China Cash Crunch Spreads; Businesses Turn to Alternatives Such as Bankers’ Acceptances to Pay Their Bills

June 26, 2013, 8:19 p.m. ET

China Cash Crunch Spreads

Businesses Turn to Alternatives Such as Bankers’ Acceptances to Pay Their Bills

DINNY MCMAHON

BEIJING—Even as Chinese officials indicate a softening of their tight grip on cash, some businesses are reporting liquidity is increasingly hard to find in some places and that customers are turning to alternatives.

It isn’t clear how deep the liquidity issues have trickled down from the financial sector, which has been gripped this month by a cash crunch widely believed to be aimed at deflating ballooning credit in the Chinese economy. But it suggests the pain could spread to other areas if cash borrowing rates for banks remain stubbornly high.Over the past couple of weeks companies have increasingly used bankers’ acceptances—a type of short-term guarantee issued by banks to finance trade—to pay their bills instead of cash, according to people in a range of industries around the country.

Liu Jiang, a purchasing manager at a copper-cable maker in China’s eastern Zhejiang province, a hub for small and midsize manufacturers and exporters, said some of his customers have been using bankers’ acceptances because they don’t have enough cash available.

“Bankers’ acceptance are relatively easy to get as they don’t show up on banks’ balance sheets,” said Mr. Liu, whose firm supplies China’s State Grid Corp. and consumes about 150,000 tons of copper a year. He also said that his firm’s financing costs have more than doubled from the beginning of the month, though “we haven’t felt the pinch yet.”

An executive with a major Chinese food-and-beverage company said that his firm’s customers also have been trying to pay for supplies with bankers’ acceptances, although the company has long had a policy of accepting only cash in advance. He also said that customers were finding it difficult to get credit.

 

Banks help facilitate commerce by issuing bankers’ acceptance bills, which guarantee that companies will get paid when they deliver the goods they have agreed to produce at some future date.

Since the bank promises to pay up regardless of who is holding the bill at maturity, they can pass through multiple hands as a substitute for cash.

It is a common, and relatively cheap, way of accessing credit in the U.S. as well. In China there is a thriving secondary market.

Issuance in China has expanded rapidly in recently years—up 22% in 2012 and 27% in 2011, according to data from Nomura. There was almost 6 trillion yuan ($975.6 billion) worth of bankers’ acceptance bills outstanding at the end of last year, Nomura said.

The holder of a banker’s acceptance also can cash them in before maturity albeit at a discount to their face value. Over the past couple of weeks that discount rate has surged as banks try to conserve funds by deterring people from cashing them in, resulting in more bills in circulation and less cash.

According to numbers from economic-data provider CEIC, the discount rate on bankers’ acceptance bills rose to 9.3% on Friday after having hovered around 3.5% for most of May. On Wednesday, the discount rate came down to 7.5%, which is still higher than at any point since late 2011.

A physical copper trader at a commodities house in Shanghai said that some large and middle-size banks weren’t willing to discount bills at all in an effort to save their cash. The trader said that the firm was getting by on its own cash reserves.

“This effective discount on payments…will drive up financing costs in the real economy, especially in the manufacturing areas that rely heavily on [bankers’ acceptances] for financing,” said Anne Stevenson-Yang, founder of Beijing-based research firm J Capital Research, in a recent note.

China’s central bank has signaled that it wants to bring an end to the interbank cash squeeze, saying Tuesday that it had injected funds into some financial institutions and is willing to do so again.

That could ease pressures on the real economy, but with banks having been warned by the central bank that they need to rein in credit, problems could persist.

The owner of a shipping company in the city of Qingdao said that some of his customers already have told him they plan to delay payment by about a month.