China’s trade war with the United States has escalated in recent days, posing a growing threat to an already slowing economy.
China is not running out of money. But Chinese banks are reluctant to lend to private businesses because they consider big, state-owned enterprises more reliable in paying off their debts. Alternative sources of money have dried up as regulators have cracked down in recent years on China’s shadowy world of unofficial lending.
So a growing number of companies are issuing i.o.u.s to their suppliers. Some suppliers turn around and use the notes to pay another supplier. And then — in a sign of how desperate some Chinese companies have become for money — they sell the notes for less cash than they are worth.
Commercial acceptance bills are not legal tender. Rather, they are pieces of paper promising payment in the future. Companies owed some $211 billion in these informal notes as of February, the most recent government data available, an increase of more than one-third from the previous year.
More debt may be floating around China’s corporate world and goes untracked if the notes are being traded for less than their face value. A market has formed around commercial acceptance bills, in which companies buy and sell them based on the prospects for being paid back. The bigger and better known the company, the more secure the bill is considered.
A pillar of China’s economy, the property sector, is feeling the squeeze particularly hard. Sales have been slowing since late 2017, making it hard to pay for new projects. At the same time, the government is clamping down on other ways that property companies raise money, like through the shadow banking system.
Property companies have adapted by effectively turning the commercial acceptance bills into a currency, according to interviews and filings from dozens of property developers and suppliers like steel companies, design and construction firms.
Xu Jiang of Zhubo Design, an architecture and urban planning company in the southern city of Shenzhen, said customers had started to pay with commercial acceptance bills two years ago. The customers, which include some of the country’s biggest developers, local governments and state-owned firms, now use these notes more frequently than paying cash, he said.
Today, one of the biggest issuers of i.o.u.s is China’s largest and best known property company, Evergrande ($36bn market cap). By the end of last year it had issued nearly $20 billion worth of i.o.u.s to its suppliers. With a towering $100 billion debt pile and a penchant for raising bonds to pay off the interest, it appears to have turned to commercial acceptance bills to help cover costs.
Bauing Construction Holding Group, a big supplier of design and materials to China’s biggest property developers, has disclosed that it is owed $96.4 million in these i.o.u.s from Evergrande.
Another company that owes Bauing money is the state-owned firm China State Construction Engineering. China State said it had owed $490 million in i.o.u.s to all of its suppliers at the end of last year.
Another major property developer, Greenland Holding, which was founded by the Shanghai government and has property developments in dozens of cities across China, had $550 million worth of unpaid notes out to suppliers by the end of last year, according to its annual report. The company said that was 10 times the amount it had outstanding in 2017.