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Cashlessness Can Be A Pathway for Negative Interest Rate

Hong Kong is relatively slow in the development of cashlessness (i.e. very slow in replacing cash transactions by electronic and mobile payment transactions), and many people including some economists in Hong Kong consider it a lag-behind of advanced technologies.

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Figure 1 Growth of Electronic Payment versus Growth of Payment Revenus 2016–2017. Source: Bansal et al. (2018) of McKinsey Global Payments Map.

For example, Figure 1 confirms that the growth rate of electronic payment in Hong Kong (about 8% at the right bottom corner) was much less than that of Mainland China (about 30% at the right upper corner), when their growth rates of payments revenue were similar (at about 25–30%).

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Figure 2a Top 10 Cashless Countries. Source: Smith (2017) of Forex Bonuses
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Figure 2b Top 10 Cashless Countries. Source: Smith (2017) of Forex Bonuses

Figures 2a and 2b show the top 10 cashless countries, Canada, Sweden and the UK were the top 3 in the study. Let’s focus on the Proportion of Consumer Transactions Using Non-Cash Methods (%) column (2nd column in Figure 2b). The top 4 countries got more than 50% transactions by non-cash methods. China’s was 10% but the growth rate was 100%! And the Chinese had issued the highest proportion of cards with contactless functions (56%).

IMF (2019) on the other hand rank cashlessness according to the proportion of cash in circulation to GDP. Figure 3 shows the ranks of the 20 countries, with Sweden, Norway and New Zealand the top 3, and Japan the 20.

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Figure 3 Currency in circulation to GDP Ratio. Source: IMF (2019)

The reported reasons of preferring cashlessness by consumers and businessmen are mostly about convenience and growth of businesses, while reasons of disliking electronic or mobile payments are familiarity, data leakage, etc. It is also unfair to the poor as they may not be able to open an electronic account for poverty reasons. Poor people, who could not afford to have a mobile phone, would not be able to transact by mobile payment or e-wallet. Elderly may not be able to master using electronic gadgets, they prefer paying cash. Yet, besides all these reasons, there are two more important reasons untold. It is not from consumers or businessmen but from the governments.

Why governments push so hard for cashlessness? There are at least TWO major reasons. First, it is a good tool to tackle money laundering and tax evasion. Second, it allows governments to implement negative nominal interest rate!

For example, Hong Kong is notorious to be one of the major centers for money laundering, its believed to be related to the common use of cash even in large amount of transactions, such as real estate, jewelry, and vehicles. Cash is much easier for snow washing transactions. In fact, Fraser (2018) identified Hong Kong and Macau as the “pivotal” players in an international dirty money racket. Lawler (2017) explained that many people from China and Russia bought luxury houses by cash in the name of shell companies for the purpose of moving money out of the countries and storing wealth in foreign real estate. Such a practice of “wealth transfer” is also common in Hong Kong, as reported in my article (Yiu, 2019). In other words, there is a ‘need’ for cash rather than electronic money in snow washing markets, which the governments want to stop. In fact, the Australia government is now proposing the Currency (Restrictions on the Use of Cash) Bill 2019 for banning cash transactions over $10,000 for the purpose of “reducing crimes like money laundering and tax evasion.” (Foster, 2019)

Negative nominal interest rate was unbelievable in the past but is now a daily headline. More and more central banks are now paying negative interest. Figure 4 shows the current situation of countries practicing negative interest rate when their inflation rate is low.

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Figure 4 Inflation Rate versus Policy Interest Rate of various countries. IMF (2019)

In the old days, cash acts as a firewall protecting against negative nominal interest rate regime. Nowadays, negative nominal interest rate policy has been practicing in say Germany bond markets. IMF (2019) makes it bluntly that “in a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession.”

Cash can be regarded as a zero-yield bond, if cash exists, people can refrain from accepting any negative nominal interest rate by retrieving all money from the banks and keep cash at home. However, once electronic money replaces 100% cash, a cashless city would empower the banks to launch negative nominal interest rate, i.e. one has to pay the bank for depositing money into the account, without escape.

IMF (2019) is even proposing a depreciating exchange rate of cash to electronic money in a non-cashless city, so as to make cash-holding costly. With the imminent global recession, negative nominal interest rate is expected to be more and more common in the world. Cashlessness is in fact paving the road towards an easier implementation of negative nominal interest rate, and a more efficient monetary policy that forces people to spend more.

References

Bansal, S., Bruno, P., Denecker, O., Goparaju, M. and Niederkom, M. (2018) Global payments 2018: A dynamic industry continues to break new ground, McKinsey&Company. https://www.mckinsey.com/~/media/McKinsey/Industries/Financial%20Services/Our%20Insights/Global%20payments%20Expansive%20growth%20targeted%20opportunities/Global-payments-map-2018.ashx

Foster, A. (2019) Ban on cash payments above $10,000 under proposed law, Aug 21. https://www.news.com.au/finance/economy/australian-economy/ban-on-cash-payments-above-10000-under-proposed-law/news-story/4f6a7daec0d888822060a15e5f038949

Fraser, N. (2018) Hong Kong, Macau pivotal players in massive criminal racket using Canadian casinos, ‘dirty money’ report claims, Jun 28, SCMP. https://www.scmp.com/news/hong-kong/hong-kong-law-and-crime/article/2152975/hong-kong-macau-pivotal-players-massive

IMF (2019) Cashing In: How to Make Negative Interest Rates Work, IMFBlgo, Feb 5. https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-negative-interest-rates-work/

Lawler, J. (2017) Money laundering is shaping US cities, Washington Examiner, Mar 27. https://www.washingtonexaminer.com/money-laundering-is-shaping-us-cities

Smith, S. (2017) The 10 most cashless countries in the world — where does the UK rank? The Telegraph, Oct 10. https://www.telegraph.co.uk/money/future-of-money/10-cashless-countries-world-does-uk-rank/

Yiu, C.Y. (2019) A New Cause of Unaffordable Housing — That Explain Why More Supply Cannot Help, Medium, May 13. https://medium.com/@edwardyiu/a-new-cause-of-expensive-housing-that-explain-why-more-supply-cannot-help-df6465940db2

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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