In Depth: Taming the Wild West of China’s Supply Chain Finance

[para. 1][para. 2] Tech giants like Ant Group, JD.com, and Tencent Holdings, along with automakers such as BYD Co. Ltd., have entered the crucial yet low-profile realm of supply chain finance (SCF) in China. This sector, vital for maintaining business cash flow and reducing financing costs, was traditionally dominated by banks. However, it is increasingly populated by electronic platforms created by major enterprises, state-owned corporations, and third-party fintech firms.

[para. 3][para. 4] After a decade of rapid growth, Chinese regulators are tightening control over these platforms, which some insiders claim have become disorderly, occasionally harming small suppliers. The lack of supervision and market data raises concerns that the vast issuance of electronic IOUs could distort the money supply, potentially misleading the central bank's assessment of economic liquidity. In response, the People's Bank of China (PBOC), along with other government bodies, has introduced draft regulations aimed at risk management in the SCF sector while ensuring that suppliers, particularly small and midsize enterprises (SMEs), maintain access to liquidity and payment.

[para. 5][para. 6] Industry insiders speculate that these proposed regulations could significantly alter the electronic SCF landscape, potentially driving out smaller platforms and heralding a new era of slower growth. However, the regulations also signal governmental endorsement, enhancing the legitimacy of the industry. The draft rules, titled "Notice on Regulating SCF Business to Guide Supply Chain Information Service Agencies to Better Serve SME Financing," aim to enhance supply chain efficiency by minimizing cash flow disruptions.

[para. 7][para. 8] While recognizing the positive influence of electronic SCF platforms and electronic accounts receivable certificates (eARCs) in securing payments and financing for SMEs, the draft also highlights existing risks. Concerns include the chaotic industry's operational "regulatory blind spot," the potential negative impacts of increasing inter-company debt through eARCs, and the lack of standards for the platforms' technologies.

[para. 9][para. 11] Estimates about the SCF platform scale vary, but BYD disclosed eARCs worth over 400 billion yuan accounting for some of its supplier transactions in 2023. Hangzhou CChC Digital Technology Co. Ltd. estimated that over 500 platforms collectively issue between 4 trillion to 5 trillion yuan of eARCs annually, with other assessments reaching up to 10 trillion yuan. Cloudchain Group Co. Ltd. reported more than 500,000 SME suppliers on its platform, with 1.8 trillion yuan worth of eARCs issued by anchor enterprises.

[para. 12][para. 13] SCF enables companies to manage finances by issuing IOUs instead of immediate payments, allowing suppliers to record receivables as assets and delay payments as liabilities. These IOUs can be sold at a discount to third parties, such as banks, for immediate cash, theoretically benefiting all parties involved.

[para. 14][para. 16] Encouragement from the Chinese government since 2017, along with inclusion in the 14th Five-Year Plan, has bolstered SCF as a policy focus, resulting in widespread involvement from banks, fintech companies, and state-owned enterprises. However, as the sector expanded, it became unwieldy, leading the government to propose regulatory measures for better data collection, transparency, and reasonable fees.

[para. 17][para. 18] Regulations aim to limit the power of anchor enterprises, large companies at the core of SCFs, which could otherwise introduce financial risks. Concerns exist that these enterprises financially overextend, potentially affecting the broader banking system and monetary policy. For instance, BYD's significant increase in accounts payable has drawn attention, as they often extend terms through eARCs, which function like cash but evade typical monetary regulations.

[para. 19][para. 22] The PBOC raised concerns about anchor companies exploiting eARCs to avoid strict commercial bill regulations, thus creating a shadow financing system. Proposed regulations therefore include requirements to protect SME suppliers against exploitative practices by anchor enterprises, mandate transparency in SCF fees, and improve debt monitoring by banks involved in SCF activities.