Chinese Way of Doing Business: In Cash We Trust; Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa

April 30, 2013

Chinese Way of Doing Business: In Cash We Trust


SHANGHAI — 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 — entirely in cash. “He drove here with two friends in a beat-up Honda,” Mr. Lin recalled. “One of his friends carried about $60,000 in a big white bag, 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, where hotel bills, jewelry purchases and even the lecture fees for visiting scholars are routinely settled with thick wads of renminbi, China’s currency. This is a country, after all, where home buyers make down payments with trunks filled with cash. And big-city law firms have been known to hire armored cars to deliver the cash needed to pay monthly salaries.

For all China’s modern trappings — the new superhighways, high-speed rail networks and soaring skyscrapers — analysts say this country still prefers to pay for things the old-fashioned way, with ledgers, bill-counting machines and cold, hard cash. Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa. 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 visage, has been the largest note in circulation, even though the economy has grown fiftyfold. (The country’s national icon, Chairman Mao, appears on nearly every note: the 1-, 5-, 10-, 20, 50- and 100- renminbi note.)Chinese economists and government 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, according to a report published by the China Banknote Printing and Minting Corporation. Adjusting for the size of its economy, China has about five times as much cash in circulation as the United States.

In the United States, the highest denomination printed is $100; in Japan, it is the 10,000-yen note, worth about $100; the 500 is the highest-denomination euro note, worth about $650. 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 or Swiss watch, never mind a car, home or a yacht, which China’s state-run media said was bought a few years ago by men bearing two suitcases filled with cash.

Following those paper bills as they course through this booming economy offers a fascinating glimpse into how China’s financial system works, and how parts of the country remain stuck in yesteryear.

“In large parts of China, it still looks like the U.S. in the 1950s: most everything is in cash,” said Jeffrey R. Williams, executive director of the Harvard Center Shanghai and a former bank executive who has worked in China for more than 30 years. “In the U.S., you might have one bill-counting machine at a bank, but here every teller has one.”

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 of their wealth. As was the case in other developing economies of Asia, easily traceable credit cards and checks are not commonly used.

“The average Chinese trusts neither the Chinese banks nor the Communist Party,” said Friedrich Schneider, an authority on shadow economies around the world and a professor of economics at the Johannes Kepler University of Linz in Austria. “This is simply a mistrust of government. And so lots of people deal only in cash.”

That lack of trust fosters a cat-and-mouse 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 off-the-books transactions are conducted almost entirely in cash, because it is harder for the authorities to trace and tax.

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.

In another case, the brother of China’s former railway minister was caught hiding about $5 million worth of renminbi at his home, some of it stored so poorly that the mildewed bills broke one government bill-counting machine.

To keep a lid on the illegal cash transfers, China restricts cross-border money transfers and places limits on foreign currency exchange.

Understandably, printing all that money is a major endeavor. The China Banknote Printing and Minting Corporation runs 80 production lines with 30,000 workers, six bank note companies, two paper mills, a printmaking company, a plate-making corporation and a firm that produces special anticounterfeiting security lines.

The People’s Bank of China, which oversees the operation, declined to comment on what the government calls the “name cards of the Republic.”

Perhaps those paper bills should come with a warning about storage practices. Last month, 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?”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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