Howâ€™s this for a monetary paradox: the worldâ€™s fastest-growing major economy, the second-largest economy in the world, with more billionaires than any country except the US, has a currency whose highest denominated bill is worth less than that of any developed country in the world, as well as many of the poorest ones.Â
Weâ€™re talking, of course, about China. The largest denominated bill is the red 100 yuan note. At todayâ€™s exchange rate, itâ€™s worth about $15. Itâ€™s been the largest bill in circulation for the last eleven years. During that time, Chinaâ€™s economy has more than tripled in size. ATM machines have become pervasive. Prices for many things have reached American levels.Â
Credit cards are still rare. Chinese do most of their buying, even of big ticket items, in cash. Itâ€™s not uncommon, for example, to pay for cars and houses completely in cash â€“ using enough cash to fill either the car trunk, or a kitchen refrigerator. Because hospitals in China take cash and demand upfront payment before any treatment, most Chinese keep a stash of emergency cash at home of many thousands of renminbi.
Among the affluent Chinese bosses I know, itâ€™s common to carry both a wallet and a kind of â€œguy purseâ€ where they keep Rmb30,000-Rmb50,000 in cash. Â It’s like carrying around a small brick Â — and just as obvious.Â
Next door to me in Hong Kong, the highest bill is circulation is HKD1,000, worth over eight times the 100 yuan note. In Taiwan, the biggest bill in circulation is NTD2,000, worth five times more than the 100 yuan note. In Singapore, itâ€™s a $10,000 note. To use renminbi to get one, youâ€™d need 500 of the 100 yuan notes.Â
For lots of reasons, macro and micro, China urgently needs larger denominated currency. Yet, itâ€™s very unlikely to get it anytime soon.Â
A main reason, as far as I can determine, is a justifiable fear of mass counterfeiting. In China, counterfeit bills are already rife. Before moving to China, I never knowingly handled a counterfeit note. Here, Iâ€™ve already twice been given counterfeit bills as change, and then got stuck with them.Â
Youâ€™d think, of course, that most of the counterfeit Chinese bills would be the 100 yuan note. In fact, most of the fakes in circulation are 10 and 20 yuan notes, each worth so little itâ€™s hardly worth the expense and risk of producing the forgeries.Â
Whatâ€™s going on here? Though itâ€™s the highest denominated bill, the 100 yuan note has a very unusual pattern of circulation. Itâ€™s never given as change, since itâ€™s the largest bill. As a result, individuals get their 100 yuan notes almost exclusively direct from the bank, either an ATM or at the counter. These bills are usually new, or nearly new, and all are checked to make sure they are genuine.Â
When you then use the notes, they are usually checked again by the receiver to be sure they are not counterfeit. Since they canâ€™t be used as change, whoever got the 100 yuan as payment will almost certainly return them to the bank. Any bills that are not in perfect condition get scrapped. This is particularly true in larger cities. One result is every time I go to withdraw money from an ATM, Iâ€™ll get only brand-new bills. Even in the rare cases when Iâ€™ve been given a lot of 100 yuan notes by someone, usually as repayment, they are also almost always in mint condition.Â
If China ever did introduce a 500 yuan note (worth about $65), then the 100 yuan notes would start to be used as change. Counterfeiting would almost certainly explode. The incentives, compared to today, would be overwhelming. The logistics needed to combat it almost incomprehensible. Most stores, even small ones, have machines at every cash register to detect counterfeits. But, lots of commerce in China is still hand-to-hand, in wholesale and retail markets as well as street vendors.Â
Thereâ€™s no realistic way to protect these tens ofÂ millions of small businesses and traders from the punishing risks of getting stuck with phony bills. Â When the cost of wrongly accepting a single fake bill, as now, is usually 10 yuan ($1.50), itâ€™s unfortunate, but manageable. If it becomes $15, itâ€™s easy to foresee that these tens of millions of businesses would refuse to accept 100 yuan notes from customers. The result: lots of disruption to established patterns of trade across all of China.Â
At its current pace, Chinaâ€™s economy will double again in the next seven years. Will the 100 yuan note still be the largest in circulation then? My money says it will be.Â
4 thoughts on “Big Economy, Small Cash”
I don’t recall always getting brand-new 100RMB notes from ATMs or bank tellers. I mean, the notes are in good condition but not usually brand-new. Most of my time in China has been spent in Chengdu; how about you?
Why don’t they just use the plastic bills invented by Australia and now made for and use by HK for their currency too?
The other problem is that the cash density ATM’s is quite low – and I often ran into empty machines. Especially around the golden weeks.
Considering the large population of diversified education background it’s a realistic way of management. Hopefully electronic transaction will promote as popular as big cities.
Unless I’m out of the loop, isn’t the W10,000 note (value ~USD$10) still the highest denomination in South Korea? Perhaps the same anti-counterfeit philosophy coming out of Seoul.