What is Yi Gang trying to say in his 1st interview after retiring from PBoC?

China's former central bank governor talked about jiaozi from 1,000 years ago - for what?

In a recent comment on a Pekingnology post, Geremie R. Barmé, the veteran Australian sinologist who counts Kevin Rudd as his student, invoked the observation of Miklós Haraszti, a Hungarian writer, from decades ago:

…the technique of writing between the lines is, for us, identical with artistic technique. It is a part of our skill and a test of our professionalism. Even the prestige accorded to us by officialdom is partly predicated on our talent for talking between the lines… .

…Debates between the lines are an acceptable launching ground for trial balloons, a laboratory of consensus, a chamber for the expression of manageable new interests, an archive of weather reports. The opinions expressed there are not alien to the state but are perhaps simply premature.

Commentators including Chairman Rabbit have pointed out that some vital China knowledge is so obscure that they are now essentially esoteric. In my opinion, the higher end of China watching inevitably involves locating and distilling what is written between the lines. Merely locating valuable content out of a sea of carefully crafted speeches, documents, and interviews packed with obscure phrases is a difficult if not impossible undertaking for many. I hope Pekingnology - and The East is Read, a sister newsletter - could at least help with that, in its humble effort to promote a more comprehensive understanding of China.

Today, I am sharing a January 12, 2024 interview of Yi Gang, former Governor of the People’s Bank of China, by 金融时报 Jinrong Shibao (literally Financial Times), a newspaper by the central bank.

Yi obtained his Ph.D. in Economics from the University of Illinois Urbana–Champaign and became an Associate Professor with tenure at Indiana University–Purdue University Indianapolis, before going back to Peking University, his alma mater. He later joined the People’s Bank of China and rose through its ranks until heading it between 2018 and 2023.

Yi retired in July last year and his five-year tenure at the helm of China’s central bank is known for, according to Bloomberg, “a restrained policy approach focused on moderate stimulus and reducing financial risks in the economy.”

The preface of the Jinrong Shibao interview reads:

On January 12, 1024, the Northern Song court decided to establish the Jiaozi Affairs (Bureau) in present-day Chengdu, Sichuan (then known as Yizhou). The Northern Song’s 交子 Jiaozi became the earliest invented and used paper money in human history, marking its 1000th anniversary this year. The Northern Song’s Jiaozi, followed by 钱引 Qianyin, 会子 Hui'zi, 蒙元中统钞 Mongol Yuan Dynasty's Zhongtong notes, and the 大明宝钞 Da Ming Baochao notes, represent significant contributions of China to the history of human currency. Influenced by these innovations, Persia, India, Japan, and Goryeo also issued paper money. Today, paper money has become an important tool for payment and settlement in human society.

Yi Gang, the president of the 中国金融学会 China Society for Finance & Banking and former governor of the People's Bank of China, pointed out that Jiaozi was an important financial innovation in our country's history. It initiated the grand experiment of paper money as a credit currency, and the experiences of its success and failure have important implications for currency policy and the stability of currency value.

Paper money itself has no value; the value represented by paper money relies on a series of credit system arrangements during the issuance process. Currently, most countries treat paper money as the national credit currency, i.e., fiat money. Researching the inception and management methods of Jiaozi and exploring the series of credit support system arrangements behind it offer significant insights into the issuance and management of currency.

For this, a reporter from the Jinrong Shibao conducted an exclusive interview with Mr. Yi Gang.

Now, as impressive as the 1,000-year mark sounds, Yi certainly wasn’t talking about history for the sake of history and was aiming at something present, as he readily admits at the end of the interview. But what exactly was he probably referring to, if he was indeed referring to anything exact?

I don’t have the answers, but here are a few thoughts.

In repeatedly invoking the private origin of jiaozi and that a good currency system emerges after the competition, was Yi, now out of government office, alluding to what he cautiously nodded at a decade ago?

