A few years ago the market for supply chain finance in China was forecast to be around RMB15bn in 2020, while the value of “chattel” – receivables and inventory – has been put at RMB350-500 trillion. But most SMEs in China are struggling from a shortage of finance, said Prof Hua Song of Renmin University, Beijing at SCF Forum Europe 2018. Part of the problem is that most SMEs don’t have proper financial statements.
Banks are reluctant to engage in providing finance for SMEs. Even traditional reverse factoring is difficult to do in China because the giant companies are reluctant to make the necessary invoice confirmations. Without them confirming the transactions, and with no SME balance sheets, so reverse factoring doesn’t feature.
So a new form of SCF developed, where the finance providers are the buying companies themselves, rather than commercial banks. This was pioneered by Haier as a way of enabling distributors to get the funding they need to take on stock.
But not all companies re giant companies, he said. So a third stage of supply chain finance has developed, based on platform providers and the networks of buyers and sellers. For example, Ali Baba has established a platform called Onetouch.
A serious problem in China is what Song calls “hooligan companies” – those that deliberately extend their payment terms to suppliers to unacceptable extremes, intentionally prolonging their days’ payables outstanding (DPO). “The average payment period in today’s China is about one year. That’s hooligan!”
But while around 80% of SMEs export overseas, 24% of receivables were overdue by 90 days; 16% were overdue by 120 days; and 10% were overdue by 150 days. “So it means if I have an order from overseas, I can’t accept it – just because of working capital.” That is the “true picture in China” against which Ali Baba established its Onetouch platform.
This model of supply chain finance is being further challenged by fintech challengers, Song said, and these new models are reaching into further tiers of the supply chain beyond tier one.
But a challenge is, “In China, we don’t believe any financial statements.” Organisations ensure the authenticity of suppliers by checking their tax identification.
Another challenge is that, even with SCF offered to farmers, for example, at a very low rate of just 4% – lower, even, than the benchmark rate of 4.55% – but farmers can’t tolerate even a rate as low as that.
But blockchain is already being used in SCF in China, Song said.
In the Q&A, Song said that regulation was the answer to change the attitude of “hooligan companies” and prohibit that kind of behaviour.