A man next to a sculpture representing the renminbi and an abacus in Guangzhou, China. Photo: EPA
by Neil Newman
by Neil Newman

Will China’s digital yuan help Hong Kong go cashless? Don’t bank on it

  • Hong Kong prides itself in being up with the latest technology and being a tech hub. But, cash remains king, and a digital yuan might become a digital yawn
  • Digital currencies issued by central banks could be the answer for e-payment-phobia and tackling illicit use of cash, but, it will be an uphill struggle to convince sceptics
I have disappeared into Finnair. Finally cracking under the pressure of not seeing my parents for a year and a half, it was time for a visit to Britain. In the process of gathering all the usual things – passport, cards, cash – I came across a bag of coins. Although accumulating small change is something I try to avoid, I still end up with far too many heavy coins destroying my pocket linings.

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.

Even though Hong Kong prides itself on being up with the latest technology – and was very early to adopt e-money with the Octopus card – apart from the recent hygiene incentive, the transition to a truly cashless society has not happened.

Real money

According to the Hong Kong Monetary Authority ( HKMA), physical cash in circulation (the generally ignored “M0” datapoint) has continued to rise since the introduction of Octopus cards in 1997.

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.

Neil in cashless England, after disappearing into Finnair. Photo: Neil Newman

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.

Cash-loving Hong Kong is not alone in seeing an increase in cash circulation, though: as Britain and Japan introduced cashless forms of payment, the amount of cash out and about increased.

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:

  • Cash is anonymous and beyond the scrutiny of governments and tax authorities, so cash transactions can dodge the tax collector. Ageing populations are feeling the cost of death duties and an early shift to cash keeps this hidden.
  • 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.

We also generally dislike banks. A YouGov UK survey in 2018 revealed that 10 years after the Global Financial Crisis, banks had largely failed to rebuild the public’s trust and that 66 per cent of the people surveyed believed banks did not work to the best interests of society.

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?

A card only sign in Britain. Photo: Neil Newman

Funny money

The Bank of England in 2016 was the first central bank to call on other central banks to create digital state-backed currencies in order to control the money supply, be able to follow the flow of money and also restore faith in currencies in times of economic stress by giving an alternative to regular cash in circulation. Tracking the flow into unwanted illicit activities, in particular the financing of terrorists, also sounded like a great idea. However, ‘Britcoin’, as it was dubbed, has never seen the light of day.
The United States is also looking at the possibility of launching its own digital currency, with the Massachusetts Institute of Technology (MIT) working with the Federal Reserve Bank of Boston on the project. But as in Britain, nothing has been mentioned with respect to a launch of an e-dollar.
China, however, has embraced the initiative, and is in the lead with the launch of its state currency, the digital renminbi, which is undergoing testing in at least eight major cities including Beijing. “Smart City” Hong Kong is keen to participate in cross-border testing of this technological monetary event. Given the rate of growth of cross-border renminbi transactions between Shenzhen and Hong Kong, Hong Kong could find itself in the epicentre of the largest digital currency launch in Asia.


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?

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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 2016, the Indian government announced that all 500 rupee (US$7) and 1,000 rupee Mahatma Gandhi banknotes were no longer legal tender, with Prime Minister Narendra Modi claiming the move was to deal a blow to the shadow economy, and counterfeit and illicit cash funding of illegal activities including terrorism.

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.


Is cryptocurrency too risky for China?

Is cryptocurrency too risky for China?

Will Hong Kong go digital?

While Legco is dealing with challenges to the new National Security Law, it is now also facing the threat of domestic terrorism with the recent discovery of a bomb-making plot in Tsim Sha Tsui. So, it has good reason now to insist on the introduction of a digital currency locally and can use the leading-edge technology that China has developed.
Like India, it may be necessary to reduce the amount of physical cash around and drive the transition to cashless payments that way, right down to the humble taxi driver, and stop cash hoarding at home. As the Indians found, amid the chaos of a cash shortage created by demonetisation, cashless payments surged.

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