C.K. Yen hadn’t had any illusions about what his job would entail. China’s economic problems were as numerous as they were severe, his predecessor had rather despairingly told him, and based on his own experience in the provinces from the past few years he was inclined to agree. Still, there were two things which had caught him off guard.

The first was the utter… depravity? Incomprehensibility? Delusion? There wasn’t a proper word to sum it up, but T.V. Soong was not making him a happy man.

The second was that despite all the bad news (and there was a lot of it), he still had quite a few quivers in the arrow, so to speak. The government had a sizable reserve of foreign exchange, and the fiscal situation had improved considerably since the postwar demobilization. He had an extensive line of credit from the United States available in case of an emergency, and even some public credibility from the victory over the Japanese. All in all, Yen would rather be ambassador to the US, but Economic Minister seemed like a position he could at least do some good in.

The basic problem was that society’s demand for goods far exceeded the country’s ability to provide them, and there was really no getting around that. Even the fairly low living standards of the average Chinese could no longer be supplied by the country’s ravaged industrial base. The government’s strategy to solve this had until now been to simply beg for more aid from abroad, but this was clearly having deleterious effects which were canceling out much of the benefit. In short, the influx of cheap American goods had dramatically uncut most local industries (the largest being textiles and food processing), causing the overall supply to change little while increasing unemployment and wreaking havoc in the country’s domestic value chain.

Of the twenty-four hundred-odd manufacturing businesses in Shanghai, only about eight hundred were engaged in any kind of production at all, and many of those were operating at reduced hours. Of the remaining sixteen hundred, hundreds of businesses had resorted to selling their machinery for scrap value, while putting hundreds of thousands out of jobs. It was no exaggeration to say that the economy had been better while under both Japanese occupation and American blockade. At least then, the Japanese had the force of arms to simply take the factories produce.

The irony was that many Chinese businesses probably could be competitive with American imports. Most of the country’s industry got its raw materials domestically, which meant consumers wouldn’t need to spend scarce US dollars, and of course labor costs were lower. However, the rural farmers which had previously supplied the cotton, food, and so on which fueled Chinese light industry were no longer participating in trade, partly because of the war, and partly because they had no reason to accept payment in fapi banknotes which would be worthless before they could even return to their villages. Better to resort to subsistence farming and ride out the storm.

Part 1: Greasing the wheels

A key issue is that the government sets a cap on interest rates offerable on bank accounts. Private banks cannot offer interest rates on savings higher than those offered by the Central Bank of China, and the interest rates offered by the Central Bank of China are far too low, mostly because the government was hoping to save on borrowing costs. However, the only real effect of this miserly decision has been the immense growth of an underground money market, which in turn funds crime and speculation.

Yen’s first policy in his new job will be to rationalize the interest rate policy of the Central Bank. Interest rates offered by the Central Bank and all three major state-owned banks (Bank of China, Bank of Communications, and Farmer’s Bank) will be realigned with the average national consumer price index, which will be updated every week.

As a further incentive to rural farmers, the Farmer’s Bank will be offering special city-specific deposit accounts offering a guaranteed return over the consumer price index of a specific urban area, with the caveat that these accounts will be capped to the fapi equivalent of $100, and can only be cashed out in the city in question. Finally, since most farmers don’t have bank accounts on account of simply being illiterate, we will be offering to allow for farmers to be paid in scrip (really, bonds) which can be redeemed based on the inflation between when they were issued and cashed in, on the condition that it can be proved the money came from a legitimate business transaction with a manufacturer of good standing.

All in all, this is expected to considerably increase the nominal cost of borrowing for both the government and for private borrowers, though since the government “borrows” from banks it already owns, these costs are mostly imaginary and the entire process is equivalent to simply printing money. Hopefully, the higher interest rates and frequent rate updates will deter the use of credit for speculative purposes (a common tactic right now is to borrow money to buy gold or foreign currency in the hopes that official interest rates fail to match real inflation, allowing speculators to profit off the difference).

The more direct impact of this change will be to encourage people to businesses to actually store their money in official financial instruments, rather than with shady moneylenders or under their mattresses in the form of gold bars, and to reduce the overwhelming pressure to immediately spend any money one gets their hands on. Furthermore, by offering a reasonably reliable inflation-hedged store of value, it will encourage rural agricultural producers to reintroduce themselves to the urban economy, and supply the raw materials needed to get factories going again, which so far have been effectively kept out of cities due to currency-related difficulties.

Getting farmers to actually use the national currency, or some proxy for it, again will also help reinforce state power in the countryside. Fapi the physical manifestation of the government's authority, and having it become more widespread will make it easier for the government to collect taxes, punish non-collaborators, or requisition goods for the military. Getting money in the banks is also extremely helpful to the government’s finances, since the government can effectively appropriate the reserves for its own purposes without needing to print money.

