« Back to Menu

M: Money

Yuan Dynasty bank note with its printing plate from 1287

The history of China’s monetary system is an under-researched topic but it’s safe to conclude that the Chinese were pioneers in financial innovation.

When Qin Shi Huang united the nation in 221 BC, copper currency was used, with strict controls on the production of copper and the minting of coins. A thousand years later new ways of paying for goods and services began spreading from China to other nations.

The first paper money and banknotes

Paper currency was a byproduct of another of China’s great innovations: wood-block printing. Paper payment started to appear in the Tang Dynasty around 800 and was known as feiqian, or ‘flying cash’. The money originated as certificates issued by the government to pay merchants in distant parts of the empire. This explained its name: it was much easier to courier over longer distances.

It was during the Song Dynasty about two centuries later that jiaozi, or ‘exchange paper’, came into circulation as the world’s earliest bank notes. The printed notes were widely used in Sichuan, then an affluent region along the Silk Road, although some scholars believe the innovation could have been introduced by Jewish merchants who had settled in Kaifeng, then the country’s capital (several hundred Kaifeng residents can still trace back their Jewish ancestry, albeit they have largely assimilated within Chinese culture).

After overrunning the Middle Kingdom in 1271, the Mongols began printing what was believed to be the world’s first fiat currency. During the Yuan Dynasty, international trade had opened up via land and sea. Marco Polo was so fascinated by how the government-backed currency circulated in China that he was believed to have brought the idea back to Europe.

The rise and fall of the ‘silver empire’

Traditionally-minded Chinese believed that an empire’s demise could be traced back to the emperor losing the ‘mandate of heaven’ (see D for Dragon Throne). Economic factors, especially mismanagement of monetary policy, were a decisive factor.

Take the Mongol’s Yuan Dynasty, which lasted for just 97 years. It has been well-documented that overprinting of its fiat money led to some of the worst inflation in Chinese history between 1260 and 1309. This eventually led to nationwide uprisings.

An economic crisis also contaminated the Ming Dynasty’s later years in the 1600s. The game-changer this time, however, was a large amount of silver that found its way from the ‘New World’ of America. It began to flow into China thanks to demand from Europe for local goods (see P for Porcelain).

That was a fundamental turning point in China’s monetary history as the economy morphed from its older copper currency towards a silver standard. The problem was that although China was rich in copper, it was never a major producer of silver. A contraction in silver supply began to grip the Ming empire in the mid-seventeenth century when Spain enforced laws banning trade with the Chinese (mainly via the Philippines), while the new shogunate regime of Japan (a major silver exporter) also banned exports. The resulting spike in silver’s value was disastrous for the Ming economy, which was already under stress from a series of natural disasters and famines (see E for Environment).

By the onset of the Opium War in the first half of the 1800s, European countries had switched to the gold standard. Yet silver was still the major currency circulating domestically in China. After the Opium War, China suffered from a worsening trade imbalance as it turned from an exporter into a net importer. Worse, most of the indemnities related to the conflict were settled in gold. That meant that the Qing government was hit by hefty foreign exchange losses as silver declined in price. Between 1901 and 1902, for instance, the Qing court suffered huge losses as silver prices in London plunged more than a fifth. The situation was exacerbated by rampant counterfeiting of silver within China – which debased the currency. In a bid to shore up its finances, the government set up its first central bank in 1905. The Great Qing Government Bank (today the Bank of China) was a last-ditch effort to defend its monetary sovereignty. However, it was too late: the Qing Dynasty, together with 4,000 years of imperial rule, would come to an end six years later.

How has the Chinese government learned from monetary history?

This is a very popular research topic among financial think tanks in China – especially reviews of how the Middle Kingdom lost its competitive advantages when it switched to the silver standard some 500 years ago.

China has once again become a major global exporter and it has built up large foreign exchange reserves too – reaching close to $4 trillion at one point. This time round the government wants to use its trade surplus more carefully. It also wants to broaden the reach of its own currency, the renminbi. Rather than hoarding the world’s most popular fiat currency (the US dollar) as the Ming and Qing once did with silver, the Chinese have been anxious to diversify their holdings into other commodities and asset classes, and to promote greater acceptance of the renminbi in international markets.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.