Grow the Economy, Print Bigger Currency
As you may have heard, China’s economy has changed over the last few years. In 1979 China’s economy was 10th biggest in the world between Spain and Holland. It is expected to pass Japan as the world’s second largest this year, if it hasn’t already.
And yet, with all of the changes that have taken place, there are still some odd remnants of an economy from years gone by that no longer exists. Cash, for example, is still overwhelmingly the preferred type of payment. While you see many more domestic credit cards and bank transfers these days, the overwhelming majority of daily commerce is still done with cash, particularly outside of the three biggest cities. And this doesn’t just go for your local 鸡蛋饼, either. I’ve had landlords who prefer to receive months of payments at a time in cash. You still see people making down payments on apartments in cash. Hell, when I lived in Chengdu, they used to pay my monthly salary in cash. Sadly it fit in a money clip fairly easily.
Now, all of this would be fine, except for one problem. The government has had the foresight to change economic policy drastically in 1979, gradually float the currency to avoid crisis and dissolve, sell or drastically change the structure of state-owned enterprises. And yet, it hasn’t occurred to anyone yet that perhaps it’s time to start printing a bill larger than the hundred.
This, my friends makes no sense at all. It would be tough enough putting a downpayment on a house with US hundreds. Imagine doing it with a bunch of $15 dollar bills. This is really the craziest most out of date anachronism I’ve ever heard of. It makes my life painful, and it makes everything seem more expensive. For example, if you buy a computer, most people hand over stacks of cash. That has to be a disincentive to making big purchases. It just feels like you’re spending a fortune.
The one argument I’ve heard for the hundred being the biggest bill is that it is a deterrent to corruption and the underground economy. If you have a trunk full of case, there’s not much you can do with it.
But that seems like a weak case to keep the rest of us miserable. There’s a restaurant in Baoli Dasha where the coffee is RMB 128. That’s right, there is no bill in China that can cover a single cup of overpriced coffee. That’s preposterous.
So if China is really going to promote consumer spending, I have one simple piece of advice: print larger denominations of currency.
Bill responds:
Posted: June 6th, 2009 at 7:51 am →
Watch what you wish for. They may print a bigger currency, as in size of the paper, but not the value, just to ensure that your monthly salary won’t fit the money clip.
Jeremy responds:
Posted: June 6th, 2009 at 11:22 am →
It’s savings that has led to China’s massive growth over the years, even if too much of it has been funneled to America as loans.
And I think it might shake the cognitive dissonance of one too many people who realize their money has declined to a tiny fraction of its original value if they start putting out 1,000 Yuan bills.
Imagine if they put out 10,000 Yuan bills – a 10,000 Yuan household used to be the equivalent of a millionaire as we all know.
It could be a big mistake to remove one of the few restraints keeping China’s central bank from monetizing ever greater amounts of money.
BlueUnderSun responds:
Posted: June 10th, 2009 at 5:18 am →
hehe, it never occurs me that we actually need a larger bill. But everytime when I get back to China, I am amazed how much cash my sister has to put in her wallet. In UK, I never had more than £20 in my wallet, since I can get cash very easily anywhere. There is a £50 notes, but I never see anyone uses it in UK.
JohnR responds:
Posted: June 24th, 2009 at 8:10 am →
Hey Josh,
I noticed China Daily newspaper picked up this blog entry and published it a few days ago in the column “sweet and sour”. It was in the “sour” column.
It seems a rather American idea that consumption is how to grow an economy. Using an analogy, consumption of fat burgers everyday is great for building a much bigger fatter flabby body, but is it really the body you want? Big is not everything, healthy and strong is also important. Sensible controlled consumption balanced with exercise is required to have a healthy body.
To connect the analogy, wise spending of money (durable goods, appreciating assets, infrastructure, public works) should be balanced with savings rather than spending on credit increasing debt. Credit card spending on computers and on non-durable, depreciating goods, is like eating fat burgers every day. Makes you fat, higher GDP, but not stronger. (GDP measurements don’t discriminate on good vs bad consumption, all consumption is assumed to be good and increases the GDP).
China is doing a lot of things right. Lots of savings, not much use of credit cards, these are all good things. When you are in China thinking twice about buying a computer with an Intel or AMD chip inside (both from US), with Nvidia / ATI graphics chip (US or US), plus Broadcom Wifi/LAN chip (US) plus Samsung/Kingston/Corsair memory chips (Korea/US/US) etc, which countries does it hurt most? (perhaps the ASUS/VIA motherboard is designed in Taiwan and if you are lucky, manufactured in Shenzhen).
When you buy some cheap $5 or $10 piece of crap plastic nicknack from Walmart without thinking twice because it’s a small denomination note (and the price of a cup of coffee), very good chance some guy in China makes a bit more money.
John