In recent years, due to the combined impact of a downward trend in the real estate market and the pandemic, supply chain enterprises of real estate companies have suffered heavy losses.
Particularly, the longstanding practice of real estate enterprises to use commercial bills as a main payment method has seriously impacted the operations of building material manufacturers, equipment suppliers and construction contractors in the upstream supply chain, as commercial bills have become centrally due and unable to be cashed.
To a certain extent, real estate enterprises’ continual and mass commercial bill “bounce” has manifested as a systemic credit risk for the entire industry.
Aiming to further regulate commercial bill-related business and promote healthy development of the bill market, the Commercial Bill of Exchange Acceptance, Discount and Rediscount Management Measures, jointly formulated by the People’s Bank of China and the China Banking and Insurance Regulatory Commission, were implemented in January this year.
According to data recently released by the Shanghai Commercial Paper Exchange Corporation (SHCPE), as of the end of February 2023 the number of overdue acceptances by real estate-related enterprises decreased by 50% compared with the end of 2022.
It is therefore clear that since introduction of the measures, the phenomenon of real estate companies’ fund occupation to upstream supply chain enterprises has improved.
Significant reduction in the bill period will ease funding pressure on real estate supply chain companies.
The measures reduce the maximum payment period (from the issue date to the due date) of commercial bills from one year to six months.
This provision significantly reflects the legislative intention to protect micro, small and medium-sized enterprises, which will effectively alleviate funding pressure on real estate supply chain companies and strengthen their willingness to accept commercial bills.
However, it is expected that a significant reduction in the bill period will seriously impact the profitability of bill financing institutions in the short term. At the same time, due to the limited financing period for bills, the scale of real estate companies issuing commercial bills may further decline in the future.
Strictly controlling the ratio of acceptance and margin to total assets may improve the quality of financial bills.
Financial companies are non-banking financial institutions and in the past few years there have been many cases of group companies excessively relying on their financial companies for bill financing.
The most famous case was Baota Petrochemical Group, which issued bank acceptance bills through its financial company for huge-scale bill financing, ultimately leading to many of its suppliers being mired in its RMB10 billion (USD1.45 billion) bill debt.
After implementation of the above-mentioned measures, acceptance bills issued by financial companies are now separate from those issued by banks. In addition, financial companies are required to limit their acceptance amounts to no more than 15% of their total assets, and their margin should not exceed 10% of their monthly deposit absorption scale.
Controlling the acceptance and margin ratio of financial companies can effectively improve the quality of financial bills. It’s important to note that the mandatory requirement to adjust these ratios will not take effect until 1 January 2024. This gives commercial banks and financial companies time to adjust their business accordingly.
Emphasising real trading relationships in basic credit claims to ensure security of bills.
The above-mentioned measures emphasise that banks, financial companies and other institutions should strengthen their review of the real trading relationship of the drawer when conducting acceptance and discount business.
However, some have pointed out that this provision violates the non-causality principle of the bills, and may restrict the circulation of bills. However, article 4 clearly emphasises the obligation of the acceptor to pay unconditionally on expiration of the commercial bill.
Clearly, the measures balance the security and non-causality of bills. But it is worth noting that they do not specify which materials the drawer and discounting applicant need to submit for transaction relationship review, or the criteria for review by relevant institutions, and further implementation details are yet to be announced.
Strengthening credit constraints and credit disclosure mechanisms will force real estate companies to strengthen their credit management.
Taking into consideration the new measures and the Operational Guidelines for Commercial Bill Information Disclosure, developed by the SHCPE, acceptors and discounters should regularly disclose their bill acceptance and credit status on the SHCPE’s information disclosure platform.
For acceptors that continue to experience negative credit events, the SHCPE will stop providing bill acceptance, discounting, pledging and other services. Obviously, the series of credit constraints and information disclosures adopted by the measures will force commercial bill acceptors, such as real estate companies, to strengthen their credit management and liquidity management of their capital chains.
Those continually overdue with commercial bills will undoubtedly overdraw their credit, marking the end of the era of mass bubble bursts of commercial bills for real estate companies.
Accelerating the internal differentiation of commercial bill credit for real estate companies.
Overall, introduction of the measures will undoubtedly reduce the scope of credit crisis in the real estate market. It should play a positive and constructive role in curbing the scale of overdue commercial bills for real estate companies, and maintaining fair trading relationships in the bill market.
At the same time, the commercial bill credit of real estate companies will also be significantly differentiated. For financially and credit-wise stable real estate companies, the efficiency of issuing bills will also be significantly improved.
However, debt risks and financing difficulties may continue to remain unsolved for real estate companies that have already faced massive overdue bills and cannot apply for new bill business in the short term. Ultimately, they face the possibility of being cleared out of the market at an accelerated pace.
Zhou Le is a partner at Blossom & Credit Law Firm
Blossom & Credit
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