Triangular debt troubles China’s SMEs once more as economy’s post-Covid recovery struggles to gain traction
- Politburo pledged last month to ‘fundamentally address the arrears that have confronted enterprises’
- Overdue payments totalled more than US$967.8 billion by the middle of last year, according to BOC Research Institute report
Triangular debt, a problem that first troubled China’s economy over three decades ago, has resurfaced as the country’s post-pandemic recovery is challenged by weak demand at home and abroad.
Triangular debt arises when delayed or partial payments leave companies owing money to each other and to their banks. It discourages production and investment and the resulting liabilities or bad loans can put a damper on growth and exacerbate financial risks.
In the early 1990s, following a bout of monetary tightening designed to rein in inflation, triangular debt affected a third of bank loans.
The economic disarray pushed Beijing to take resolute measures to address the problem, with then vice-premier Zhu Rongji injecting more than 50 billion yuan (US$7 billion) into a number of fixed-asset investment projects in June 1991.
After launching a campaign last year to address overdue payments to small- and medium-sized enterprises (SMEs), Beijing underscored the importance of the task last month in its formal assessment of the economy’s first-quarter performance.
Firms are trying their best to maintain their own operations by delaying payments and keeping more cash in hand
With private businesses, the backbone of China’s economy, struggling, the Politburo – the Communist Party’s top policymaking body – pledged to “fundamentally address the arrears that have confronted enterprises”.