BEIJING (CAIXIN GLOBAL) – China is about to rein in its booming, 167.23 trillion yuan (S$36 trillion) market for commercial acceptance bills, a risky, controversial form of business financing that played a role in the 2019 collapse of Inner Mongolia-based regional lender Baoshang Bank.
Stung by that financial calamity, China’s central bank and top banking regulatory agency are about to overhaul the 25-year-old regulations governing the bills. The rapid growth in their use in recent years and their involvement in fraudulent financing and other violations spurred regulators to close loopholes and tighten supervision of the instruments.
Feb 14 was the deadline for comments on a draft revision of interim measures issued in 1997 covering commercial acceptance bills, which enable supply chain businesses to monetise their receivables. The revisions are expected to have a dramatic impact on commercial banks, financial companies and commercial acceptance bill issuers and intermediaries.
The new measures stress that commercial acceptance bills should be based on real transaction relations and set the maximum maturity of such bills at six months, down from a year. The draft rules would cap the maximum payment of acceptance bills at 15 per cent of the payer’s total assets, and the margin deposit for acceptance bills at 10 per cent of the payer’s total deposits at the issuing bank.
Commercial acceptance bills are issued by companies that promise to pay a set amount to the bill’s holder on a designated date. The bills are usually used for business-to-business payments but also as a form of short-term trade financing. The payee can choose to hold the bill until maturity and receive payment then, or before the maturity date can transfer it to another party or sell it to a bank at a discount and receive the money in advance.
China’s market for commercial acceptance bills expanded 13 per cent in 2021 from the year before, according to the Shanghai Commercial Paper Exchange. Though detailed data is unavailable, industry participants say a significant share of the market is probably financing bills, which have no underlying transactions between the payer and the payee.
Their main purpose is for companies to obtain funding from banks. Another significant portion of the market is arbitrage bills, in which banks issue acceptance bills to obtain deposits, industry participants said.
Targeting arbitrage bills
The new rules aim to restrict the arbitrage use of commercial acceptance bills, which is especially common among medium and small banks, industry participants said.
For example, in a typical arbitrage bill transaction, a company might deposit 10 million yuan in a bank at, say, 4 per cent. The company then pledges the deposit as collateral to issue an acceptance bill, which it sells to the bank at a discount with an assumed interest rate of 3.5 per cent. The business thus would earn 0.5 of a percentage point of interest, and the bank would increase its deposits.
The bank can also rediscount the commercial bills to other banks to make a smaller profit. In this way, the funds continue circulating within the interbank system.
Such practice became rampant in the past decade, peaking between the second half of 2018 and early 2019, several bankers familiar with the industry told Caixin. The Baoshang Bank collapse alerted the central bank to the hidden systemic risks in commercial acceptance bills, according to a bank executive who manages acceptance bill business and who participated in the revision of the rules.
Baoshang, which was 89 per cent owned by private conglomerate Tomorrow Holding, was taken under state custody in 2019 amid severe credit risks. The bank was found to have a financial black hole of 220 billion yuan due to massive misappropriation of funds by its largest shareholder.
The lender relied heavily on the interbank market, where banks borrow from each other and use the funds to bolster liquidity. Before its collapse, Baoshang had only 200 billion yuan of outstanding loans but nearly 300 billion yuan of transactions with more than 700 partners on the interbank market.
A key channel Baoshang used to increase its deposits was trading in arbitrage acceptance bills. The fall of the bank spread the risk to multiple other lenders that had received Baoshang’s discounted acceptance bills, according to the executive in charge of his bank’s bill business.
At the peak of trading in arbitrage acceptance bills in 2018 and 2019, several lenders in northeastern China generated about 60 per cent of their deposits in this way, a senior bill industry participant said. The volume of arbitrage bills has declined in the past two years, but the new rules will have a greater impact on those banks that previously issued large amounts of them, the senior bill industry participant said.
