“He drove here with two friends in a beat-up Honda,” Mr. Lin recalled. “One of his friends carried about $60,000 in a big white bag, and the buyer had the rest in a heavy black backpack.”

Lugging nearly $130,000 in cash into a dealership might sound bizarre, but it’s not exactly uncommon in China, where hotel bills, jewelry purchases and even the lecture fees for visiting scholars are routinely settled with thick wads of renminbi, China’s currency.

This is a country, after all, where home buyers make down payments with trunks filled with cash. And big-city law firms have been known to hire armored cars to deliver the cash needed to pay monthly salaries.

For all China’s modern trappings — the new superhighways, high-speed rail networks and soaring skyscrapers — analysts say this country still prefers to pay for things the old-fashioned way, with ledgers, bill-counting machines and cold, hard cash.

Many experts say it is not a refusal to enter the 21st century as much as wariness, of the government toward its citizens and vice versa.

Doing business in China takes a lot of cash because Chinese authorities refuse to print any bill larger than the 100-renminbi note. That’s equivalent to $16. Since 1988, the 100-renminbi note, graced by Mao Zedong’s visage, has been the largest note in circulation, even though the economy has grown fiftyfold. (The country’s national icon, Chairman Mao, appears on nearly every note: the 1-, 5-, 10-, 20, 50- and 100- renminbi note.)

Chinese economists and government officials often suggest that printing larger denomination notes might fuel inflation. But there is another reason.

“I’m convinced the government doesn’t want a larger bill because of corruption,” said Nicholas R. Lardy, a leading authority on the Chinese economy at the Peterson Institute for International Economics in Washington, noting that it would help facilitate corrupt payments to officials. “Instead of trunks filled with cash bribes you’d have people using envelopes. And there’d be more cash leaving the country.”

All the buying, bribing and hoarding forces China to print a lot of paper money. China, which a millennium ago was the first government to print paper money, accounts for about 40 percent of all global paper currency output, according to a report published by the China Banknote Printing and Minting Corporation. Adjusting for the size of its economy, China has about five times as much cash in circulation as the United States.

In the United States, the highest denomination printed is $100; in Japan, it is the 10,000-yen note, worth about $100; the 500 is the highest-denomination euro note, worth about $650. No major economy has limited itself to such a low denominated bill as China.

By making the 100-renminbi note the largest bill, the nation’s citizens need more of it to buy a television or Swiss watch, never mind a car, home or a yacht, which China’s state-run media said was bought a few years ago by men bearing two suitcases filled with cash.

Following those paper bills as they course through this booming economy offers a fascinating glimpse into how China’s financial system works, and how parts of the country remain stuck in yesteryear.

“In large parts of China, it still looks like the U.S. in the 1950s: most everything is in cash,” said Jeffrey R. Williams, executive director of the Harvard Center Shanghai and a former bank executive who has worked in China for more than 30 years. “In the U.S., you might have one bill-counting machine at a bank, but here every teller has one.”

Although China’s coastal cities have flourished during the 30 years of economic prosperity, economists say the country’s interior remains poor and disconnected from the more modern aspects of the financial grid. As a result, the poor prefer to do business in cash.

Xu Yan contributed research in Shanghai.

Article source: http://www.nytimes.com/2013/05/01/business/global/chinese-way-of-doing-business-in-cash-we-trust.html?partner=rss&emc=rss