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Chenhao: Big Money Mirrors a Big Problem
Over the past few weeks, speculation has been mounting that China is planning to issue a new RMB 500 bank note in November . Reports suggest that the new note, which would be far and away the largest face-value bank note in circulation on the mainland (the current largest note is the red RMB 100-bill), will feature the portrait of Deng Xiaoping.
China’s central bank, the People’s Bank of China (PBoC) has been busily denying these plans in the mainstream media over the past few weeks. But regardless of whether or not it is true, it seems to me that even the rumor itself is adding fuel to the fire, and is part of a growing public panic about the threat of inflation.
The possible printing of a RMB 500 bill will have a much larger psychological impact in terms of pushing up inflationary expectations than gasoline and diesel price hikes earlier this week. It’s therefore not surprising that PBoC officials are attempting to downplay the rumors, as, even if the issuing of a RMB 500 note is something that has been discussed internally in the past, it is clear that now is not a good time to be announcing such news.
No one seems to know where the rumor originated from (the police are apparently on the case). Even this fact can be viewed as evidence of the rising tide of anxiety about inflation that is sweeping the nation – people are calling inflation from every direction. Recently, there have been news reports suggesting that, in some first-tier cities, people have been rushing to buy properties, driven by the possibility of looming inflation.
The big banknote therefore mirrors a big problem. On the one hand, asset prices have been rising significantly since the beginning of the year, along with the rebound of the economy. On the other hand, these recoveries have been spurred by government fiscal stimulation and loose monetary policies, and the sustainability of the recent growth remains questionable.
As Vice-Premier Li Keqiang said at the Global Think Tank Summit in Beijing on July 2nd, the recovery’s foundations are far from solid. Rising inflation expectations could make it more difficult for the Chinese authorities to maintain its broadly supportive monetary stance, which is still needed to sustain the recovery.
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Chenhao Zhang follows macroeconomic development and investment deals in China.
