Why other countries are giving China a licence to print money

South China Morning Post: China is printing foreign currencies on a massive scale as Beijing seeks to increase its influence on the world economy and geopolitics.

Multiple sources in the China Banknote Printing and Minting Corporation confirmed to the South China Morning Post last month that money production plants across the country were running at near full capacity to meet an unusually high quota set by the government this year.

Most of the demand comes from participants in the “Belt and Road Initiative” and one source, who requested not to be named due to the confidential nature of the information, said Chinese yuan bills only made “a small proportion of the orders”.

The state-owned company, headquartered in Beijing’s Xicheng district describes itself as the world’s largest money printer by scale. With more than 18,000 employees, it runs more than 10 strictly guarded facilities for the production of paper notes and coins.

By contrast, its US counterpart, the US Bureau of Engraving and Printing, employs a tenth of the staff at two currency factories, and the world’s number two, the British firm De La Rue, had just over 3,100 employees at the end of last year.

In China, the rise of mobile payments in recent years has significantly reduced the use of and demand for banknotes.

From big cities to remote villages, smartphones have become wallets, with most transactions in grocery stores now carried out digitally, leaving many printing plants short of work.

But the resulting lull ended suddenly earlier this year.

The nation’s largest currency paper mill in Baoding, Hebei province, sprang in to action with the sudden arrival of “big orders”, according to an employee working in the 604 Factory, a subsidiary of the corporation.

“Our machines have been running at full steam for months”, according another employee working at the facility.

However, the sudden rush in orders has left the factory struggling to keep up.

The process of producing banknotes involves turning fine cotton and linen fibres to pulp, which is then turned into high quality money paper with anti-counterfeiting water marks.

But the process requires a lot of steam, supplied by the local generating plant, and the resulting power demands have left the whole city struggling to keep up with the pace of production.

“The steam shortage remains a headache. We have filed a complaint to the city government. They are looking for a solution. So far the steam shortage has not had too much of an impact on the output,” said another employee on Monday.

Another currency paper mill in Kunshan, Jiangsu province, reported a similar change.

“Last year was particularly bad. We had almost nothing to do,” an employee said.

“We had no choice but to make marriage certificates and driving licences to keep the production line from rusting. This year the workload is full,” he said.

Most of the banknotes the mills were producing were not yuan, the employee said.

“The processing is different. Currency paper varies from country to another and each client has their own requirements.”

The employees all requested not to be named due to the secrecy of their work.

According to Liu Guisheng, president of the China Banknote Printing and Minting Corporation, China did not print foreign currency until recently.

But in 2013, Beijing launched the belt and road plan, a global development blueprint involving about 60 countries from Asia, Europe to Africa to stimulate economic growth with large-scale capital investment and infrastructure construction projects.

Two years later, China started printing 100-rupee notes for Nepal, Liu wrote in an article in China Finance, a bi-monthly journal run by China’s central bank in May.

Since then the company had “seized the opportunities brought by the initiative” and “successfully won contracts for currency production projects in a number of countries including Thailand, Bangladesh, Sri Lanka, Malaysia, India, Brazil and Poland,” he said.

But that could be just the tip of the iceberg. The actual number of countries that have or plan to outsource currency printing to China could be much bigger, according to one source in the corporation.

Some governments have asked Beijing not to publicise the deal because they are worried such information could compromise national security or trigger “unnecessary debates at home”, the person said.

Hu Xingdou, a professor of economics at the Beijing Institute of Technology, said a country must have considerable trust in the Chinese government to allow it to print its banknotes.

“The world economic landscape is undergoing some profound changes. As China becomes bigger and more powerful, it will challenge the value system established by the West. Printing money for other countries is an important step,” he said.

“Currency is a symbol of a country’s sovereignty. This business helps build trust and even monetary alliances.”

Beijing has regarded money printing capability as being as crucial as its atomic bomb programme to its national security amid fears its enemies could use fake notes to disrupt the economy.

The international money printing market has been dominated by Western companies for more than a century and some governments outsource printing to several different companies.

De La Rue, for example, has more than 140 countries as clients, according to information on its website.

Other major players include Giesecke & Devrient in Germany, which serves about 60 nations, and Crane Currency based in the United States with more than 200 years in the trade.

The main drawback of having money printed outside the country is the security risk.

Seven years ago, during the downfall of Muammar Gaddafi in Libya, the British government seized nearly $1.5 billion worth of dinars printed by De La Rue, causing serious cash shortages that increased the pressure on the regime.

De La Rue did not respond to the Post’s queries.

Modern money printing facilities are also extremely sophisticated and expensive to operate and use technology beyond the reach of ordinary business to reduce the risk of replication.

Some security features such as embedded thread, metallic ribbon and colour-shifting ink require considerable licence fees and many countries cannot afford to print all the banknotes they need.

Zhongchao Special Security Technology, a subsidiary of China Banknote Printing and Minting Corporation is now the world’s biggest supplier of security features for banknotes, according to De La Rue.

The British firm’s latest annual report said the Chinese firm now has a third of the global market share, four times that of its own.

Sources in the industry say that one of its major advantages in this area is by being able to provide security features at a relatively low cost compared with more technologically advanced Western rivals.

Currently China is the only country that has the capacity to perform Intaglio, or “raised” printing simultaneously on both sides of a banknote, while in 2015 Chinese researchers won an international innovation award for ColorDance, a new holographic feature that can significantly increase a paper currency’s security at relatively low cost.

But not everyone is optimistic about the future of money printing as cashless payments grow in popularity around the world.

“I won’t let my children work in this factory. Paper currency is doomed,” said an employee in the Kunshan facility.

According to the People’s Bank of China, only about 10% of payments in retail sales were made in cash in 2016 due to the prevalence of mobile phone payment methods.

The share may even be even lower now, but the central bank did not respond to requests for comment.

The number of people working in the Chinese money printing industry fell by more than 2,500 between 2013 and the end of last year, according to the central bank.

In the face of this, the factory worker said China would face enormous challenges taking business from well-established Western printing companies.

“There is still a technological gap between us and the West. To fill the gap requires some talented young people. But now most PhDs under the age of 40 in our factory have left.

“With their knowledge and experience they have easily found jobs in private companies, which offer them much higher salaries and benefits,” said the employee.

“And we are state companies. We are crippled by inefficiency in competition against private companies.”

(Source: https://www.scmp.com/news/china/society/article/2158782/why-other-countries-are-giving-china-licence-print-money)