China’s economic slowdown and the increasing severity of its trade war with the U.S. has small businesses struggling to pay bills on time, The New York Times reported Tuesday (Aug. 6).
Business owners in China are turning to IOUs in the form of commercial acceptance bills as financial institutions pull back from lending to SMBs, reports noted, adding that the government’s crackdown on shadow banking has further limited firms’ access to capital. These commercial acceptance bills promise future payment on debts, reports explained, and are not legal tender. Government data shows that $211 billion worth of these IOUs are in circulation as of February — a 33 percent increase from the same time a year prior.
The IOUs are trickling through the supply chain, with small businesses using those commercial acceptance bills to pay their vendors which, in turn, pay their own suppliers with those IOUs, too.
Some businesses are so desperate for capital that they sell those commercial acceptance bills for less than they’re worth, reports said.
According to Paulson Institute Research Fellow Dinny McMahon, a similar trend was seen two decades ago amid an economic boom in China, which saw state-owned enterprises exchanging commercial acceptance bills totaling about one-fifth of the nation’s economic output, according to the publication.
“You had companies holding stacks of paper,” he said. “The fact that these things are proliferating again at a time of entrenched economic downturn should be a signal of the degree of distress that companies are finding themselves in.”
One executive, Xu Jiang, the chief operating officer of architectural firm Zhubo Design, told The New York Times that developers have begun paying the firm in commercial acceptance bills, which he found “difficult to accept.”
“I didn’t know who would pay me and the debt is still on me,” he said. “But if I didn’t accept it, I couldn’t get the money. We suppliers were forced to become part of their financial chain.”
That sentiment is reminiscent of some complaints heard in the trade finance world with companies obtaining a discount on their vendor invoices in exchange for paying the bill early. It also recalls the broader issue of late supplier payments as corporates delay settling their bills in order to hold onto capital longer.