Where’s the Cash – Why China’s Private Sector Woes Are About Payments, Not Credit

Late last year, Beijing became increasingly worried about the health of the private sector. In particular, it focused its concerns on the difficulties small, private firms had in accessing cheap credit. Yet access to credit has been a perennial problem for the private sector stretching back over a decade.

So, why the renewed concern? The most common explanation is that the contraction in shadow banking—which began in earnest at the end of 2017—has made it more difficult for private companies to borrow. While that might be a contributing factor, we don’t believe that it’s at the heart of the private sector’s difficulties.

Rather, we posit that private companies aren’t facing a credit problem, but a payments problem. Specifically, we believe that companies are having to wait significantly longer than in the past to get paid by their customers, resulting in private companies having less cash on hand to stay afloat.

This report will lay out the case for why payment conditions have deteriorated. Moreover, it will show that, contrary to public perception, the banking system has responded on a massive scale to deal with the private sector’s problems, but has done so by providing small private companies with the equivalent of low-interest payday loans. While that has kept companies alive by covering their cash shortfalls, it doesn’t help firms with their working capital or investment needs. Finally, we will explore the reasons behind the deterioration of payment conditions.

Shadow Boxing

At a conference convened in November 2018 to discuss private sector funding issues, People’s Bank of China (PBOC) Governor Yi Gang acknowledged that “Some policies [implemented by the central bank] were ill-considered, lacked coordination, and deviated in execution…which led to a tightening of credit that increased private companies’ difficulty in borrowing.”[1]

Yi pointed to a slowdown in bank lending to private companies, a decline in bond issuance by private firms, and bottlenecks in the equity market, all of which have made it difficult for the private sector to raise capital. But the explanation was met with some skepticism. While bank lending to small and micro firms slowed throughout 2018 and lending by the Big Six banks[2] contracted (see Figure 1), overall growth remained fairly robust. As such, the contraction in shadow banking emerged as a dominant explanation for the private sector’s woes (see Figure 2).

Figure 1. Not as Much Credit
In 2018, banking sector lending to small firms slowed, and the major state banks cut back on lending altogether.
Note 1: In 2019, CBIRC changed the metric by which it measures loans to small firms such that the data can no longer be compared to earlier periods.
Note 2: State commercial banks refers to ICBC, CCB, BOC, ABC, BoCom, and Postal Savings Bank.
Sources: CBIRC, MacroPolo.

But such an explanation is very difficult to square for several reasons. First, there is no reliable data available on shadow bank lending to the private sector. Second, fixed asset investment by private firms in 2018 held up surprisingly well, suggesting that in aggregate, the private sector’s access to credit didn’t take a serious hit (see Figure 2). Third, the types of shadow banking that contracted in 2018 have never been particularly supportive of the private sector but were mostly aimed at property developers and state industrial firms. Small, private companies, on the other hand, have traditionally borrowed through informal channels, such as kinship networks and other entrepreneurs, pawn shops, small-loans companies, and P2P platforms, all of which have suffered or have been in crisis for years now.

Figure 2. Strong Investment
Fixed asset investment by private companies was remarkably robust last year.
Sources: Wind, NBS.

A Payments Problem

That’s not to say the contraction in shadow banking didn’t hurt the private sector, but it’s insufficient in explaining the totality of the private sector’s problems. Instead, what has put undue stress on private firms is the increasing delays in payments from customers, an issue significant enough to get the attention of Premier Li Keqiang.

“Government departments and state firms all must resolutely stop falling behind in making payments owed to private companies,” Li said in a State Council meeting in November 2018.[3] “For government to do so violates the basic responsibility of the ‘people’s government serving the people.’”

Since then, other indications of private companies facing payment arrears have emerged:

  1. Deteriorating Payments

Coface, a credit insurance company, conducts an annual survey of between 1,000 and 1,500 Chinese firms—of which about 90% are in the private sector—to gauge payment conditions. According to its most recent survey,[4] in 2018 companies on average were willing to accept payment 86 days after a sale. That was up markedly from 76 days in 2017 and 56 days in 2015 (see Figure 3).

The report expressed particular concern about the rise in payments overdue by more than 180 days, which are seldom paid. According to the report, when more than 2% of a company’s annual revenue is made up of sales that should have been paid at least six months earlier, then its “cash flow may be at risk.” In 2018, 55% of respondents had ultra-long payment delays in excess of 2% of turnover, up from 47% in 2017 and 33.4% in 2015.

Figure 3. Payment Problems
The average payment terms offered by private companies has been lengthening since 2015.
Source: Coface.

Figure 4. Waiting Longer for Cash
The time it takes large companies to get paid has been getting longer since the end of 2017.
Source: Wind, NBS.

The Chinese government doesn’t track payment conditions at private companies. However, a monthly survey of more than 90,000 large industrial companies by the National Bureau of Statistics suggests that deteriorating payment conditions are not unique to the private sector. At the end of April, the NBS survey reported that it took firms on average 55.1 days to be paid by customers, up from 39.1 at the end of 2017, prior to which the level had been fairly stable (see Figure 4).

