Getting Credit To Small, Private Companies: A Renaissance for Commercial Paper

In 2016, a spate of fraud involving bankers’ acceptance drafts (BADs) and commercial acceptances drafts (CADs)—which are collectively called commercial paper or corporate bills—led to a major contraction in both their issuance and the volume of bills that are discounted. While that has seemingly helped erase the worst abuses, the fallout is still being felt in the real economy. Commercial paper has long been a vital source of credit and liquidity for small- and medium-sized enterprises (SMEs), which also happen to be the part of the economy most squeezed by Beijing’s deleveraging campaign. This is in part because of the contraction in the amount of commercial paper being discounted.

Some relief may be on the horizon, however. The issuance and discounting of commercial paper has started to rise in recent months. No doubt that’s in part due to falling interest rates which makes it more appealing for small companies to borrow. But it also signals a vote of confidence from regulators following a two-year campaign to make the commercial paper market more transparent, fraud-free, and market-oriented.

For the most part, The Cleanup has focused on how China’s financial system is changing to deal with bad loans. But an equally important part of clean-up efforts involves examining how the system is adapting to prevent abuse and improve efficiency. That’s the sort of change underway in the commercial paper market, exemplified by the migration of corporate bills from being a paper-based instrument to one that is almost entirely electronic.

Down for the (Dis)count        

BADs and CADs can either be discounted or undiscounted. Traditionally, undiscounted bills have gotten most of the attention. As shadow banking expanded rapidly following the global financial crisis, the issuance of undiscounted BADs ballooned to such an extent that the PBOC began incorporating them into its measure of Total Social Financing. Undiscounted bills are off-balance-sheet guarantees extended by the banks that issue them, but they can quickly become an on-balance-sheet loss if the company on whose behalf the bank issued the bill defaults (for an explanation of how BADs and CADs work, see Box 1 below). In a slowing economy, that generates very real risks to the banks.

However, that risk has diminished significantly in recent years with the volume of outstanding undiscounted BADs falling by more than half since the end of 2014 (see Figure 1).

Figure 1. Undiscounted and Under Control
Total outstanding undiscounted BADs, in trillions of yuan
Source: Wind, PBOC, MacroPolo.

The focus of regulators has since shifted to discounted bills, an area that has garnered far less attention. Discounting is when a company exchanges a bill—prior to its maturity—for cash, albeit for an amount less than the bill’s face value. Discounting has long been a vital source of credit to SMEs, providing much needed cash for periods ranging from a few weeks to a few months. According to data from the Shanghai Commercial Paper Exchange, in 2017 nearly 65% of all commercial bills were issued on behalf of SMEs—a ratio that had remained fairly constant for years.[1] However, according to the exchange, 83.6% of all discounted bills were presented for discounting by SMEs.[2] In a banking system that primarily lends to state firms and large private companies, commercial paper has long been one of the few reliable sources of credit for smaller private firms that typically use it not to fund investment projects, but as a way to cover operating costs.

However, discounting has been subject to prevalent abuse. Most notably, the disclosure of major bill-related scandals that involved potential losses worth billions of yuan have implicated Agricultural Bank of China (ABC), Citic Bank, and Bank of Tianjin in 2016, as well as the China Postal Savings Banks in January 2017.[3] The ensuing crackdown resulted in a contraction of commercial bill discounting. At its peak in October 2016, “paper financing” (票据融资)—which is how the PBOC refers to discounted commercial paper held by banking sector institutions[4]—accounted for 7.9% of all outstanding bank loans to non-financial companies[5] and declined to only 4.5% at the end of April 2018. In absolute terms, that represents a decline in the face value of outstanding discounted bills of 34.3%—a contraction that disproportionately hit SMEs.

Figure 2. A Recent Surge
Outstanding paper financing as a share of total outstanding bank loans to non-financial companies
Note: “Paper financing” refers to commercial paper discounted by banking institutions; “Non-financial companies” refers to “Loans to Non-financial Enterprises and Government Departments & Organizations.”
Source: Wind, PBOC.