The New York Times reported in 2013

Speaking at an economic forum on Wednesday, Yi Gang, the deputy governor of the People’s Bank of China and director of the State Administration of Foreign Exchange, said that it would be impossible for China’s central bank to recognize Bitcoin as a legitimate financial instrument in the near future. But, Mr. Yi added, people are free to participate in the Bitcoin market and he would personally adopt a long-term perspective on the currency

Yi, in the interview, also cruised from 1024 AD to arguing that “establishing and improving a modern central bank system is crucial” for today’s China, where there needs to be “a clear goal of maintaining the stability of the value of the currency” as he attributed the collapse of many fiat paper money of Chinese dynasties to “the curse of fiscal overspending leading to currency devaluation and inflation.”

Yi Gang devoted a lot to formulating and formalizing the 现代中央银行制度 modern central banking system, including by placing it within the 中国式现代化 “Chinese path to modernization,” an overarching ideological framework since 2021. Andrew Batson neatly summarized it

that is the point he wants to make: these policies have been successful in making China stronger, so they should continue. You don’t have to agree that his argument is correct on the merits to understand that he wishes to preserve the PBOC’s autonomy and policy preferences in an era of heightened politicization and grand campaigns.

As China’s economy faces daunting challenges, including a spiraling stock market at its five-year low that only rebounded today, it can be expected that the central bank would be expected to “do more”. Writing in the People’s Daily, the flagship newspaper of the Communist Party of China, Yi drew a red line in 2020 for the modern central banking system:

It is essential to implement an independent financial management system for the central bank to prevent the monetization of fiscal deficits. A "firewall" must be established between the fiscal authorities and the central bank to separate their financial resources, while also preventing the central bank's balance sheet from assuming corporate credit risk, which could ultimately affect the credibility of the renminbi.

专访易纲：一场伟大的纸币实验、重要的金融创新

Exclusive Interview with Yi Gang: A Great Paper Currency Experiment, Significant Financial Innovation

The Birth of Jiaozi and Its Institutional Arrangements

From the very beginning, paper money faced the challenge of how to limit its issuance.

In the early Northern Song Dynasty (late 10th century), in today's Chengdu area of Sichuan (Yizhou), to solve the inconvenience of carrying iron coins, merchants established Jiaozi shops and issued exchange coupons known as Jiaozi, also referred to as 私交子 private Jiaozi. Later, the government designated the issuance of Jiaozi to sixteen wealthy merchants through a joint guarantee special franchise. In the 天圣元年 first year of the Tian Sheng era, the Northern Song court established the Yizhou Jiaozi Affairs (Bureau), transferring the right to issue Jiaozi to the government, which then issued 官交子 official Jiaozi.

After more than 100 years of circulation, Jiaozi was converted into 钱引 Qianyin during the 崇宁 Chongning and 大观 Daguan periods of the Northern Song Dynasty (in 1107 AD).

(The Jianmen Pass was an important ancient route for exchanges between the Sichuan region and the Central Plains. Its rugged terrain contributed to the economic independence of ancient Sichuan, creating the conditions for the popularity of iron coins and the birth of Jiaozi.)

Jinrong Shibao Reporter: Why did paper money originate in the Song Dynasty?

Yi Gang: The emergence of Jiaozi in the Northern Song and Hui'zi in the Southern Song during the Song Dynasty was not a coincidence. Numerous historical records and evidence indicate that the Song Dynasty was one of the most developed periods in China's history in terms of science and technology, culture and art, urban commerce, and the market economy. The development of the market required a considerable degree of division of labor and a significant proportion of products to be commodities intended for sale in the market. The exchange of goods, based on the establishment of property rights, required a considerable legal system and rules to protect the legality and predictability of market transactions. The urban commerce of the Northern Song was developed, and the demand for currency was high. Additionally, the Chengdu area of Sichuan (Yizhou) was an iron coin region where iron coins had low value and were inconvenient to carry. Thus, the market's need for a convenient form of currency led to the emergence of Jiaozi.

Jinrong Shibao Reporter: How was credit ensured and circulation guaranteed during the development of Jiaozi?

