A COMPREHENSIVE review of China's monetary and financial problems was made by Mr. TT. V. Soong in his first speech as Chairman of the Bank of China at the Annual Meeting of the shareholders held on Saturday in the Chinese Bankers' Association Building.
Mr. Soong's Report, in addition to outlining the operations of the Bank in the past year, made special reference to the developments arising out of the silver crisis and its ultimate effect on the Government's currency policy.
He also surveyed the agricultural and industrial situation and specifically dealt with the progress of economic reconstruction and development.
An extended precis of the Report follows, comprising several passages given in extense.
'The abandonment of the gold' standard In Great Britain, India and Japan towards the end of 1931, and in his opening brought about' a substantial appreciation of the Chi-nose dollar in terms of foreign curyeneles, The U.S." silver purchase programme, which came into operation In the middle of 1934, had. the effect of further raising the' exchange value of China's currency, despite fan already existing unfavourable balance of international payments. The deflationary consequences in China may be seen in the fall in the Shanghai commodity price inde: from 1292 in September, 1931 to 99) in December, 1934, Owing to the large and continued outflow of silver inthe second halt fof 1994, and the consequent: serious Aepletion of the reserves of the bank-{ing system, which not only intensified the deflationary movement, but even ereaied fears of a financial crisis, the Government had felt obliged in the middle of October, 1936, pose 10 per cent, tax and' a vari Able equalization charge on. exports of silver, While retaining the silver standard" internally, this measure! hhud effectively broken the tr in}, between' the exchange value the currency and the external price fof silver, As a result, exchange yates were to a large extent left to find their own level, though the Government did attempt, with a. considerable measure of success, 10 steady the market whenever fluetuations became too violent, of apprehension with regard to future currency developments resulted in considerably lower rates " for forward exchange. The interest equivalent of the spread between spot and forward rates of exchange rose, In fact, at times to as high as nearly 30 per cent. per- annum, This high Interest yield" encouraged the employment in the exchange market of funds that" would In more normal circumstances have been available for fnaneing current business. and raised the cost of commercial borrowing to impossibly high levels, so that trade and industry were severe ly handicapped and frequent appeals for financial relief were addressed to the Government, Reflecting in part the acute stringency of credit, outstanding day-to-day Joans in the' Shanghai real estate market could not be repaid, and, with entirely nominal prices ruling, was impossible either to sell, or to obtain new loans against, real estate In Shanghai that had previously Deen regarded by the banks os firstelass security. At the same time prices on the Shanghai Stock Exchange continued to decline, and the volume of transactions dwindled to a fraction of the turnover of previous With every financial institution anxious to maintain or increase its Uquidity, and no opportunity for the realization of securities for which in more normal times there would have been a ready. demand, there was danger, not only of a complete freez~ ing up of the markd, but even of the development of a ancial Horns of @ Dilemma always been clear that the measure adopted was only a transi Honal arrangement, enabling the' Government to gain time and to. work towards a more. permanent solution, Indeed, this measure, while effective temporarily in preventing a further fall in commodity prices, eventually placed the country on the horns of a dilemma, If exchange rates moved up In. sympathy with the rise in the value of silver, the export trade would be handicapped fand internal deflation continue. Tf, fon the other hand, exchange rates fell substantially, it would Increase the difference between the internal and external value of the currency, fand a large-scale continuous smug-ling of silver' would ensue, As then redeemable in silver, might easily lead to "runs on the Banks, with, serious" ancial" eon Sequences.
With the price of sliver in London continuing fo rite in 1036, thave was Sonstant anxiety Inthe fnanelal market, Early im the year, when th Frequent, changes in" the variable fqualzation charge, required to off-Sct fluctuations in' the silver value of the dollar, were aggravating. the feeling of nervousness in the market, he equalization charge was left at nominal gute, andy instead, there wan gubatituted "gentlemen's agree: ment" between the. Chinese and foreign banks not to export silver.
'By this time the depletion of silver stocks that hed already occurred, combined with the tendency 46 Hoard or smuggle out of the country Sliver dollars' the bullion stue which had risen much above their xchange value, had created a seri ous shortage of funds for financing formal business requirements.
Despite repeated offal assurances that the Government had 0 inten tion of seeking an easy way out of {ts"aiteuitios by means of devalue tion oF similar expedients, the feel Ing of tension remained, and the me erasing strain on the currency #93. fern was reflected in a. continued Alisparity. "between Shenghai ex. change andthe. external price Silver, and a widening of the rates between spot and forward exchange. The following table shows how ari {ela the position of the dollar had become. (See adjoining column.y
Text read from the printed page and cleaned; old type leaves the occasional error.