  1. Discounted Bankers’ Acceptances

Perhaps the clearest indicator of the payment problem has been the banking system’s response, manifest in the surge of discounting of bankers’ acceptances. (We’ve written about bankers’ acceptances before, and a primer explaining how they work can be found below.)

Bankers’ acceptance discounting is technically a type of trade finance, but it works in a way that’s not dissimilar to a low-interest payday loan. It’s a way for firms to get cash for sales they’ve already made, but are still waiting upon payment from the customer. However, banks don’t pay out the full amount of what the company is owed. The size of the haircut they impose is called the discount rate. In 2017, the last period for which we have data, nearly 84% of the funds extended by banks from discounting went to small- and medium-sized firms (SMEs)—a group largely represented by private companies.[5]

Figure 5. A Resurgence in Discounting
Discounting bankers’ acceptances has taken off since RRR cuts started in May 2018.
Note: PBOC data refers to discounted bankers’ acceptances as “paper financing.”
Source: Wind, PBOC.

Banks’ discounting activity started surging a year ago, coinciding with the first of five cuts to banks’ reserve requirement ratio (RRR) (see Figure 5). At the end of April 2019, the outstanding volume of discounted bankers’ acceptances (what the PBOC refers to as “paper financing” in its data) was up 2.92 trillion yuan, or 76%, from a year earlier. It’s here that Beijing’s call for cheaper credit for private companies has been most pronounced. The discount rate on bankers’ acceptances peaked in March 2018, declining the following month with the announcement of the first RRR cut, and has since fallen well below the corporate lending rate for ordinary loans (see Figure 6).

Governor Yi has embraced bankers’ acceptance discounting as a key pillar of his strategy to deal with the private sector’s problems. Last year the PBOC increased its quota for rediscounting (whereby it buys acceptances that commercial banks have already discounted) and relending (whereby it buys loans made by the banks) by 400 billion yuan. Most of that has been used for rediscounting, a marked shift for the PBOC that has previously used the quota primarily for relending activities (see Figure 7). On June 14, 2019, the PBOC increased the quota for rediscounting by a further 200 billion yuan.

Figure 6. Less of A Discount
The discount banks charge on acceptances has been falling relative to other interest rates.
Note: Paper financing is how PBOC data refers to discounted bankers’ acceptances.
Source: PBOC.

Figure 7. Reviving Rediscounting
In recent quarters, the PBOC has increased its rediscounting activity more than relending.
Source: Wind, PBOC.

As a rule, companies don’t like discounting their bankers’ acceptances. Many Chinese firms operate on wafer thin margins, and discounting erodes their profits. Still, sometimes they can’t avoid it. While undiscounted acceptances are transferrable and circulate among companies as a cash-substitute, firms need real cash to pay wages, bonuses, taxes and social security contributions, utilities, and interest on loans. The willingness of companies to massively increase discounting partly reflects a better discount rate, but also companies’ need for cash.

  1. Undiscounted Commercial Acceptances

Although still fairly small, the rapidly rising volume of commercial acceptance drafts is of particular concern. It not only highlights the struggles of private firms that receive them as payment, but also shines a light on the difficulties faced by the large firms that issue them.

Commercial acceptances are IOUs. When a large company buys something from a supplier, it can pay with a commercial acceptance, which is a promise to pay the full amount of the sale at a predetermined date in the future. Like bankers’ acceptances, they are transferable, which means a company that receives one can use it to pay its own suppliers. Moreover, companies can ask banks to discount it. However, unlike bankers’ acceptances, payment is ultimately dependent on the future financial position of a company, not a bank.

Under normal circumstance, companies usually try to avoid accepting commercial acceptances as payment, since banks are less willing to discount them and they’re more likely to default. In the early 2000s, commercial acceptances were at the heart of China’s triangular debt problems, where companies found themselves holding stacks of commercial acceptances issued by customers who had been unable to honor them at maturity. After the problem was cleaned up, commercial acceptances fell out of favor.

But their volume has surged since August last year. At the end of February 2019, the volume of outstanding commercial acceptances was 2.2 trillion yuan, up 35% from a year earlier (see Figure 8). (Since February, the Shanghai Commercial Paper Exchange has changed the way it measures commercial acceptances. Still, even by the new measure, commercial acceptances have continued to grow strongly in recent months). Over the same period, the volume of outstanding bankers’ acceptances (both discounted and undiscounted combined) rose by only 26%. Moreover, commercial acceptances now account for a significant share of the undiscounted acceptances in circulation. At the end of February, the total volume of outstanding undiscounted commercial acceptances was equivalent to 39% of outstanding undiscounted bankers’ acceptances, up from 27% a year earlier.

