Will China's digital yuan help Hong Kong go cashless? Don't bank on it
Leaving Heathrow Airport in a cab, I was reminded how far down the e-payment path Britain has gone. On my last visit to London most city businesses preferred cashless transactions, but in the countryside a wallet of notes was still useful. Now, even countryfolk are not interested in cash and people throughout the country rarely exchange any at all. Everything is paid for by "tap and go" bank cards, in between dollops of hand sanitiser.
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Small payments, such as taxi fares, are still largely made in small coins and notes, the wet markets are all cash, and even some tunnel crossings between Hong Kong Island and Kowloon are cash only. Many of Hong Kong's dai pai dongs and tea shops refuse cards, and occasionally larger restaurants will force you to go to the ATM.
By comparison, farmers markets in Britain use Apple Pay or credit card dongles on cellphones, the Dartford Tunnel Crossing under the River Thames is paid for online and referenced against car number plates, taxi drivers would rather take a card for hygiene and convenience reasons, and given that HM Revenue and Customs like to investigate cash transactions in restaurants, no restaurateurs invite it in.
In Britain, as the amount of cashless payments went up, with small payments by contactless cards overtaking cash in 2018, the total number of £50 notes (about US$70, and Britain's largest note) has more than doubled in the past decade. In Japan the largest bill, a 10,000 yen note (about US$90) accounts for 93 per cent of all bills in circulation and demand for it is increasing, as opposed to smaller notes which people have less need for.
So clearly, cash doesn't disappear entirely with electronic payments, especially for large bank notes, but coins and small bills may eventually vanish. Demand for large bank notes in Britain and Japan has risen for the following reasons:
As banks move money, physically or otherwise, and make payments to third parties and other banks, the accumulated charges are passed onto their clients. While we remain in a low-interest-rate environment and earn next to nothing on deposits, there is little incentive to put money in the bank only to have to pay fees to get it out again. Might as well keep it handy.
But piles of cash laying around the home attracts unwelcomed attention. Large bills take less space and are less conspicuous when tucking them away, so to hide money, the bigger the denomination the better.
In a nutshell, we prefer to hide money rather than bank it, which may not be the safest idea, and is certainly a headache for the central bank, but if you don't trust banks then what is the alternative for large sums?
No doubt one of the biggest hang-ups with a centrally-controlled digital currency will be privacy concerns. Not only can the currency's issuer and controller track usage of the currency, but potentially also "turn off" the money if the wallet's owner breaks the law. This will no doubt meet strong resistance from savers, and to some extent this may also explain why Hong Kong so far has been reluctant to go fully cashless. So how can the SAR government encourage its take-up?
One way to push the adoption would be to remove high-value bank notes from circulation. This strategy is not without precedent, and has been dubbed 'demonetisation' by the press.
In Europe the days of the highest-value euro banknote, €500 (US$590), ended in 2019. That denomination has not been issued by banks in the eurozone since then, and it is being removed from circulation to discourage its use by criminals and terrorists. As it becomes rarer, large cash transactions become more visible and can be scrutinised. Italy has further tightened the screws on cash by progressively tightening the use of it: currently, any transaction over €1,000 in banknotes is illegal.
In 2018, the UK Treasury found that roughly 330 million £50 notes, with a total value of £16.5 billion, were not used for regular transactions and concluded that they were also used for illicit activities by criminals: funding terrorists, money laundering, a shadow economy, and tax evasion. To date, the government has resisted calls for the withdrawal of the note, as forcing the public to take their nest egg to a bank, deposit it, and register ownership to drive out cash stashed would be political suicide.
Either way, keeping a close eye on the M0 data from HKMA now becomes all the more relevant.
Neil Newman is a thematic portfolio strategist focused on pan-Asian equity markets
This article originally appeared on the South China Morning Post (SCMP).
Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.
