Thomas Tooke

The Exchange Rate of China and the Currency reform of December 5th 1935

In Currency reforms on March 2, 2013 at 9:28 pm

Frank Tamagna wrote in 1942 in his book Banking and Finance in China:


The issue and payment of drafts in foreign currencies requires a previous operation: namely, the fixing of the exchange rate at sight and forward. In the ‘twenties the Chinese market was entirely dependent for it upon the foreign banks. The opening rates of the Hongkong and Shanghai Banking Corporation were published at 9.30 a.m. in Shanghai and at 10 a.m. in the other branches and these were accepted as the official quotations in the market.  They were expressed in sterling on the basis of the T/T rate on London, while for other currencies the London cross-rate was used. In 1930 the National Government introduced the Customs Gold Unit, an accounting currency based on a hypothetical pure gold content of 60.1866 centigrams (equivalent to gold weight of the “Sun”, the monetary unit proposed by the Kemmerer Commission), and the Central Bank of China began quoting its exchange rate in taels and yuan on the basis of the T/T rate of Shanghai and New York.

After the United States went off the gold and the exchnage rate between Shanghai and New York could no longer be used, two important changes took place. Beginning in March 1934 the exchange of the Customs Gold Unit in silver yuan was calculated according to the London rate of gold ingots on the previous day and the T/T spot rate on London. After September 1934, he daily rate of the Customs Gold Unit thus established was used for figuring the standard price of gold in the Shanghai market, on the basis of which settlement could be legally effected for incomplete forward gold transactions and “no opposition could be brought to the fore by either party”. The steps taken by the Central Bank of China tended to bring the exchange of the silver currency under its control and to restrict the opportunity for arbitrage operations, as theses were effected through fictitious buying and selling of gold bars in the Shanghai market.

The position of the foreign banks was, however, only slightly impaired by these measures, because as long as silver was the monetary unit of the country, foreign exchanges rates frequently diverged from the price of silver in gold, and these variations permitted profitable manipulations. During the period from 1931 to 1935, at first owing to the rapid decline in the price of silver and later owing to its rapid rise, foreign banks often had difficulty in obtaining at current rates forward exchange to cover their daily transactions. As a result, they increased the margins between buying and selling rates, by lowering purchasing rates or raising selling rates or both, thereby obtaining considerable profit. Cross-rate operations were in fact made not only for genuine requirements, but also for speculative purposes, especially during the rapid changes in international exchange rates. Shanghai was a typical speculative market on bullion and exchanges, and foreign banks developed into the most important medium through which such operations were carried out.

Following the currency reform of 1935 (nationalization of Silver on December 5th 1935), foreign banks liquidated most of their silver and turned the rest over to the Currency Reserve Board. The Government banks, in turn, sold the silver abroad in exchange for foreign currency. Some silver was sold in the open markets of Bombay and London, but most of it was transferred by special arrangements to the Treasury of the United States. “


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