 1936, government-owned industries were only 15% of GDP. In 1938, the ROC established a commission for industries and mines to control and supervise firms, as well as instilling price controls. By 1942, 70% of the capital of Chinese industry were owned by the government.Sun Jian, pp. 1237–40. In an effort to rectify this, Chinese Industrial Cooperatives (CIC) were created in 1937, under the "Gung Ho" Movement, before becoming formalized in 1938. The creation of Chinese Industrial Cooperatives allowed the Chinese people to establish smaller industry centers in small towns across China, allowing for economic and industrial production away from battle or possible Japanese invasion. In addition to supporting the economy, more immediate efforts were placed on supporting the Chinese military in producing whatever materials were needed for the war. Chinese refugees and those displaced by the war were hired by CICs to help production.
The CICs relied on foreign aid and contributions, which drew mixed reactions. Overall, the CIC program failed as they had a goal of creating 30,000 cooperatives, but only succeeded in making approximately 2,000 cooperatives instead. The name "Gung Ho" comes from the Americanization of the Chinese name for Chinese Industrial Cooperatives. The full name, "工業合作社" (gōng yè hé zuò shè) was often shortened to the term "工合" (gōng hé), which was mistaken by U.S. Marine Evans Fordyce Carlson to mean "work together". Carlson then went on to use this believed motto as his slogan throughout the war, generating that phrase "Gung Ho" that has come to be in the English language.
Hyperinflation
+Inflation in wartime ChinaYearNationalistCommunistJapaneseChongqingChengduFupingTianjin1938126128100143193922022527223219405696651,09250619411,5761,7698991,09919424,4084,5591,4693,453194313,29814,7209,77414,362194443,05056,96534,483284,3021945156,195170,37954,6019,740,248
From the summer of 1937 through the end of 1949, the Chinese economy suffered inflation and hyperinflation. Starting in July 1937, the Japanese military advanced through northern and eastern China, forcing the Nationalist government to retreat inland and abandon significant manufacturing and agricultural regions, as well as key transport hubs for imports and exports. This retreat, combined with Japanese blockades of Chinese transport routes, led to immediate price surges in Free China. Each successive Japanese victory exacerbated the situation. For instance, the fall of Wuhan and Guangzhou in late 1938 caused import prices to rise by 72%. The Japanese invasion of Guangxi in late 1939 nearly doubled import prices in Chongqing. In contrast, locally produced goods, including food and agricultural raw materials, maintained stable prices until 1938, supported by a robust harvest in Sichuan that year. However, from 1939 onwards, the prices of both imported and local goods began to rise in tandem as around five million refugees moved westward into Free China. Tax revenues decreased drastically while military expenses remained high.
Since the start of the war, the Chinese government began funding its efforts through the issuance of war bonds, which initially enjoyed strong public support. By late 1938, government spending expanded not only for the war effort but also for reconstruction and the development of inland industries and transport infrastructure. This expansion aimed to reinforce infrastructure and sustain the war effort within the remaining Chinese-controlled territories. Consequently, government spending increased by 33%, despite the administration now managing only about half of the country. However, public confidence in war bonds waned, leading to a decline in bond sales since 1938. Additionally, the limited new taxes, which were not introduced until late 1939, failed to offset the government's excessive spending. As a result, the budget deficit continued to grow unchecked. With limited tax revenue from occupied regions and no bond market, China relied on banking institutions to fund deficits, leading to monetary expansion.
Inflation, previously moderate, surged after the Pacific War began. The economic situation further worsened as China became increasingly isolated once Japan occupied British Burma and French Indochina. After the Japanese attack on Pearl Harbor in 1941, Japan quickly seized the whole of Shanghai and, in 1942, cut off the Burma Road, a crucial supply route for China. This led to a 50% decrease in imports in 1942 compared to the previous year. Despite efforts to compensate with The Hump air transport route over the Himalayas, by 1944, China was only receiving 6% of the total imports it had in 1937. Additionally, rice production in southern China faced unfavourable outcomes, although wheat and barley production in Henan and Hebei saw slight increases. Due to administrative failures, the Nationalist government struggled to enforce price control measures, despite issuing decrees to this effect. None of the government's strategies addressed the need to curb its own budget deficit, which continued to generate inflation. The ROC government's tried unsuccessfully to curb inflation with the introduction of new currencies and failed attempts in both 1942 and 1943 to institute a general price freeze. The efforts at price controls failed because China's agricultural economy was very concentrated, industry was declining, and exchange rates collapsing.
In 1942–1943, the American Dollar Bond scandal arose. The Nationalist government of China decided to use US$200 million to absorb excess fabi in an effort to curb inflation. In theory, Chinese purchasers would use fabi to buy bonds at the official exchange rate and be paid in dollars when the bonds were redeemed following victory over Japan. The American Dollar Bonds were issued on March 24, 1942. The public response was poor, with few bond sales. In October 1943, H.H. Kung sent a secret memorandum to Chiang Kai-shek asking that the bond sales end. Subscriptions were closed on October 15, 1943, and a central bank official falsely announced that all bonds had been sold. Secretly, insiders then purchased the remaining bonds using currency acquired on the black market. The result was a windfall for Nationalist government insiders including Kung, the Soong family, Wei Daoming, Long Yun, and others. United States Treasury Secretary Henry Morgenthau Jr. reported to United States President Franklin D. Roosevelt that the US$200 million had been spent with little impact in curbing inflation. Within the Nationalist government of China, Kung was criticized for corruption, and the incident was significant in Chiang losing faith in Kung and removing him from politics.