This year, however, the need to get more credit to SMEs has been a major preoccupation of financial regulators. Consequently, they have seemingly rediscovered their faith in commercial bills. Indeed, since bottoming out in April—18 months after the contraction began—discount levels have surged in recent months. At the end of August, discounted bills made up 5.6% of outstanding credit to non-financial firms (see Figure 2). Moreover, over the four months from May to August, paper financing accounted for 39.2% of all newly issued bank credit to non-financial companies. In August alone, more than 70% of new credit issued by the banks to non-financial companies was from paper financing (see Figure 3).

Figure 3. A Solution for SME Funding?
Monthly change in paper financing and other bank loans to non-financial companies, in trillions of yuan
Note: “Paper financing” refers to commercial paper discounted by banking institutions; “Non-financial companies” refers to “Loans to Non-financial Enterprises and Government Departments & Organizations.”
Source: Wind, PBOC.

This latest surge no doubt comes in part as interest rates start to fall (the 2016 contraction in discounting volume coincided not just with the reforms, but also with a spike in discounting rates. However, it’s important to note that previous rate increases didn’t result in discounting volumes contracting.) (See Figure 4). But it also likely represents efforts to use commercial paper as a tool to ensure that new credit is specifically targeted toward SMEs. While it’s unclear whether the rise in commercial paper discounting has been driven by authorities or the commercial banks themselves, the change has clearly been endorsed by the central bank. In June, PBOC Governor Yi Gang said that, among other measures, the central bank would relieve pressure on small firms by increasing the volume of commercial paper that it rediscounts[6] (rediscounting is a monetary policy tool whereby the central bank buys commercial paper directly from the banks). At the end of June, the total volume of PBOC’s outstanding rediscounted commercial paper stood at 190 billion yuan, whereas the total volume of outstanding commercial paper was 10.4 trillion yuan.[7] Although the PBOC’s rediscounting activities are relatively small, they are a way for the central bank to signal its intent to the market.

Figure 4. Turning More Accommodative
Quarterly discount rate on commercial paper
Note: ‘Discount rate’ refers to ‘Weighted average paper financing interest rate’ (票据融资加权平均利率).
Source: PBOC.


Commercial bills fall into two categories—bankers’ acceptance drafts (BADs) and commercial acceptance drafts (CADs). BADs are primarily issued by banks and the “finance companies” (财务公司) that are the financial arms of large and predominantly state-owned conglomerates. CADs are issued by non-financial companies that tend to be large, credit-worthy corporations. In essence, both are a form of trade finance—their issuance is supposed to reflect a promise by one company to pay for goods sold by another at some point in the future. But their real value is that they are transferrable—meaning they can circulate as a substitute for cash—and can be discounted to exchange for cash prior to maturity.

BADs work like this: when a company—say, a widget maker—sells its widgets to a customer, it can either demand cash up front, or it can agree to accept payment at some later date (let’s say in six months’ time). However, by accepting payment in six months, the widget maker runs two risks. First, there’s the risk that in six months’ time the cash won’t be forthcoming, perhaps because the buyer won’t be in business, or it won’t have the cash, or even if it does have the cash it will delay payment further and use the cash for some other purpose. Second, the widget company runs the risk that it won’t have enough cash to operate its business during the six-months wait period for payment.

Chart 1. Mechanics of a BAD

So, to deal with those risks the widget maker might insist that the customer pay with a BAD. The BAD is essentially a promise by a bank that in six months’ time it will pay the widget maker what is owed. Hence, the widget company is no longer exposed to the risk of the customer not paying because the bank has now guaranteed payment. The bank itself shoulders the responsibility of collecting payment from the customer, and with it the risk that the customer can’t pay (see Chart 1).