Yi Gang: Paper money can be categorized into two types based on its credit: one that can be exchanged for metal currency and another that cannot be exchanged and is circulated by state power with national credit support. From the first day of its birth, paper money faced the issue of how to constrain its issuance. As the earliest form of paper money, Jiaozi had a series of credit system arrangements in place from the beginning to support the stability of its currency value.

Firstly, there was an issuance limit and a reserve system. Official Jiaozi had an issuance limit, initially set at 1.25 million 贯 guan [a unit], with a cash reserve requirement using iron coins circulating in Sichuan. The reserve requirement was set at 360,000 guan for each issuance, approximately 28% of the total. The issuance limit and cash reserve were institutional arrangements to ensure cash redemption and enhance the credibility of Jiaozi.

Secondly, official Jiaozi was issued by period, with old Jiaozi exchanged for new ones at the end of each period, every three years. This periodic issuance managed the cumulative amount of Jiaozi in circulation, continually withdrawing old Jiaozi to keep the market circulation volume under control.

Thirdly, Jiaozi also retained some characteristics of flying cash, allowing for the issuance of Jiaozi in one location and the purchase of goods or withdrawal of cash in another.

The Circulation and Economic Impact of Southern Song’s Hui'zi and the "Cheng Ti Policy"

The circulation range and economic impact of Hui'zi far exceeded that of Northern Song Jiaozi, almost becoming the legal currency of the Southern Song [Dynasty].

Unlike Northern Song’s Jiaozi, the paper money Hui'zi issued by the Southern Song was an unconvertible credit currency supported by national credit from the beginning. Hui'zi mainly circulated in the southeast region, representing copper coins, and was also called 东南会子 Southeast Hui'zi. Hui'zi was initially issued by the private sector, known as 便钱会子 convenient Hui'zi. During 钱端礼 Qian Duanli's administration in 临安府 Lin'an Prefecture [Southern Song Dynasty’s capital], Hui'zi was taken over by the government. Later, Qian Duanli was appointed as the 户部侍郎 Deputy Minister of the Ministry of Revenue, and the Ministry took over the management of Hui'zi. Hui'zi was widely circulated in the southeast, used for tax payments and market transactions. The circulation range and economic impact of Hui'zi as paper money far exceeded that of Northern Song’s Jiaozi, almost becoming the legal currency of the Southern Song.

In the early 13th century, the Southern Song faced financial difficulties, and Hui'zi devalued due to excessive issuance. The concept of 称提之政 "Cheng Ti" was used to discuss the stability of paper money value. 称提 Cheng Ti refers to achieving an equivalent balance between different items. The main issue that the Cheng Ti policy aimed to solve was stabilizing the value of Hui'zi.

Jinrong Shibao Reporter: How did the Southern Song government support the credit of Hui'zi with the "Cheng Ti Policy"?

Yi Gang: In summary, the main content of the Cheng Ti policy included increasing the supply of metal currency to withdraw and reduce the circulation of paper money Hui'zi; and specifying the use of Hui'zi, mandating its use in tax payments and large goods purchases.

One approach was to withdraw Hui'zi using monetary and fiscal measures, exchanging copper coins for Hui'zi and adjusting the ratio between copper coins and Hui'zi. This was known as 子母相权 "mutual weighing of mother and child" and 虚实相称 "matching of virtual and real." Copper coins were the mother, and Hui'zi (paper money) was the child, hence the mutual weighing. If Hui'zi did not have corresponding copper coins, it was considered a "child without a mother," not adhering to the mutual weighing principle.

Another approach was to use periodic issuance, exchanging old Hui'zi for new ones at a multiple ratio to withdraw old Hui'zi. During the 嘉定 Jiading period, it was stipulated that the Hui'zi issued in its fourteenth period in the fourth year of Jiading (1211) would be exchanged at a 1:2 ratio for the eleventh to thirteenth period old Hui'zi. Later, the eighteenth-period Hui'zi was exchanged at a 1:5 ratio for the sixteenth-period Hui'zi. Similar policies are still in use today, with many modern countries swapping new currency for old to combat inflation, including cases where zeros are removed during the exchange.

