Dual Leadership and the 1956 Credit Reforms of the People's Bank of China

Abstract

In 1979 when debate over economic reform gained momentum, the future role of China's banking system became a major topic. Having fallen into obscurity during its merger of 1970–77 with the Ministry of Finance, the newly independent People's Bank of China became an aggressive advocate of reform. With its aim directed at the Ministry of Finance as well as local party “barons,” the bank's advocates called for an end to the Sovietinspired “Big Budget, Small Bank” financial system and to local Party interference in the bank's operations. Under this system, of which the 1956 credit reforms were a crucial part, the People's Bank had two principal functions. First, by carefully auditing the financial operations of all state enterprises, the bank was to ensure their adherence to the state plan. Bank credit was meant to compel enterprise management adherence to the state plans. The second function was a quantitative control of the nation's money supply. Bank supervision of enterprise finances was meant to be one way to this objective. But from its first efforts in 1955 to implement such micro-financial controls over the economy, the People's Bank encountered strong opposition from enterprise management, local bureaus of finance, the Ministry of Finance, and the Party apparatus. As a result, its supervisory function began to atrophy, leaving the bank to pursue control over the money supply. This it did primarily through reliance on its savings operations which, in contrast to enterprise supervision, enjoyed the strong support of the Party apparatus. By the height of the Cultural Revolution Party leftists saw the bank as a perfect object for bureaucratic “simplification.” Aside from its savings operations, its credit and even financial planning functions had become vestigal. Consequently, in 1970 the headquarters of the bank was dissolved and local bank branches merged with the budgetary system.