We usually date the Great Depression from October, 1929, when the New York Stock Exchange crashed, ushering in a cascade of defaults from investors, banks, and their business partners all over the world. And indeed some Chinese felt the crash quickly and painfully. Silk producers, for whom the United States was a key market, were devastated. (To make matters still worse, improvements in the production techniques for rayon – marketed as a cheap, synthetic substitute for silk – just happened to reach the market right around 1930.) Other producers of commodities sold on global markets, such as cotton, wheat, rice, and peanuts, were also powerfully affected.
For a while, though, China’s coastal cities were protected from the crisis; Shanghai in particular had an economic boom in the early 1930s. The reason was China’s unusual currency system.
When the Depression began, most global currencies were tied to gold. But the Chinese yuan was tied to silver; so was the Hong Kong dollar, since its economy was strongly tied to the mainland and it made sense to limit fluctuations in the relative values of mainland and HK currencies. As commodity prices fell with the decline of global demand, silver fell faster than gold, pushing down the value of silver-linked currencies relative to most others. This devaluation made Chinese manufactured goods more competitive in global markets; Shanghai, with a large share of China’s modern factories, was a major beneficiary. (Hong Kong, which did not do much manufacturing for export in those days, was much less affected.)
In addition, because the government backed China’s currency with silver reserves, demand for the metal fell less in China than it did elsewhere; this meant that silver soon became worth more in China than elsewhere. Consequently, silver flooded into China during the early 1930s – especially into the International Settlement in Shanghai, which seemed like a safe haven from the turmoil in much of the country, and indeed the world. (There is some evidence of a net flow of silver from rural China into Shanghai, though that is less clear.) Looking for an outlet, this money fueled a speculative boom in Shanghai real estate. While this was painful for the city’s huge numbers of renters, the rising land values did put money in the hands of property owners, and provided collateral for loans that financed other investments. Businesses that catered mostly to better-off people, as the department stores did, fared very well.
It was not to last. As the Depression wore on, many countries abandoned the gold standard and devalued their currencies; by 1934, silver was rising relative to gold, eroding China’s competitive advantage. Then the United States government, responding to pressures from domestic silver mining interests, made huge purchases of silver in 1935; with silver values overseas now rising relative to China, the silver that had previously rushed into Chinese cities now fled. Shanghai’s real estate bubble collapsed, greatly worsening its depression. International aid efforts failed, largely because of Japanese obstruction. In November of 1935, the Nationalist government abandoned the silver standard as part of a radical (and fairly successful) currency reform. With China no longer on a silver standard, there was no reason for Hong Kong to stay on one. The colonial government dropped the silver standard, and pegged the Hong Kong dollar to the British pound. (That peg remained until 1972, when Hong Kong shifted to a US dollar peg.) Sincere, over-extended and desperate for cash, had to take out an emergency loan from HSBC, mortgaging all of its assets.
For a while, then, urban Chinese – especially wealthier urban Chinese – had been sheltered from the worst of the Depression. Companies like Sincere benefitted; on Nanjing Road, the early 30s even seemed to some like a golden age. But a brutal reckoning came soon after, and an even more brutal one – all-out war with Japan – came soon after.
