John Foley Beijing
WHERE has China’s cash gone? Consumers are still spending at a rapid rate.
Yet the role of notes and coins in the economy has slumped. Innovations like bank cards and internet group Tencent’s new digital money are a recent factor.
But the wider story is that China’s wonky interest rates are causing strange behaviour and mounting risk. The relative demise of hard currency is partly down to innovation.
Users of Tencent’s mobile chat app WeChat can now pay each other by generating pixel-based QR codes on their iPhones. Mobile payments rose 137 percent in the three months to June from a year earlier, according to the central bank.
The shift from cash to bank cards and electronic payments has been going on for years, and is not necessarily worrying. But the wider aversion to old-school money creates a puzzle. Cash has dwindled to less than 5 percent of China’s broad measure of money last month, from 11 percent at the end of 1999. Though cross-border comparisons are tricky, bills and coins currently make up almost 11 percent of US money supply.
There are some simple explanations: for example, depositors trust China’s banks because they are mostly state-owned. But China’s rapid growth, combined with capped deposit rates, has made liquid assets unattractive.
Time deposits, which lock up money for longer, have grown to 64 percent of total personal and corporate savings, from 56 percent five years ago. Firms like Tencent and rival Alibaba add a new twist by offering money-market funds that allow customers fast access to their cash, but with higher interest rates.
The result is a growing maturity mismatch outside the banking system.
For now, Tencent’s payment method is just another nifty tool. But it is likely to encourage more funds into digital wallets, and from there into higher-yielding online products. Monetary authorities, meanwhile, should be on alert to the wider shift into longer-dated assets repackaged to appear as liquid as hard currency. When savers seem to be getting something for nothing, it often suggests regulators are behind the curve.