Sun Wenkai

The Economic Daily – PSBC Small and Micro-sized Enterprise Operating Index (hereinafter referred to as “SMEOI” or “the Index”) reported 50.2, 50.4, and 50.1 in July, August, and September 2023, respectively, all of which fell within the range of prosperity. Compared with the second quarter of 2023, the index went up significantly, which revealed the recovery and expansion of the micro and small economy in China. The continuously recovering demand is an important reason why the Index could stay within the prosperity range. The expanded market demand has enabled enterprises to increase their procuring and profit, as shown by the two subindices that reflect the procuring and performance, both remaining above the boom threshold in the third quarter of 2023. The confidence index has stayed above the threshold since the beginning of 2023, which attested to the adequate confidence of micro and small enterprises overall.

The Index moved in tandem with the recent macroeconomic situation. As shown by the data from the National Bureau of Statistics (NBS), the recovery of the Chinese economy has become more pronounced, with positive changes in a number of areas and indicators. China’s economy expanded 5.2% in the first three quarters of 2023 compared with the same period last year, indicating a stably rebounding trend. Foreign trade was better than expected, and the domestic market became more dynamic. Both the data on total retail sales of consumer products and the data on consumption of services were turning for the better in the third quarter of 2023. Strong growth in tourism consumption during the Mid-Autumn Festival and National Day Holiday highlighted the potential and vitality of market consumption.

Although the Index showed an improving trend of micro and small enterprises overall, the risk index was still below the threshold in the third quarter of 2023. The risk index consists of three subindices of liability ratio, payment collection cycle, and turnover of working capital, all of which were under the boom threshold and on the decline in the third quarter of 2023, reflecting an increase in the problems of payments in arrears and the difficulty of micro and small enterprises in repaying their debts. This has led to a rise in operating costs, which largely explains the decline in the willingness of micro and small enterprises to expand. Micro and small enterprises have been experiencing difficulties in repaying their debts for many years. According to the author’s statistics, the proportion of accounts receivable in operating income of micro, small, and medium-sized enterprises kept going up since 2014, which indicates that the problems of accounts receivable should be addressed from a long-term perspective.

Micro, small, and medium-sized enterprises are in a relatively weak position in the market, which makes them vulnerable to the problems of payments in arrears. Difficulty in recovering a large number of accounts receivable exposes small and medium-sized enterprises to a series of problems such as financial strain, rising costs, and insufficient investment in other areas, which could disturb their normal operations and might even lead to bankruptcy in serious cases. A survey found that micro, small, and medium-sized enterprises face the following common problems with respect to accounts receivable.

Long project cycles and large-scale advances. Massive advances usually need to be made for construction projects in their early stage, while the turnover rate of accounts receivable is low. Enterprises in the technical service industry mostly adopt the collection mode combining “advance payment, interim payment, final payment, and quality guarantee deposit payment”, in which the payment ratio at each stage is agreed by and between both parties. Even so, the advances paid are not enough to cover the upfront costs, and related enterprises need to advance funds.

Unsatisfactory performance of contracts by Party As. Relevant surveys showed that there are still Party As who use their dominant position in the market to sign contracts that do not comply with industry norms, or even change the signed contracts without authorization. Some Party As require enterprises to start operations before contracts are signed, which sets the stage for subsequent payment problems.

Prevalent use of bills and notes. It is a common practice that large enterprises use bank acceptance bills for settlement in their contracts. In this case, enterprises may be unable to discount their bills or encounter low discount rates, thus their contractual amounts become reduced in a disguised form.

Inadequately inclusive supply chain finance. At present, specialized supply chain finance companies still have great limitations in providing financing to micro, small, and medium-sized enterprises. The accounts receivable of ordinary small and medium-sized enterprises have little access to the accounts receivable financing service platform system, and cannot benefit from relevant financing services.

To date, China has successively formulated laws and regulations such as the Small and Medium-sized Enterprises Promotion Law and the Regulations on Ensuring Payments to Small and Medium-sized Enterprises and has rolled out a series of action plans to clear arrears to small and medium-sized enterprises. These policies and initiatives have played a critical role in alleviating the problems of accounts receivable in micro, small, and medium-sized enterprises in China. However, related surveys found that all kinds of arrears persist and need to be further addressed from the following dimensions.

First, further improve relevant laws and regulations. The legal responsibility rules need to be improved to crack down on acts such as deliberately delaying project acceptance and defaulting on the payment of accounts receivable to small and medium-sized enterprises without justified reasons. Joint disciplinary efforts should be intensified against the acts of abusing the dominant position in the market to withhold the accounts receivable of small and medium-sized enterprises or maliciously default on the payment of such accounts receivable.

Second, assign duties to different entities and enhance active investigation. It is necessary to manage the payment of arrears to small and medium-sized enterprises properly. All levels of government organs should clearly divide and assign the duties to all parties and ensure they can be fulfilled with concrete actions. They shall take the initiative along with relevant departments to regularly investigate how accounts receivable are actually paid to micro, small, and medium-sized enterprises.

Third, further develop supply chain finance services to alleviate the financial pressure of enterprises. The business of financing pledged by orders, inventories, and accounts receivable, among others, should be developed in accordance with the law. Greater financing support should be provided to micro, small, and medium-sized enterprises, upstream and downstream, by strengthening cooperation with core enterprises. Government organs, public institutions, and large enterprises should promptly confirm the debtor-creditor relationship when small and medium-sized enterprises make requests for confirming accounts receivable. Large enterprises should be encouraged to provide supply chain financing to small and medium-sized enterprises, upstream and downstream.

(The author of this article is the Associate Dean of the National Institute of Small and Medium-sized Enterprises, Renmin University of China; and Professor at School of Economics, Renmin University of China.)