Earlier this year the People’s Bank of China (PBOC) changed the way it calculates Total Social Financing (TSF)—its measure of credit in the economy—by adding new components to capture changes in how the financial system operates. But beyond adding new elements, the PBOC may need to reconsider how it measures an existing core component, namely undiscounted bankers’ acceptances.
Undiscounted bankers’ acceptances—which are recorded off banks’ balance sheets—have been a part of TSF since the PBOC launched the measure in 2013 to account for the increasing role of shadow banking in credit creation. They grew in popularity in the immediate aftermath of the global financial crisis because they allowed banks to ramp up credit while avoiding regulatory scrutiny. Undiscounted bankers’ acceptances have become less relevant in recent years, as their total outstanding volume has declined by a third since the end of 2015 (see Figure 1). Most observers attribute their decline to the broader contraction in shadow banking.
Figure 1. Undiscounted Bankers’ Acceptances Have Been DecliningSource: Wind, PBOC.
In their stead, undiscounted acceptances of another type—commercial acceptances—have risen, a renaissance that reflects the difficulties some firms are having in coping with the slowing economy. Most importantly, the relative importance of undiscounted commercial acceptances has surged. At the end of February, there were about 40 yuan of undiscounted commercial acceptances for every 100 yuan of undiscounted bankers’ acceptances, up from about 25 a year earlier (see Figure 2). That suggests it may no longer be sufficient to only consider undiscounted bankers’ acceptances when measuring credit growth.
Figure 2. Commercial Acceptances Have Risen Relative to Bankers’ Acceptances…Source: Wind, PBOC, SHCPE, MacroPolo.
Figure 3. …And Are Rising Relative to Bankers’ AcceptancesSource: Wind, PBOC, SHCPE, MacroPolo.
Further anecdotal evidence suggests commercial acceptances have returned to vogue well before the SHCPE started publishing data. “In recent years…the scale of commercial acceptance activity has constantly expanded,” the Payment and Clearing Association of China, a government-backed industry association, said in a note on its websitein May 2018.
Acceptances are a type of trade finance. When a company buys something from a supplier, it can pay with cash, or it can pay with an acceptance draft. Bankers’ acceptances are issued by commercial banks and are a promise by the bank to pay the bearer its full face value in cash at maturity. Commercial acceptances are issued by companies, who promise to do the same. The difference is in the credit worthiness of the issuer. Whereas banks are highly unlikely to have any difficulty honoring their acceptances, companies run the risk of not having enough cash on hand for payment (see more detailed explanation here).
The government only started publishing comprehensive data on the issuance of commercial acceptances at the beginning of 2018. Since then, undiscounted commercial acceptances have been steadily increasing. In the year ending February 2019, their outstanding volume was at 1.46 trillion yuan, up 34% from 1.09 trillion yuan a year earlier. (The Shanghai Commercial Paper Exchange (SHCPE), which publishes the figures, in March changed the way it collects the data, making it difficult to compare figures from recent months with last year.)
Not all companies have embraced commercial acceptances, but for some this type of financing has become an important part of their business. According to its earnings report, at the end of 2018, China Railway Group had 10.2 billion yuan worth of commercial acceptances it needed to pay out at maturity, more than 10 times the level three years earlier. At the end of 2018, steelmaker Beijing Shougang had 5.3 billion yuan worth of commercial acceptances outstanding, whereas three years earlier it had none at all. According to the Payment and Clearing Association, commercial acceptances are mainly issued by large, state-owned firms with good credit.
The expanding role of commercial acceptances is a symptom of the slowing economy. It signals that companies that were previously reluctant to accept commercial acceptances as payment no longer feel they can do so without sacrificing sales. Moreover, it implies that many companies no longer feel as though they have sufficient resources to have banks issue bankers’ acceptances for them. Banks typically require companies on whose behalf they issue a bankers’ acceptance to hold a portion of its value as a bank deposit.
Bankers’ and commercial acceptances combined are still below the total outstanding volume of bankers’ acceptances alone at the end of 2015, and neither pose a threat to the overall financial system. But rising undiscounted commercial acceptances is a sign of mounting distress among certain firms. And both types of acceptances combined have become far more representative of credit trends than examining each alone.
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