Ensuring a certain proportion of Hui'zi in tax collection was another measure. The famous "half money, half Hui'zi" tax collection method of the Southern Song required half copper coins and half Hui'zi in tax payments, maintaining the payment ability and value stability of Hui'zi. There were also more detailed structural policies, such as 按亩征会 "levying Hui'zi per mu," requiring one guan of Hui'zi for every mu of land owned, and 品搭盐钞 "combine paper money with salt license," requiring merchants to combine Hui’zi with the government-issued salt license when purchasing salt from government monopolies. These policies were similar to early experiments with inflation taxes and structurally placed more of the cost of withdrawing Hui'zi on wealthy individuals, such as landowners and merchants in salt.

阴助称提 "Yin Zhu Cheng Ti," or supporting Cheng Ti through the sale of monopolized goods or government-licensed assets, was another policy, resembling modern central bank open market operations. The Southern Song government withdrew Hui'zi by selling gold, 官诰 government offices, 度牒 religious certificates, and through the monopoly of essential living goods such as salt, tea, and alcohol.

Jinrong Shibao Reporter: What lessons from the Southern Song government's Cheng Ti policy can be learned for future monetary regulation?

Yi Gang: All these Cheng Ti policies were regulations concerning both the issuance and use of Hui'zi.

(Hui’zi of Southern Song Dynasty.)

On one hand, due to financial pressures, too much paper money Hui'zi was issued, and the focus of Cheng Ti was on finding ways to withdraw Hui'zi in circulation.

On the other hand, specifying the use of Hui'zi through government power was also very important. First, the government accepted Hui'zi for tax collection, then accepted Hui'zi payments for auctioning various government-monopolized rights and licenses. Granting credit to Hui'zi through state power in both issuance and use alleviated the devaluation of Hui'zi, allowing it to be used on a large scale for a considerable period and maintaining the basic stability of Hui'zi's currency value for a long time.

From Jiaozi, Qianyin, Hui'zi, to the Mongol Yuan Dynasty's Zhongtong notes, and then to the Ming Dynasty's Da Ming Baochao notes, although these were advanced credit support systems at the time and some maintained widespread use for hundreds of years, they all eventually faced unsustainable outcomes. After these paper currencies entered government issuance, due to fiscal deficits, military needs, civilian disaster relief, and official corruption, they often ended up with excessive issuance, significant devaluation, and ultimately an unsustainable fate. Until the 万历 Wanli era of the Ming Dynasty (around 1580), 张居正 Zhang Juzheng, the chief minister of the Ming cabinet, implemented the 一条鞭法 Single Whip Law reform, essentially establishing a silver-based currency and tax system nationwide, marking the end of the great experiment with paper currency from the early Song Dynasty to the mid-Ming Dynasty over 600 years, profoundly affecting the flow of silver worldwide for the next 200 years.

(Ming Dynasty's Da Ming Baochao notes)

Jinrong Shibao Reporter: How was the relationship between metal coinage and paper money maintained during the circulation of ancient paper money?

Yi Gang: During the widespread circulation of paper money in the Song, Yuan, and Ming dynasties, copper coins always accompanied it, forming a co-existing circulation system of coins and paper notes. The prevalence of paper money did not diminish the importance of copper coins.

Looking at China's thousands of years of monetary history, copper coins have always held an important position, being the main currency used by the common people for daily market transactions. In some dynasties, the management of copper coin minting was more orderly, while in others, private minting of copper coins was rampant. Thus, from a comprehensive view of China's monetary history, copper coins represent a significant main thread. The Northern Song was also one of the periods with the highest copper coin minting.

The Economics of Money Insights from the Song Dynasty Paper Money Experiment

A good monetary system emerges from competition under constrained conditions.

In the history of ancient Chinese monetary thought, the idea that dynasties should attempt to monopolize currency issuance has long dominated. Officials not only advocated for the court to monopolize currency issuance but also saw it as an important means to maintain social and economic order.

Jiaozi represents a significant financial innovation in China's history, followed by a series of paper currencies until the mid-Ming Dynasty, playing an important role in China's monetary system and circulating for hundreds of years. These provide valuable historical experiences and insights for future monetary and financial studies.

