China fails to print enough renminbi, central bank says

The People's Bank of China has increased renminbi circulation by 80% in the past five years, but demand for wallet-ready bills grew by 20% each year, the bank said.

When you withdraw Chinese yuan from the bank these days, chances are the notes have just been shipped out of the money printing factory.

The People's Bank of China (PBoC), the country's central bank, has increased yuan circulation by 80% in the past five years by improving printing capacity and prolonging production hours. Still, it fails to meet the fast-growing demand for wallet-ready bills, the PBoC said in a note on its website.

China had Rmb2.4 trillion ($363 billion) worth of cash notes in the market, excluding bank deposits, in late 2005. By November last year, the circulation had jumped to Rmb4.23 trillion. It may seem like a big increase, but the demand for cash notes has grown at an even higher rate of 20% per year during the same period, the bank said.

“The growth of yuan-note printing capacity fails to keep the same pace as the growing demand for bills, even though we have done our best to improve the output and our existing facilities,”  Ma Delun, vice governor of PBoC, said in the note.

China has the biggest money printing production in the world. It employs more than 30,000 people to work on the production lines. The country has six money printing factories and another three factories forging coins, according to the bank.

Despite 30 years of remarkable economic development, cash remains the preferred settlement option in China. The one hundred renminbi note, which was first issued in 1988, is the latest and largest denomination of the Chinese currency.

The country's massive bank loans, busy trade activities, growing wages and rocketing consumer prices are happening side by side with an underdeveloped electronic transaction system. A fraction of the country's population use credit cards and banks don't issue cheque books to retail customers. Even smaller-scale businesses will often settle deals in cash.  

After excessive lending of Rmb9.6 trillion in 2009, Chinese banks pumped Rmb7.95 trillion of new loans into the market last year, official figures show. And some analysts argue the real credit growth is much bigger than the official data.

Other factors increasing the demand for renminbi notes include the fact that it is becoming more popular to use these notes in shops and restaurants in Hong Kong and Macau, Ma said.

Moreover, the increasingly sophisticated production of fake notes also poses challenges to the PBoC. “We are cracking down on the production of fake notes, [but] their imitation of the ink, picture, watermark and paper has become very sophisticated,” Ma said. “It's not an easy job to provide people with satisfactory and safe notes,” he said.

Beijing has made an effort to tame rising consumer prices and curb excessive liquidity in the market after the country's inflation rose to 5.1% in November from 4.4% in October last year, well above the central bank's tolerance level of 3%. The central bank announced a rate hike on Christmas Day for the second time in less than three months, saying it would lift the lending rate by 25 basis points to 5.81%. More rate hikes are widely expected as the current benchmark rate is merely 0.7 percentage points higher than the inflation rate.

The government has also announced plans to set price caps and ordered companies to lower selling prices for the sake of the national interest, and has told banks to limit the amount of new loans. But analysts predict new loans will amount to around Rmb7.5 trillion in 2011. That suggests the PBoC still needs to print more money.

¬ Haymarket Media Limited. All rights reserved.
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