BADs address the second risk facing the widget maker as well. BADs are transferrable. If the widget maker needs to pay a supplier but finds itself short of cash, then it can use the BAD in lieu of cash. If the supplier also finds itself short of cash it can then use the BAD to pay what it owes to another company, and so on. In fact, a BAD can be used as payment by multiple companies down the supply chain. When the BAD matures, the bank that issued it will pay the BAD’s full face value to whoever presents it for redemption (see Chart 2).

Chart 2. Transferring BADs as Payment

BADs aren’t a perfect substitute for cash as they can’t be used to pay wages, taxes, and some utilities. However, BADs can be exchanged for cash at a bank—or some other financial institution—prior to maturity. However, the bank will pay less than the full face value of the BAD—that’s to say it acquires the BAD at a discount. Hence, companies are typically reluctant to exchange BADs for cash prior to maturity because they get paid less than what they’re owed—and less than what they’ll get if they can only hold out until the bill matures. When the BAD matures, the discounting bank can redeem the full face value of the BAD upon presenting it to the issuing bank (see Chart 3).

Chart 3. Discounting BADs

In summary, undiscounted BADs flow around the economy as an alternative currency, passing from company to company until maturity. Meanwhile, discounted BADs are short-term loans that are guaranteed by another financial institution.

CADs work almost entirely the same way as BADs. Like BADs, CADs can circulate around the economy like cash, and they can be discounted. However, because they’re issued by corporations and not financial institutions, they carry a higher credit risk. Consequently, companies generally don’t like receiving them as payment, and banks are far less willing to discount them. But when making a sale is dependent on being willing to accept a CAD as payment, many companies will take on the risk rather than lose the sale.

BAD(s) to the Bone

Perhaps the most common abuse involves banks issuing BADs that aren’t backed by real trade. That allows entities that might not otherwise be able to get a loan any other way, such as real estate developers or local government financing vehicles, to use discounted BADs to fund investment projects. Of the 109 BAD-related fines imposed by the China Banking and Insurance Regulatory Commission (CBIRC) in 2017 on banks, more than half involved BADs that weren’t backed by real trade.[8]

However, there were other violations as well. In particular, two junior ABC employees’ alleged embezzlement of 3.8 billion yuan sheds light on why paper-based BADs are such a liability.[9] The state bank had discounted the BADs and was storing them in a safe until they matured. Then, in May 2015, the employees took the BADs from the safe and, using a broker, entered into a repurchase agreement with another bank. Under that agreement, the employees exchanged the BADs for cash, but promised to pay back the cash in return for the BADs before they matured. That way they could have the BADs back in the safe before anyone came looking for them. In the meantime, they had a whole lot of cash with which they could speculate. However, after losing money from their investments in wealth management products (WMPs)[10] and the stock market, it became impossible for them to honor the repurchase agreement. Consequently, the BADs were never returned to the safe, the junior employees were found out, and ABC was left with a 3.8 billion yuan hole on its books.

Clearly, a centrally managed electronic system would have denied the bank employees the opportunity to steal the BADs. Electronic corporate bills would also prevent the employees of companies that had received BADs or CADs as payment from doing the same thing, or even absconding with them and claiming they were lost. They would prevent counterfeit BADs and CADs from circulating. And they would make it easier for banks to verify the legitimacy of a bill presented to them for discounting.[11] Instead, all these problems persisted with paper-based bills.

Consequently, many companies—foreign firms in particular—refused to accept BADs that had already circulated too widely. Others would discount them immediately upon receipt in order to avoid any risk that might arise from having them lying around. In short, uncertainty surrounded paper-based corporate bills’ legitimacy, whether they would be honored, and whether they might go missing.

These risks weren’t lost on the authorities.

“Despite [their] rapid development and growing importance, commercial drafts face a number of problems. These include irregularities in draft acceptance and discount, dishonor by non-payments, fake drafts, and unregulated innovation,” said Su Ning, then-deputy governor of the PBOC in October 2009.[12] “These problems could lead to financial risks, threaten fund security, and hamper the development of the draft market.”

