Manila Bulletin: “Lin Lu remembers the day last December when a Chinese businessman showed up at the car dealership he works for in north China and paid for a new BMW 5 Series Gran Turismo -in cash.
“One of his friends carried about $60,000 in a big white bag,“ Mr. Lin recalled, “and the buyer had the rest in a heavy black backpack.“
Lugging nearly $130,000 in cash into a dealership might sound bizarre, but it’s not exactly uncommon in China.
This is a country, after all, where home buyers make down payments with trunks filled with thick wads of renminbi, China’s currency. And big-city law firms hire armored cars to deliver the cash needed to pay monthly salaries.
For all China’s modern trappings -the high-speed rail networks and soaring skyscrapers -analysts say this country still prefers to pay for things the old-fashioned way, with cash.
Doing business in China takes a lot of cash because Chinese authorities refuse to print any bill larger than the 100-renminbi note. That’s equivalent to $16. Since 1988, the 100-renminbi note, graced by Mao Zedong‘s face, has been the largest note in circulation, even though the economy has grown fiftyfold. No major economy has limited itself to such a low denominated bill as China.
By making the 100-renminbi note the largest bill, the nation’s citizens need more of it to buy a television, never mind a car, home or a yacht.
Chinese economists and govern ment officials often suggest that printing larger denomination notes might fuel inflation. But there is another reason.
“I’m convinced the government doesn’t want a larger bill because of corruption,“ said Nicholas R. Lardy, a leading authority on the Chinese economy at the Peterson Institute for International Economics in Washington, noting that it would help facilitate corrupt payments to officials. “Instead of trunks filled with cash bribes you’d have people using envelopes. And there’d be more cash leaving the country.“
All the buying, bribing and hoarding forces China to print a lot of paper money. China, which a millennium ago was the first government to print paper money, accounts for about 40 percent of all global paper currency output.
Although China’s coastal cities have flourished during the 30 years of economic prosperity, economists say the country’s interior remains poor and disconnected from the more modern aspects of the financial grid. As a result, the poor prefer to do business in cash. The rich also like to deal in cash, and they typically hide their money in the underground economy to avoid government scrutiny.
“The average Chinese trusts neither the Chinese banks nor the Communist Party,“ said Friedrich Schneider, an authority on shadow economies and a professor of economics at the Johannes Kepler University of Linz in Austria.
That lack of trust fosters a game between the government and its subjects, analysts say. Executives make secret cash deals to earn outside consulting fees while working at state-run companies. The government responds by trying to penetrate a vast underground economy, where transactions are conducted almost entirely in cash.
Often, the culprits are the very government officials who are supposed to be upholding the laws.
Take the case of Wen Qiang, the former police chief in the city of Chongqing. He was caught in 2009 with nearly a million dollars in renminbi, carefully wrapped in plastic bags and hidden in a water tank at a relative’s home.
To keep a lid on the illegal cash transfers, China restricts cross-border money transfers and places limits on foreign currency exchange.
And then there’s the issue of rodents. In March, a migrant worker in Shanghai discovered that mice had chewed into tiny pieces the $1,200 his wife stored in a closet. A local bank agreed to exchange the money if the man could reassemble at least three-quarters of a bill.
“But the bills are now in small pieces and it’s almost impossible to fix them,“ said Zhao Zhiyong, the 37-year-old worker. “Who could know that the money would be chewed by mice?“ Xu Yan contributed research in Shanghai.
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