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The currency used is China is known as the Chinese Yuan (CNY) or the Renminbi (RMB) or commonly known as "kwai" ("equivalent of "bucks" in the U.S.). The most common bill is 100RMB and is what is distributed by the ATMs. (photos here: http://www.chinatoday.com/fin/mon/ ) 100RMB bills are widely accepted even for small purchases although you may get a strange look if you buy a 2RMB bottle of water with it.
Cash is king in China. Credit cards are only accepted in hotels, larger restaurants and larger stores or malls. When making a purchase with a "foreign" credit card in a department store, you may be asked to show your passport although this now happens less. Expect to pay cash at markets, small restaurants and for taxis
ATMs are virtually everywhere. Banking is a big business in China. They provide instructions in English and accept international cards which are part of a major network such as Interac, Cirrus, Plus, Visa and MasterCard. The maximum withdraw is partly dictated by your own bank and is generally about 2500RMB. You will also find ATMs in hotel lobbies and department stores. If one ATM does not work with your card, just try another bank. Of course your own bank will probably charge you a fee but it is a small price to pay for the convenience of not having to carry a pile of cash. You cannot usually use a "foreign" debit card to make a purchase in a store. You need a Chinese card showing the "Unionpay" logo. (Discover cards should work where Unionpay cards work, but they lack the logo and it can be hard to convince the clerks to give it a try.)
Alternatively you can bring cash to China and open a bank account in any bank. You will get a bank card to withdraw funds from the card all over the country at no fee. This card can also be used to make purchases in stores and pay at restaurants.
Fake bills exist but are pretty rare. Apparently more of them are in the south. In the course of numerous trips and while staying in China, after tens of thousands of RMB (yes, even rent is paid cash!) one contributor never saw a fake bill. If you want to bother checking them look here: http://www.study-in-china.org/LivingI... Essentially, look for texture on Chairman Mao's collar.
Do not bother with travelers checks, as they are hardly used any more. Apparently some banks are even known for turning them down and they will at the very least prove to be a big waste of time as you may need to hunt for a place to exchange them.
Stories about bringing U.S.$1 bills to bargain in markets are based in the far past. The Chinese currency is now stronger than the U.S.$ and the merchants would be stuck wasting time to go to the bank to exchange them. Merchants have no interest in foreign currencies. Close to Hong Kong (Shenzhen) some store owners may accept HK$ but the exchange rate will not be favorable.
The Chinese exchange rate is regulated so it does not matter where you exchange your money in China. In all international airports there are money changers as well as ATMs. Unlike most other countries, the exchange rate at the airport is rather good. You will most often than not get a much better exchange rate in China than back home. Nevertheless. it is not a bad idea to leave home with a few 100RMB to get you going while you land so you can at least get to your hotel without any problem. Money changers will have the same exchange rate as the ATMs but will also charge some fee. It is better to use the ATM when you need money rather than changing too much at the start of the trip. Bigger hotels wll also exchange curency but usually only for relatively small amounts. Do not exchange currency on the black market (people on the street). Odds are you will get fake bills.
Finally, no tipping in China. Not for taxi drivers or restaurant waiters. It is not expected and if you do it they may turn it down and will certainly not be viewed as an act of generosity. It is a rather condencending act actually. The exception are the 5-star hotel bellboys. They have been spoiled by international travelers although will not be upset if you do not tip as the Chinese certainly don't.