Section 1 Exploration of the monetary policy framework after the founding of New China（1949—1977）

This paper collates and analyzes the evolution of China's monetary policy framework in the past 70 years，which can be divided into five stages：the first stage is the period of national economic recovery at the beginning of New China，spanning roughly from 1949 to 1952.The second stage is the period of planned economy，spanning roughly from 1953 to 1977.The third stage is the period of coexistence of state planning and regulation by market forces，spanning roughly from 1978 to 1992.The fourth stage is the period of establishing and improving socialist market economy，spanning roughly from 1993 to 2012.The fifth stage started with the comprehensive deepening of reforms in 2013.The first section of the paper reviews the first four stages and focuses on the money creation mechanism，objectives and tools of these periods，while the rules and transmission channels will be discussed in the next section.

I.Monetary and financial policies during the period of national economic recovery：1949—1952

During the national economic recovery at the beginning of New China，a modern monetary policy framework was absent. Due to years of war，regional economies were independent from each other for a long time and difficult to move towards integration. Different currencies were used in different regions，with various names，formats and exchange rates. In a word，the nation's currency system was fragmented（Wu Li，1995）. One of the priorities of the new regime was to establish an independent and unified monetary system quickly. Therefore，issuing RMB and creating a uniform national currency became the primary task in currency and finance. The currency unification of liberated areas began as early as in 1947 when the War of Liberation came to the strategic turning point. In March 1948，the five major liberated areas in North China[3] adopted the resolution Unifying New China's Currencies at the North China Financial and Trade Conference，and proposed a principled plan for currency unification：“unify the currencies of the local region as the first step[4]，and then from north to south，specifically the northeast and the north first，followed by the northwest and Central Plains，then the west and the south，and finally achieve national unification through People's Bank of China's issuance of standard currency”[5]. In December 1948，the People's Government of North China began issuing banknotes of the People's Bank of China as the unified standard currency of North China，East China and Northwest China. At the same time，it stipulated the exchange rates between former and the new currencies，gradually recalled former currencies issued by various base areas or the liberated areas at different historical periods such as Agrarian Revolution，the War of Resistance against Japanese Aggression and the War of Liberation，and implemented the policy of “marginalize and invalidate the majority，collect and exchange a minority within a given time limit”[6] for the “Jin Yuan Quan”（gold-yuan note）issued by the Kuomintang government.

The money creation mechanism of this period was relatively simple. The issuance and circulation of RMB cash and the stability of currency value mainly depended on the credit and authority of the new regime，including its military strength and the ability to guarantee material supply and stabilize prices. By comparison，credit-derived activities conducted by private financial institutions such as banks only played a very limited role in money creation.

The monetary policy objectives of this period focused on preventing inflation and ensuring financial stability，which translate into establishing and maintaining the whole society's confidence in renminbi，ensuring the issuance of renminbi and its unified value nationwide. From April 1949 to March 1950，there were four inflations in big cities. Take the “Shanghai Wholesale Price Index” as an example，it rose by 42 times in March 1950 compared to December 1948[7]. Meanwhile，the black market transactions of gold，silver and foreign currencies were active，and financial speculation activities such as high-interest loans were rampant，which not only undermined the issuance of RMB and its stability，but also raised possibility of a vicious circle. In fact，preventing inflation，ensuring financial stability，and maintaining the whole society's confidence in RMB was not only the objectives of monetary and financial policies at the time，but also an important objective of the overall financial and economic work（Xue Muqiao，Wu Kaitai，1985）. In order to achieve these objectives，control of cash issuance，effective allocation of supplies and crackdown on speculation must go hand-in-hand. It was during this period that the concept of “three major balances” in financial and economic work took shape. “Balance between cash collection and payment” was one of the three major balances[8]，which could also be regarded as the intermediate objective of the monetary policy of the period.

In order to prevent and control inflation，ensure financial stability，safeguard confidence in RMB，and guarantee the issuance of RMB，the new regime used a variety of monetary policy tools and non-monetary policy tools. Among them，monetary policy tools mainly include the following. First，reduce cash injection and strengthen cash management. For example，the People's Bank of China signed the Trade Vault Contract with the Ministry of Trade，and signed contracts on vault agency and fund transfer[9] with the Ministry of Railways，the Ministry of Fuel Industry，the Ministry of Heavy Industry，the Ministry of Posts and Telecommunications and other departments to collect and transfer funds in a unified manner. In 1949，the Notice on the Decision to Comprehensively Implement Domestic Exchang e was promulgated to promote non-cash settlement. Second，offer “net-priced savings”，guaranteed and hedged savings，and premium rate savings，and encourage banks to attract deposits and recover loans to tighten monetary policy. Third，adjust the deposit and loan interest rates. Raise or lower the deposit and loan interest rates according to the price situation，to indirectly regulate the supply and demand of capital in the market. Fourth，issue “People's Victory Net-Priced Bonds” to withdraw gold and other currencies such as US dollar. Fifth，design and implement different credit policies for public sector and private sector，trade sector and production sector，and to flexibly use credit leverage. Non-monetary policy tools mainly include[10]：first，carry out inter-regional allocation of materials，conduct state-run trade for massive sell-off of materials，mobilize private enterprises to engage in production so as to increase supply to the commodity market；second，strengthen taxation and withdraw money；third，use administrative measures to combat speculative organizations，including investigating speculative activities，shutting down sites，and penalizing primary speculators；fourth，channel hot money and re-open the stock exchanges in Beijing and Tianjin that had been closed down previously.