Su was speaking at the launch of the Electronic Commercial Draft System (ECDS), the PBOC’s first attempt to deal with the risks of the commercial paper market. The system allowed for bills to be issued, signed, endorsed, discounted, and rediscounted electronically. In fact, it could fulfill any function that had previously been possible using paper bills. Moreover, electronic bills do away with the problem of fake bills, of transporting them cross-country, and of bank branches having to independently verify the prior holders of bills. Hence, the ECDS promised to reduce the costs and improve the circulation of corporate bills.

Electric Slide

However, despite broad recognition of the shortcomings of paper bills, for years electronic bills accounted for only a minority of all commercial paper issued. In 2013, only 8.3% of commercial bills were electronic, rising to 16.2% in 2014 and 26.7% in 2015.[13] Even as late as December 2016, PBOC vice governor and head of the State Administration of Foreign Exchange (SAFE) Pan Gongsheng lamented that “China’s commercial bills are mainly paper, trading is mainly offline, the level of digitization is low…and operational risks are fairly large.”[14]

The failure to embrace electronic bills more readily seems in large part due to the benefits that banks drew from the paper market’s opacity and inefficiencies.

“ECDS is not commonly used because only bills in paper form have room for gray area income…The room for maneuver is less for electronic bills which have relatively high transparency,” the Hong Kong Trade Development Council (HKTDC) said in a June 2016 note.[15]

The HKTDC saw most of this gray income coming from inadequate regulatory oversight of the rediscounting market (the rediscounting market refers to the trade of discounted BADs and CADs between banks themselves and with other financial institutions). “Currently, the inter-bank bill rediscount market is fraught with irregular transactions, including commercial banks acting as ‘bridging banks’ to earn interest spreads…as well as bills intermediaries making profits by maturity mismatch.”

Paper bills also allowed banks to earn fees from “warehousing” services whereby they took over the administrative burden of managing BADs and CADs from companies with large flows of commercial paper.[16] (For a more detailed explanation of the ways banks have abused and benefitted from China’s commercial paper system, this FT Alphaville piece provides an excellent primer.)

Efforts to overhaul the commercial paper market started in April 2016 following comments from the PBOC’s Pan saying that the central bank would begin building a centralized electronic market.[17] That August, the PBOC issued rules requiring that as of 2017, all commercial paper with a face value of more than 3 million yuan must be electronic,[18] and starting in 2018, all bills with a face value of 1 million yuan must be electronic.[19] Then in May 2018 the CBIRC declared that within six months, only electronic bills could be traded across provincial borders, hugely circumscribing the efficacy of paper bills.[20]

The result had been the wholesale migration of commercial bills from being a financial tool that was predominantly paper based to one that is now largely electronic. According to Reuters, the PBOC initially intended for 80% of commercial paper issued by every financial institution to be electronic by the end of 2018.[21] However, the pace of change has far exceeded expectations. According to the Shanghai Commercial Paper Exchange (SHCPE), in the first half of 2018, more than 90% of commercial paper issued was electronic.[22]

The exchange, which was set up in December 2016 and manages the ECDS, is another important part of the transformation. The exchange is a platform over which financial institutions can trade commercial paper, replacing the opaque over-the-counter arrangements that preceded it. Perhaps most importantly, with the unprecedented centralization of all this commercial paper activity in its hands, the exchange has unparalleled insight into the commercial paper market. Based on the data it has published since February 2018,[23] it would seem that the size of the commercial paper market is significantly larger than what PBOC data suggest.

New Market, New Data

The PBOC’s data has two shortcomings. First, the data only covers undiscounted BADs and not CADs. Second, the data on “paper financing” measure commercial paper—both BADs and CADs—discounted by banks, finance companies, and trusts, but do not capture the significant volume of discounting that takes place outside of those institutions.

