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An employee works at a textile factory in Binzhou, Shandong province, on April 17. The manager of a state-owned textile supplier has expressed doubts over the likelihood of “triangular debt” being repaid en masse. Photo: AFP

China heads off ‘triangular debt’ quagmire with demands for state repayments

  • Provincial governments, state-owned enterprises urged to get financial houses in order
  • Unique debt structure, where payments are owed between entities as well as to banks, could throttle growth momentum

China’s top leadership is cranking up the pressure on provincial authorities and state-owned enterprises to pay back money owed to private companies, calling on them to “shoulder the responsibility” as the country eyes a sustainable solution to its overall debt load.

A special campaign on “triangular debt”, which refers to a chain of delayed or partial payments, has been launched to untie the multi-trillion-yuan knot that is ensnaring struggling businesses and hindering the country’s growth momentum.

“State-owned enterprises must take the lead,” Premier Li Qiang said at a State Council meeting on Wednesday. “We must make sure that debt owed is paid.”

How will China’s SMEs shape up amid troubling return of triangular debt?

Triangular debt was a prime motivator for the massive restructuring scheme in the late 1990s, when the government recapitalised its banks to write bad assets off its books. That phenomenon has made an unwelcome return - a byproduct of the pandemic-induced slowdown and state firms reasserting themselves in key industries.

No official figures exist demarcating the size of the burden.

A Bank of China report published in 2022 estimated the total at 6.7 trillion yuan (US$918 billion) as of the middle of 2021, equivalent to 5.8 per cent of the country’s gross domestic product that year.

Zhu Baoliang, an adviser with the State Information Centre - a government think tank under the National Development and Reform Commission - told media in August the volume of outstanding corporate receivables in China had increased by more than 10 per cent in the first half of the year.

It’s common for payment to be delayed one or two years
Jay Feng, Guangdong
The government’s call for repayment - if heeded - would help free up private businesses to hire more personnel, as cash flows have been stifled due to overdue payments and longer delays.

Mainland China’s average payment delay was 83 days last year, shorter than the 86 in 2021 according to global trade credit insurer Coface. Both values, however, are almost twice as long as Japan.

On the ground, local governments and state enterprises are trying their best to maintain normal operations by deferring payments and keeping cash in hand. They are also taking advantage of a broader access to funding channels than private players enjoy.

China’s private firms still face ‘hidden barriers’, state media warns

“The government has long required us to repay debts, but the results have not been significant,” a manager of a state-owned enterprise in southwestern China said, choosing to remain anonymous due to the sensitive nature of the subject.

The manager’s firm, a manufacturer of raw materials for textiles, has been in a state of financial loss since 2020. It has outstanding debts of several billion yuan, and has so far repaid only 30 per cent of arrears owed to transport suppliers since April.

As the primary consideration for corporate repayment is to maintain operations, the manager said, suppliers will be prioritised.

“If our suppliers do not receive payment, they will refuse to provide materials and may even take legal action.”


Anger mounts as China's property debt crisis leaves flats unfinished

Anger mounts as China's property debt crisis leaves flats unfinished
Provincial and municipal officials have attributed the shortfall to shrinking tax revenues after nearly three years under China’s restrictive zero-Covid policy.

But the ill effects of the debt load are not necessarily being felt equally, said Jay Feng, a subcontractor for the state-run power grid in southern China, as well as for some property developers in Guangdong province.

“Whether you can get paid depends on how close you can get to the leadership of SOEs,” he said. “If the relationship is good, you are paid faster, but not in full.”

In central Henan province alone, 9.56 billion yuan (US$1.31 billion) in overdue payments to small and medium-sized private firms were tallied up by local governments and SOEs last year, according to an annual government audit.

Continued delays are understandably vexing for those directly affected. Feng expressed outright distrust in state entities, saying: “It’s common for payment to be delayed one or two years with the excuse of red tape or audit issues.”

China’s ticking debt dilemma: the longer they wait, the bigger the cost

The potential consequences of inaction have not gone unnoticed. Beijing sounded the alarm over the growing number of companies owing each other as well as their banks when assessing the country’s first-quarter economic performance at a Politburo meeting in April.

Wang Dongjing, former vice-president of the Central Party School, said earlier this year local authorities should repay private companies first, and then state firms and banks.

“When private businesses have enough funds and are profitable, they’ll be able to repay bank loans,” he explained.

The government has made support for the private sector a major priority, with a 31-point action plan unveiled in July, but more may be needed to mitigate unseen risks.

For the time being, the triangular debt issue has not proved to be a catalyst for a profound crisis, but the economy remains laggard. Official data showed combined profits by private industrial enterprises with annual operating revenues of 20 million yuan or above fell by 10.7 per cent year on year to 1.02 trillion yuan in the January-July period.

Private investment also dropped, down 0.7 per cent from the year prior in the first eight months of 2023.