Asia distancing itself from large banknotes

There’s nothing quite as satisfying as pulling out a couple of luxuriant golden-brown thousand-dollar Hong Kong bills from your wallet to pay for that meal at a fancy restaurant. The trouble is, the banknote may one day be out of circulation

 

Looking to curb crime and facilitate the smoother functioning of economies, regulators across Asia are staying away from large-denomination bills and, whenever possible, moving toward cashless alternatives.

 

This push to do away with bills is gaining traction partly due to the spread of new payment solutions that bypass paper cash altogether.

 

A number of countries across Asia are looking for ways to minimise the use of cash. Leading the way is South Korea, which aims to eliminate paper money by 2020.

 

Singapore had the last large-denomination bill in the region, and removed it from circulation to tighten its anti-money-laundering controls. The city-state officially discontinued the S$10,000 ($7,400) note in October 2014.

 

Singapore was somewhat of an anomaly across Asia, as few other countries have ever had high-denomination bills. Even Japan, which developed its monetary structure in tandem with the West, only issues banknotes ranging to the largest value of 10,000 yen ($90).

 

The spread of mobile payments and new technologies makes it unlikely that other countries in Asia will ever print large bills. In fact, it is more likely to head the other way, leading to less paper money all around.

 

Among Asia’s poorest countries, the highest value banknotes tend to be around $10. The biggest bills in places like Laos, Mongolia, Myanmar, Nepal and Pakistan are all worth around that much. The largest bill in the Chinese mainland is 100 yuan ($15). Cambodia bucks this trend with a bill worth around $25.

 

“In countries where poverty and corruption are issues, you have to think very carefully about the size of the banknotes,” said Keith Pogson, a senior partner of financial services with consultancy EY.

 

“Where poverty is an issue you need to have small bank notes so people can pay for small items, say, fruits,” he added. “Smaller banknotes are easier to accommodate for poor people and keeping the number small is important in poor economies.”

 

In more affluent Asian economies, such as Hong Kong and Singapore, there are bigger bills, but the trend is toward smaller denominations. Ever since Singapore eliminated the S$10,000 note, Hong Kong tops the chart with a HK$1,000 ($130) note.

 

The push to clamp down on big bills is coming from the West and gradually making its way to Asia.

 

Banning big bills

 

The European Union is considering a ban on high-denomination notes like the 500 euro ($570) bill, as it may be too large for practical everyday use.

 

Authorities fear that such a large-denomination bill could be helping support criminal activities or even terrorism. In fact, the banknote has even been given an unpleasant nickname — the Bin Laden — due to the ease with which would-be terrorists can transport the banknote.

 

The United States is also considering taking the $100 note out of circulation for similar reasons. The big bill makes it easy to move large amounts of money around. A million dollars in hundred-dollar bills weighs 1 kilogram, about the same as a laptop.

 

Even in developed economies, big bills are not always welcome. In day-to-day life in the US, using the $100 dollar bill is often reason enough to apologize. In Hong Kong, the HK$1,000 note is available but is not a frequent sight and is often reserved for one-off transactions like rent payments.

 

“You have to balance the needs of the people,” said Fred Kwan Yum Keung, an associate professor at the City University of Hong Kong. “From time to time you see that people can still do all kinds of trafficking, like taking suitcases (full of cash).”

 

He added that it is undesirable to remove the HK$1,000 bill as the Hong Kong economy needs it for practical reasons such as business transactions.

 

Kwan’s views contrast with those of governments around the world, especially those with high-denomination notes in circulation, who are increasingly considering banning big bills to deter tax evasion, financial crimes, terrorism and corruption.

 

In February, during a meeting of the Economic and Financial Affairs Council in Brussels, France’s Finance Minister Michel Sapin said that “the 500 euro note is more used to conceal than to purchase, more used for (conducting) dishonest transactions than to allow you and I to buy something to feed ourselves”.

 

The 500 euro note is the second highest currency denomination in the G10 economies, after the 1,000 Swiss franc ($1,040) note. Around 307 billion euros worth of 500 euro notes are currently in circulation.

 

During the same meeting, 28 EU finance ministers urged the European Commission to “explore the need for appropriate restrictions on cash payments exceeding certain thresholds”.

 

Academics agree. Harvard professor and former US treasury secretary Lawrence Summers published an op-ed in The Washington Post calling for the elimination of the $100 bill under the headline: “It’s time to go after the big money”.

 

“A moratorium on printing new high-denomination notes would make the world a better place,” Summers wrote.

 

“In terms of unilateral steps, the most important (player) by far is the European Union. The 500 euro note is almost six times as valuable as the $100.”

 

Criminals move more than $2 trillion around the world each year. Corruption payments amount to around $1 trillion and tax evasion robs countries of up to 70 percent of their tax income, according to Peter Sands, the former chief executive of Standard Chartered Bank, who advises the British government.

 

Tackling the ‘bad guys’

 

In his paper for the Harvard Kennedy School in the US titled: Making it Harder for the Bad Guys: The Case for Eliminating High-Denomination Notes, Sands wrote that “high-value notes play little in the functioning of the legitimate economy, yet a crucial role in the underground economy”.

 

He added that denying those engaged in illegal activities access to high-denomination notes would increase their costs and create a greater risk of detection. Eliminating high-value notes would disrupt their “business models”.

 

Even if big bills are taken out of circulation, however, doing away with the black economy is not likely to be easy. Sands points out that these “bad guys” would likely adapt quickly to the next highest-denomination note in the same currency, digital currencies or valuables such as gold or diamonds.

 

EY’s Pogson takes a similar stance: “There are always different ways for illegal transactions. Take diamonds — there’s a market for it although it is becoming increasingly hard for diamond traders.”

 

Kwan from the City University of Hong Kong concurs. “From what I have read, even criminals stay away from $100 dollar bills,” he said.

 

“The reason is, you can attract a lot of attention and it’s difficult for them to hide it (compared to $20 bills). All I’m saying is that it is not an effective way of curbing criminal activities. In principle you will reduce it, but in practice, I doubt it.”

 

A recent case in the Philippines underscores this view. Maia Santos-Deguito, who was a branch manager at Rizal Commercial Banking Corp, is currently under investigation for allegedly laundering $81 million without ever really touching a single bill.