Commercial Acceptances

At the end of August, CADs accounted for 15.8% of all outstanding commercial paper (which includes both discounted and undiscounted bills), a level that has remained fairly stable since February (see Figure 5). However, CADs accounted for only 9.6% of discounted commercial paper. That shouldn’t be a surprise because whereas BADs are backed by the credit of banks, CADs are backed by the less robust credit of companies. That means there’s a greater risk that CADs won’t be honored, thus reducing banks’ willingness to discount them. As a consequence, the volume of outstanding undiscounted CADs stood at 22.9% of undiscounted commercial paper at the end of August, a level that had been creeping upward since February.[24]

Figure 5. Relatively Little Issuance…But a Significant Part of Undiscounted Paper
Total outstanding CADs – total outstanding and undiscounted only – compared with BADs
Source: SHCPE.

That means that CADs are a potentially important contributor of liquidity to firms. While CADs are less readily accepted as payment than BADs, they’re nonetheless a liquid payment tool that company may feel compelled to accept in a slow growth or tight credit environment.

Given that the SHCPE’s data only go back as far as February 2018, there’s no way of knowing if CAD issuance has increased over the last couple of years to compensate for fewer BADs in circulation. However, a report published in May by the Payment & Clearing Association of China, an industry association under the supervision of the PBOC, suggests that issuance has been rising.

“In recent years, with the fast development of the bills market, the scale of commercial acceptance draft activity has continuously expanded…At present, CAD use is mainly concentrated in petroleum, electricity, steel, telecommunications, energy, and monopoly industries with large state firms, large and medium sized firms with a good reputation, and large firms operating internationally.”[25]

Bigger Discounting Pool

While the PBOC discloses data only on commercial paper discounted by “banking sector institutions,” the ecosystem of discounters extends somewhat further. In fact, the SHCPE includes as members a handful of fund managers and securities brokerages, and a number of “directional asset management plans” (that is, special purpose vehicles that often form the basis of WMPs). The exchange allows such members to buy discounted BADs and CADs from banks and finance firms who acquire commercial paper directly from companies. But once they do, the discounted commercial paper then moves out of the formal banking system—and is also removed from the PBOC’s data. Such transactions, however, are captured by the ECDS.

Similarly, in recent years, other non-bank institutions that operate outside of the exchange (but not the ECDS) have also been discounting commercial paper. A number of tech giants—notably Ant Financial,, and Suning—have at various times packaged commercial paper into WMPs for sale to the public. Meanwhile, a number of internet platforms have sprung up to provide a kind of auction forum for commercial paper, allowing companies to solicit better discount rates from investors than what’s available from banks. Some of these platforms also package commercial paper in WMPs.

With the SHCPE also in charge of the ECDS platform, it would seem that its data capture most if not all such non-bank discounting activity. According to SHCPE data, at the end of August, there was 5.7 trillion yuan worth of outstanding discounted commercial paper. However, according to the PBOC, paper financing stood at only 4.9 trillion yuan. The difference, which represents 15.7% of the PBOC figure, is likely discounting by institutions outside the formal banking system. It’s worth noting that ratio has been declining in recent months as banks have ramped up their discounting activity (see Figure 6).

Figure 6. PBOC Data Miss Some Discounting
SHCPE measure of bill discounting exceeds PBOC figures
Note: PBOC paper financing data only capture discounting by banking sector institutions. SHCPE data capture discounting institutions outside of the PBOC’s ecosystem.
Source: SHCPE; PBOC.


It’s too soon to tell whether the resurgence of commercial paper discounting will be sufficient to redress the problems facing small, private firms. Clearly the stress placed on such companies is not solely the result of tighter credit but also a slowing economy. Nonetheless, the recent surge in commercial paper discounting is more squarely targeted at getting funding to SMEs than most other lending tools, thereby signaling a renewed faith in an aspect of China’s financial system that had been subject to widespread abuse.


[1] Since at least 2014, the PBOC has said in its quarterly reports on the market liquidity that two-thirds of BADs have been issued to SMEs.