II.Monetary and financial policy framework during the planned economy period：1953—1977

During the planned economy period，a unique monetary and financial policy framework was formed within the then planned economic management system. This framework is different from the monetary policy framework within today's socialist market economy. Back then，finance and credit were managed as the two separate channels of capital supply，and finance was the main channel. The supply of “capital expenditure，state-owned enterprises’ own capital and its current capital” was undertaken by the finance，and bank credit policy was in a secondary position，only providing “enterprises’ temporary capital or over-quota current capital，current capital for collective ownership production，and microloan for farmers’ living expenses.” In 1978，bank credit only accounted for 23.4% of total capital for production，circulation and construction，and the rest was obtained through financial allocation[11]. The exchange of production materials was mainly conducted by transfer based on the price stipulated in the plan，and therefore，the exchange of production materials between enterprises only brought about the increase and decrease of bank deposits and loans without any cash transactions. Cash was mainly used in the following scenarios：first，wage payment of government agencies and institutions；second，sporadic expenses of government agencies and institutions；third，procurement of subsidiary agricultural products；fourth，withdrawal of individual or collective deposits.

The money supply mechanism during that period consisted of two parts：one is cash supply，such as wage expense of government agencies and institutions；the other is credit supply，such as agricultural loans and capital construction loans. Although the money creation mechanism of loan-derived deposit still existed in theory，it was difficult for the derivative deposit mechanism to play a substantial role in the real economy，considering the national banking system featuring“great unification” and the strict credit planning and credit management.

Compared with the previous period of national economic recovery，the monetary credit policy of this period had a clearer objective under strict planning and management system：maintaining the balance between cash receipts and payments，credit balance，as well as the comprehensive balance between credit and financial materials. These planned balances were collectively reflected in the stability of consumer goods prices. Since cash was mainly used in consumer goods trading，once the amount of cash in circulation exceeded the supply of consumption materials，prices would easily rise，leading to “hidden inflation”，where imbalance of demand and supply and panic buying occurs and quota has to be introduced. In 1956 and 1958 after the “Great Leap Forward”，and in 1967—1968 and 1976 during the Cultural Revolution，there were four rounds of inflation that were relatively serious. In order to achieve the ultimate objective of maintaining stable consumer goods prices，the monetary and credit policy authorities in that period used to take “growth rate of market cash flow” and “the ratio of market cash flow to the retail sales of social goods” as the intermediate objective. During the “Great Leap Forward” and the Cultural Revolution，the credit plan management system was severely disrupted. The organization of the People's Bank of China was once deactivated and so were the planned objectives regarding balances and cash flow（Zhang Peng et al.，2010）. In 1956，while state-owned commercial commodity inventories fell by 6.5% year on year，market cash flow increased by 42% year on year，indicating inflationary pressures. At the beginning of the Cultural Revolution，the ratio of market cash flow to retail sales of social goods fell rapidly from 1：8.9 in 1965 to 1：6 due to additional issuance of currency. Pressures continued to build up with short supply of consumer goods and the rising prices.

The monetary policy tools in the planned economy period were mainly administrative and mandatory measures for planning and management，mainly the following two.

First，“management based on integrated credit plan”. The “integrated credit plan management” was implemented in 1953，featuring “unified collection and allocation of funds by the state，and unified deposit and loan by the state”. The main content can be summarized as three points[12]：first，deposits at all levels were put under the centralized control of the head office，and quotas for loans were also reviewed and approved by the head office. Second，deposits and loans of banks at all levels were separated，and the quotas for loans could not be transferred. Third，enterprises at all levels prepared the plan for loans，which were reported bottom-up，and the responsible national authorities and the head office then reviewed and approved the plans top-down. The People's Bank of China，according to the national economic plan，prepared a comprehensive credit plan annually，which was revised by the State Development Planning Commission and then submitted to the State Council for approval and eventually incorporated into the national economic plan for implementation. All industrial departments and regions also compiled their own credit plans，which were submitted to the head office of the People's Bank of China for integrated balancing. In addition to the annual plan，quarterly and monthly plans were also required for credit management.

Second，“management based on cash receipts and payments plan”. Since 1953，the People's Bank of China has compiled a plan for cash receipts and payments based on the national economic plan，measuring the total cash flow by receipts and payments，so as to calculate the cash supply or the balance for withdrawal of the year[13]，and the currency circulation is then adjusted according to the plan. Specific adjustment methods mainly include：controlling the scope of cash use，promoting non-cash settlement；controlling wage expenses，e.g. introducing wage fund supervision system in 1960；encouraging savings；withdrawing cash through sales of commodities [14].