China has been at the heart of payments innovation over the past decades leading some observers to boldly announce that cash is on its way out. But banknote demand is continuing to grow. The first notes appeared under the Song Dynasty, in China between AD 960 and 1279. Today, it is estimated that around half the world’s banknotes circulate in China.
Two decades of payments innovation
In 2002, the card scheme Union Pay was launched by the leading commercial banks. The brand has experienced strong growth since and has overtaken both Visa and Mastercard, both in terms of the number of cards issued and the value of transactions. In 2017, the scheme accounted for 44% of the world’s payment cards, according to RBR.
China is also home to mobile payment giants Alipay – owned by Ant Financial – and WeChatPay – owned by Tencent – with over one billion and 700 million users respectively. By contrast, Apple Pay has 127 million worldwide. The explosive growth of both companies is largely based on their seamless integration with eCommerce, social media and other functions into user-friendly apps.
China has also been heavily involved in crypto-currencies. According to Wired,” “China has 70 per cent of the world’s crypto-mining capacity, and over 70 per cent of that capacity is nestled in the mountains of Sichuan, where abundant hydroelectric power makes the price per kilowatt some of the cheapest anywhere in the world.”
Banknote demand is growing in China
These revolutionary developments have led some observers to predict that China is seeing a rapid decline in cash demand. In January 2018, The Wall Street Journal reported “The Cashless Society Has Arrived— Only It’s in China”; in November an article in Quartz concluded “China’s cashless economy threatens to leave its elderly – and their money – behind”.
However, according to data from the People’s Bank of China, currency in circulation is growing in China, and has been growing non-stop since 2008. Between 2008 and 2018, the value of cash in circulation has more than doubled as illustrated by the chart below.
At a lower pace
If cash demand has been growing, the growth rate has been declining. This is largely explained by slower economic growth.
Between 2009 and 2011, currency in circulation grew faster than GDP, at double-digit rates. Since 2012, currency in circulation has been outpaced by GDP growth with the exception of 2016 when currency in circulation grew by 8% whereas GDP grew by 6.7%.
The Central Bank has been responding
The People’s bank of China has been closely monitoring developments in digital payments and has been taking measures to ensure the acceptance of cash. Over 600 merchants have been ordered to stop rejecting cash, including Alibaba’s Hema supermarket. It has also voiced its concerns following ‘cashless week’initiatives launched by mobile payments platform Alipay, during which merchants from selected cities were strongly encouraged to exclusively accept Alipay, giving participating users a chance to win financial rewards.
More recently, there have been reports that the government is planning to eliminate bitcoin mining in the country in a sign of growing pressure on the cryptocurrency sector, on the grounds that it wasted resources or polluted the environment.