The theory put forth here argues that the struggle to control financial policies between generalist factions, which favor decentralization, and technocratic factions, which champion centralization, gives rise to inflationary and anti-inflationary pressure, respectively. But because both types of factions exploit the banking sector to fund their respective political aims, there is a persistent failure to commercialize the banking system in China. This chapter fully demonstrates this dual logic by examining two “classic” cases of inflationary cycles: the 1978–1982 cycle and the 1983–1986 cycle, respectively.

The two cycles are essential for the main argument for several reasons. First, this period saw the first two inflationary cycles since the 1978 reform. These two inflationary cycles exhibited a “classic” pattern in which generalist factions galvanized local enthusiasm for investment through manipulating the agenda at important party meetings and through restructuring vital economic decision bodies such as the Finance and Economic Committee. Because of the latent competition between generalist factions, they competed to decentralize financial resources to provincial followers, which increased inflationary pressure. When inflation rose above a certain threshold, the central bureaucracy mobilized against the generalist factions in order to regain control over finances. Closely examining the policy coalitions that formed on investment and monetary policies in this period allows us to evaluate whether the assumptions of the theory roughly accords with political reality in China.