Jinrong Shibao Reporter: What lessons can be learned from the Northern Song’s Jiaozi and subsequent monetary experiments?

Yi Gang: Unconstrained issuance of paper money inevitably leads to inflation and currency devaluation. Gold and silver standards can serve as the basis for precious metal currency systems and also constrain the issuance of paper money.

According to historical records, the governments of the Song, Yuan, and Ming dynasties all tried to successfully issue paper money as official credit currency because paper money had the lowest cost of issuance, not limited by the stock and growth of precious metals. From the main functions of currency issuance and maintenance, the court’s primary consideration was tax collection, with currency's role as a market transaction intermediary considered secondary. The historical context for this dominant idea was that governments of a unified China designed and implemented paper currency issuance systems within a unified framework, completely different from the competitive situation in Europe's history of multiple countries minting and issuing currencies (China also experienced a period of competitive currency issuance during the Spring and Autumn and Warring States periods). However, ancient states issuing paper money often could not escape the curse of fiscal overspending leading to currency devaluation and inflation, ultimately constrained by economic laws that have existed since ancient times.

Jinrong Shibao Reporter: What constitutes a successful monetary system arrangement?

Yi Gang: A good, sustainable, and economically stable, and growth-promoting monetary system emerges from competition under constrained conditions. A true currency with robust system designs will win its place in the market competition. The gold and silver standard systems also emerged from competition. Currently, most countries adopt the system of using paper money as the national credit currency (fiat money), which requires a clear goal of maintaining the stability of the value of the currency. Therefore, establishing and improving a modern central bank system is crucial.

The Significance of Jiaozi and Related Research Directions

Paper currency innovation is an important contribution of China to the history of human currency.

Globally, Jiaozi marks a significant milestone in the transition from a commodity-based currency system to a token-based currency system, providing a reference for other countries. After the emergence of Jiaozi, countries such as Persia, India, Japan, and Goryeo also issued paper money. The paper currency innovations from the Northern Song onwards are an important contribution of China to the history of human currency.

Jinrong Shibao Reporter: In studying the historical contributions of Jiaozi, what details should be focused on?

Yi Gang: First, special attention should be given to the commercial credit behind private Jiaozi. The paper itself of Jiaozi held no value; its represented value depended on the commercial credit behind it, which in turn relied on the stable expectation that Jiaozi holders could successfully exchange it for metal currency when needed. The market-based issuance of exchange coupons based on commercial credit, forming trading bills and then circulating as paper money, becoming payment vouchers for purchases and sales of goods, signifies a major advancement in over paying with gold, silver, and iron coins by utilizing commercial credit for payment transactions.

Second, after the establishment of the Yizhou Jiaozi Affairs [Bureau], the commercial credit behind Jiaozi transformed into government credit, entering the official Jiaozi phase. It was the government credit background and the series of credit support systems for Jiaozi that enabled its great historical continuity of more than 100 years. However, after the issuance rights were transferred to the government, Jiaozi also began facing issues of fiscal overspending.

Third, certain details about Jiaozi require further investigation, such as whether it originated as a deposit receipt. Jiaozi's role as a payment method for large transactions, its reserve ratio, circulation volume, payment volume, redemption discount rate, and circulation range are all important details that merit close examination and research.

Jinrong Shibao Reporter: How should we face and understand the historical significance of Jiaozi today?

Yi Gang: The greatness and importance of Jiaozi lie in its initiation of the grand experiment of paper money as a credit currency in human currency history. The issues and institutional constructions encountered by Jiaozi have commonalities in the history of human credit currency, and its experiences of success and failure have important implications for currency policy and currency value stabilization measures. The practice of Jiaozi and subsequent paper currencies has a profound impact on many monetary theories and practical issues, such as reserve systems, paper currency renewal, exchange, real bills, inflation expectations, Gresham's law, the quantity theory of money, open market operations, coordination of monetary and fiscal policies, anti-inflation policies, and other significant topics can gain valuable insights from the study of Jiaozi. This is precisely the significance of commemorating the 1000th anniversary of Jiaozi's birth today.