Friedrich Schneider, an economist at the Johannes Kepler University of Linz in A

Question

Friedrich Schneider, an economist at the Johannes Kepler University of Linz in Austria, made the following observa- tion about China: “The average Chinese trusts neither the Chinese banks nor the Communist Party.”

If Schneider is correct, how might businesses and con- sumers prefer to carry out transactions?

The Chinese government has refused to print currency in denominations higher than the 100-renminbi note, which is the equivalent of about $16. The United States prints $100 bills and all other countries print currency in denominations that are at least that high. Given your answer to part (a), why might the Chinese government be reluctant to print currency in high denominations?

Explanation / Answer

If Schneider is correct, businesses and consumers might prefer to carry out transactions in Cash 'renminbi note' or in some other kind like paying in Dollar or other liquid assets.

The Chinese government be reluctant to print currency in high denominations because

If it prints notes with higher currency then as average Chinese trusts neither the Chinese banks nor the Communist Party , they will increase their transaction in Cash , the transaction in cash will increase and the requirement of the Banks for transactions decreases.

Also it is afraid of the wealth drain from the country, Since if it prints currency of higher denominations then it is easier for people to transfer the money in some other currency.

If you don't understand anything, then comment, I will revert back on the same.

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