Figure 8. More IOUs and Less-Trustworthy
The issuance of commercial acceptances has accelerated since the latter half of 2018.
Note: The Shanghai Commercial Paper Exchange changed the standard by which it measures bankers’ and commercial acceptances in March 2019.
Sources: Shanghai Commercial Paper Exchange, MacroPolo.

The recent revival of commercial acceptances as payment reflects firms’ fear that saying no when offered them as payment will result in lower sales. But it also reflects the straightened cash position of the large firms that issue them. When a bank issues a bankers’ acceptance, it usually requires the company on whose behalf it’s issuing the acceptance to place a proportion of its face value on deposit at the bank until maturity. The size of the deposit can range anywhere between 10% and 60% of the face value of the bankers’ acceptance, depending on how the bank assesses the risk of the firm.

Commercial acceptances, however, don’t require deposits. For a company with insufficient cash on hand to have a bank issue a bankers’ acceptance, commercial acceptances are a great alternative. Similarly, commercial acceptances free up cash that a bankers’ acceptance might lock up at a bank, hence giving the companies greater latitude to deploy scarce resources.

That undiscounted commercial acceptances have risen at the same time as bankers’ acceptance discounting has expanded signals that both the issuers and receivers of such payments are operating under cash constraints.

A Power Imbalance

To a certain extent, the deterioration in payment conditions is driven by the slowing economy. However, there are other factors at play as well:

  1. Deleveraging Demands

For state firms under pressure to deleverage, and companies struggling to maintain their credit rating, delaying payment to private sector suppliers is the easiest way to free up cash and pay down debt. Private companies are the weakest political constituency in the economy and have little scope to push back.

  1. Local Government Finances

The contraction in shadow banking likely handcuffed local governments in their efforts to raise the cash necessary to pay suppliers and contractors working on local projects. In January, Premier Li told local governments that upon issuing new bonds, priority must be given to using the funds to repay small companies and private sector suppliers.[6]

  1. Industry Consolidation

The slowing economy has forced firms in certain industries—notably construction—to consolidate. Consequently, many private companies—including multinationals—have found themselves dependent on a smaller pool of potential customers who are able to use their concentrated market power to delay payment.


While the contraction in shadow banking has likely had a negative impact on private firms’ ability to borrow, payments are the more important factor affecting the private sector’s prospects . The PBOC and banks have embraced the discounting of bankers’ acceptances as a solution. But while discounting can provide firms with the cash they need, it doesn’t get to the heart of the problem. Ultimately, souring payment conditions are the result of a slowing economy. Moreover, it’s certainly not sustainable for the state sector to continue pushing its own problems onto small and private firms, even if the banks continue to plug the gap with cheap discounting.



Bankers’ acceptances 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. Commercial acceptances 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.

Bankers’ acceptances 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 bankers’ acceptances. The bankers’ acceptance 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).

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

Chart 2. Transferring BADs as Payment

Bankers’ acceptances aren’t a perfect substitute for cash as they can’t be used to pay wages, taxes, and some utilities. However, bankers’ acceptances 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 bankers’ acceptance—that’s to say it acquires the bankers’ acceptance at a discount. Hence, companies are typically reluctant to exchange bankers’ acceptance 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 bankers’ acceptance matures, the discounting bank can redeem the full face value of the bankers’ acceptance upon presenting it to the issuing bank (see Chart 3).

Chart 3. Discounting BADs

In summary, undiscounted bankers’ acceptances 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.

Commercial acceptances work almost entirely the same way as bankers’ acceptances. Like bankers’ acceptances, commercial acceptances 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 commercial acceptance as payment, many companies will take on the risk rather than lose the sale.


[1] “易纲:前期一些政策加大了民营企业融资困难今后将避免“一刀切” (“Yi Gang: Some Policies Exacerbated Private Firms’ Funding Difficulties. In future, We Will Avoid a ‘One Size Fits All’ Approach”), November 6, 2018, National Business Daily, http://www.nbd.com.cn/articles/2018-11-06/1269989.html.

[2] ICBC, CCB, BOC, ABC, BoCOM, and Postal Savings Bank.

[3] “李克强:抓紧解决政府部门和国有企业拖欠民营企业账款问题” (“Li Keqiang: Grasp and Resolve the Problem of Arrears Owed by Government Departments and State Firms to Private Companies”), State Council, November 10, 2018, http://www.gov.cn/guowuyuan/2018-11/10/content_5339135.htm.

[4] Casanova, Carlos, “China Payment Survey 2019: Longer Delays and Growth Falters,” Coface, March 14, 2019, https://www.coface-usa.com/News-and-Publications/Publications/China-Payment-Survey-2019-Longer-delays-as-growth-falters.

[5] 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 http://www.shcpe.com.cn/info_11_itemid_1275.html.

[6] “李克强主持召开国务院常务会议” (“Li Keqiang Chairs State Council Meeting”), Xinhua, January 20, 2019, http://www.xinhuanet.com/politics/2019-01/30/c_1124066718.htm.

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