One-hundred Yuan notes are seen in this picture illustration.

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 increased by 137 percent in the three months ending June 30, year on year, according to the central bank.

The shift from cash to bank cards and electronic payments has been going on for years, and isn't 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 in July, 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 particularly unattractive.

Savers have suffered below-inflation deposit rates for most of the past decade, increasing the opportunity cost of holding short-term deposits or cash.

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.

Companies 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's 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.


- Tencent launched a new version of its WeChat mobile messaging app on August 14 with a feature that allows users to make money transfers to one another by generating a unique QR code - a kind of pixel-based barcode.

- China's central bank banned the practice of payment via code scanning in March.

At the time, the People's Bank of China said it was supportive of innovation, but that proper risk controls to protect customers must be in place.

- Internet-based payments totalled 5.3 trillion yuan (R9.2 trillion) in the second quarter of 2014, a 129 percent increase year on year, the central bank reported on August 18.

Mobile phone payments of 4.9 trillion yuan marked a 137 percent increase.

- Currency in circulation made up 4.8 percent of China's total M2, a broad measure of the money supply, in July.

It has fallen steadily from 11.2 percent at the beginning of 2000.

While M2 increased 13.5 percent in July, year on year, the currency stock increased just 5.4 percent. - Reuters

(The author, John Foley, is a Reuters Breakingviews columnist. The opinions expressed are his own.)