The interest rate system likely creates an opportunity for arbitrage between cities, and between cities and rural areas, where prices are lower, but since we want to incentivise trade, this seems like an acceptable side effect. Furthermore, with transport being so expensive as it is outside of the closely watched river and rail systems, it seems unlikely that anyone is going to be profiting by shipping bags of cash across provincial lines to collect higher interest rates, at least without being caught.

Part 2: Close the borders, stop having them be open

Well, ok, a little misleading there. But currently the government practices a laissez-faire foreign exchange policy, essentially allowing private citizens to import as many foreign goods as they’d like with few tariffs in between. This has been a disaster, both for domestic industry and for the government’s balance sheet.

Starting immediately, the government will re-impose wartime capital controls, banning any private citizen or business from converting more than $100 from fapi into foreign currency annually (some special exceptions will be made for larger manufacturers if the domestic market is unable to supply the necessary raw materials). All private holdings of foreign currency in banks will be nationalized, and international trade in gold and silver will be banned (we aren’t confiscating private precious metals yet, that would probably cause an uproar and is basically a last resort). Furthermore, steep tariffs will be placed on foreign finished goods, especially on products which are important to the Chinese manufacturing economy, like textile products, cast iron household items, and so on.

To ease the burden on those that will be hardest hit (public employees), the government will temporarily provide a moderately-sized in-kind stipend of cotton yard, cooking oil, rice, and in the northern provinces, coal to public employees, the largest groups of whom are teachers and transportation workers. Soldiers are already somewhat better off due to vast quantities of American military aid supplying plenty of uniforms and rations which would have previously had to be acquired, often forcefully, from locals — the military taking tax revenues from the south to spend in the north has previously been a major driver of vast differences in prices between provinces, so increased American military aid should go a long way towards stabilizing prices between provinces, though it will probably do little to actually decrease the overall rate of inflation.

While overall quality of life might take a hit in urban areas in the aggregate, reopening the factories will put hundreds of thousands of people back to work. In the Nanjing-Shanghai area alone, there are over 500,000 unemployed industrial workers. If prices on key commodities rise, they’ll be worse off, but the hope is that they’ll be satisfied to have jobs again.

Part 3: Patriotic Reparations

Acknowledging that a great number of Chinese business-people sacrificed for their country by either moving their industries into the interior or sabotaging their businesses to prevent usage by the Japanese, the government will finally be moving to give these brave persons reparations. Businesses owned by Japanese collaborators will be redistributed in the following order:

First of all, all businesses previously owned by Chinese before the occupation will be returned to the prior owners or their heirs. Then, priority will be given to those who patriotically relocated their businesses to the interior. Following them in line will be those to did not move their businesses but refused to cooperate with the occupiers. Finally, the remaining properties will be temporarily placed under state ownership, pending auction to private industrialists.

All redistributed properties will be given with two conditions. The new owners (or in some cases, the old owners) are absolutely banned from dismantling the machinery of their industrial concerns and fully shuttering their businesses. Many business owners have taken to dismantling their machinery due to the lack of profits to be found in manufacturing. Hopefully, other reforms will reverse this trend, but in the meanwhile the damage will be halted. Factories will receive generous loans to tide them over as the market for domestic manufactured goods recovers. Secondly, factories must adhere to government guidance in negotiations with labor. Labor unions are a key part of the current wage price spiral, and at some point government and industry will need to present a united front to halt the disaster.

Enforcement

Yen is unfortunately quite aware that basically every KMT oligarch and their associated gangs are engaged in some kind of speculation, and thus this reform is unlikely to be implemented at all in most parts of the country. Still, because the Nanjing-Shanghai region has roughly 60% of the country’s privately owned industry that is still in government controlled territory outside of Manchuria, and manages almost all of the country’s foreign trade, extending reforms to this region alone should be reasonably effective. And luckily, Shanghai happens to be the stronghold of a certain Chiang Ching-Kuo, who is probably the only person in the government willing to stake their reputation on chasing speculators. In addition, Chiang has access to a large paramilitary force which can be used to “enforce the regulations” (read: beat up speculators). It may get him in hot water, but Yen is willing to do what needs to be done.

TLDR:

• The currency being screwed screws up the commercial relations between rural and urban areas. The government is going to try to fix this by encouraging farmers to conduct commerce through banks, essentially.

• The country’s manufacturing industry is getting screwed by laissez-faire trade policy. Tariffs and capital controls, baby.

• Bribing convincing loyal, patriotic business people to use their newly returned industrial enterprises for the good of the nation, or something like that.

• Oh you know, a little bit of intimidation by CCK’s goons.

• Overall, the policy is a sort of crude pump to get the economy flowing again. It doesn’t help decrease prices at all in the short term, because it essentially locks inflation into the prices paid for basic commodities, and it’s a generally clumsy and heavy-handed way to do it, but the primary objective is to just get the commercial economy working at all.