[2] Song Hanzhuang, “票据市场向电子化线上交易转变”(“The transition of the commercial paper market to electronic online trade”), Modern Banker, August 27, 2018

[3] Don Weinland, “Bank of Tianjin Hit by $121m Fraud,” Financial Times, April 8, 2016

[4] Banking system institutions include banks, the finance companies of corporate groups, trusts, leasing companies, and credit cooperatives.

[5] Please note that throughout this report, the term “non-financial companies” refers to the PBOC’s designation of “Loans to Non-financial Enterprises and  Government Departments & Organizations” (非金融企业及机关团体贷款).

[6] “The central bank will use monetary policy, reserve requirement ratio, targeted rate cuts, relending, and rediscounting to support small firms,” Yi Gang said in June 2018 at a speech at the Lujiazui Forum in Shanghai. Soon after, the PBOC said it would raise the volume of its rediscounting and relending activities by 150 billion yuan. At the end of June, the volume of the PBOC’s total outstanding rediscounted commercial paper stood at 190.1 billion yuan, and the outstanding level of relending at 501.9 billion yuan. A transcript of Yi Gang’s speech is available here.

[7] According to the SHCPE (上海票据交易所), at the end of August 201,8 there were 10.4 trillion yuan worth of BADs and CADs outstanding, a figure that includes both discounted and undiscounted bills.

[8] MacroPolo research.

[9] Gabriel Wildau, “China Agbank Staff Accused of $578m Embezzlement,” Financial Times, January 21, 2016

[10] “Agricultural Bank of China Hit with Year’s Biggest Fine Over 3.9bn Yuan Repo Fraud Case,” China Banking News, November 21, 2017

[11] David Blair, “Electronic Commercial Draft System,” Treasury Today, January 2014

[12] “Su Ning: China’s inter-bank payment and clearing service,” BIS Review, March 2010

[13] Chen Yingying,“倒爷”钻电票空子套利 票据江湖“猫鼠游戏”几时休(“’Profiteers’ exploiting electronic bills arbitrage; how long will it take for cat and mice to play everywhere”), Shanghai Securities News, November 18, 2016

[14] Pan Gongsheng, “中国票据市场的发展与规范” (“China’s commercial paper market’s development and standards”), Financial News, December 8, 2016

[15] “Steering Group Formed to Create PBOC-led National Bills Exchange,” Hong Kong Trade Development Council Research, June 8, 2016

[16] David Blair, “Electronic Commercial Draft System,” Treasury Today, January 2014

[17] “China plans to centralize commercial paper market: media,” Reuters, March 8, 2016

[18] “中国人民银行规范和促进电子商业汇票业务发展的通知” (“PBOC notice on standardizing and promoting electronic commercial papers’ development”), People’s Bank of China, August 27, 2016

[19] Ibid.

[20] “中国银行保险监督管理委员会办公厅关于规范银行业金融机构跨省票据业务的通知”(CBIRC Notice on standardizing the inter-provincial commercial paper activity of banking sector financial institutions), CBIRC, May 9, 2018

[21] Clark Li, Li Zheng, and Pete Sweeney, “China introduces new rules on corporate bill issuance – sources,” Reuters, April 1, 2016

[22] “2018 年上半年票据市场运行情况,” (“2018 First half commercial paper market operations report”), SHCPE, August 3, 2018

[23] The SHCPE started publishing data on the commercial paper market in 2017, but it was only in February 2018 that it began publishing combined data on paper and electronic bills. Previously its data had been for electronic bills only.

[24] The SHCPE doesn’t disclose data on undiscounted BADs and CADs. We have derived figures for undiscounted commercial paper by subtracting the volume of outstanding discounted bills from the amount of total outstanding bills.

[25] Su Lifeng and Xie Lijun,“关于银行、财务公司开展商业承兑汇票业务的调研报告” (“Regarding report into banks and finance companies carrying out commercial paper business), Payment and Clearing Association of China, May 8, 2018

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