
Circulating in China’s Financial System: More Than $200B in I.O.U.s - nafizh
https://www.nytimes.com/2019/08/06/business/china-cash-commercial-acceptances.html
======
rahimnathwani
If companies have no cash to immediately pay suppliers, then those suppliers
must wait for payment. In the US, there are 'invoice factoring' companies who
will buy these unpaid invoices. They provide the cash up front, in return for
some reasonable-but-not-perfect security (the unpaid invoices) and a discount.

From the article and the first few Google search results, it seems like
'Commercial Acceptance Bills' solve the same problem. They create liquidity
for suppliers without reducing their customers' immediate liquidity.

And their liquidity seems to come from:

\- banks widely supporting their purchase

\- being transferrable

\- having a future date (I'm not sure, but this part sounds like it might be
like writing a post-dated cheque)

Given we normally like financial innovations that increase liquidity and keep
markets moving, why should we be concerned about this market, whose current
stock is less than 2% of China's annual GDP?

~~~
mises
Basically because:

1\. Things are very different in China. If you can get away with not paying,
it's not really _wrong_ in the same way as in America. They have a different
business culture based more around mutually assured destruction.

2\. China has a massively leveraged internal economy, propped up by massive
stimulus with the RMB. Only because of the two-currency BS they pull can they
continue making this work. But because external nations don't actually use
RMB, they could end up having a worse recession because of it. Or maybe
better, because of the two currencies. Honestly, it's hard to know.

3\. It's much harder to enforce these in China (unless you have the right
connections, in which case you probably don't need to go through normal courts
any way).

I'm not saying it's a bad idea, and I'm all for it in principle. I guess these
are really more general issues with China and her economy which incidentally
apply to this than issues with the concept.

~~~
rahimnathwani
"Only because of the two-currency BS they pull"

Is this really a big issue? The current spread between CNY and CNH is less
than a third of a percentage point.

Capital controls in general might be keeping CNY (and CNH) stronger than it
would be otherwise.

~~~
mises
Sounds small, but it's hit as much as a 2% spread [0]. More importantly, they
take this off of every transaciton. It makes FDI much cheaper for them when
they go into other countries. It allows them to debase their currency
internally and reap the benefits while charging others with a stronger
external currency. When you factor in shadow banking etc., the exchange rate
is not the same as the actual value _inside China_ , because she is such a
heavily gated market. These capital controls are precisely what pisses the
rest of the world off: the whole point of the WTO and trade treaties is that
you don't get to pull this garbage. When you factor in the multipliers etc.
across the world, China has skimmed huge sums of cash off the top of the
global market. [1]

[0] [https://currenxie.com/blog/how-to-take-advantage-of-the-
cny-...](https://currenxie.com/blog/how-to-take-advantage-of-the-cny-cnh-
spread-20160810.html)

[1]
[https://twitter.com/adamscrabble/status/1094717028009689089](https://twitter.com/adamscrabble/status/1094717028009689089)

------
Lecteur
In which the NYT discovers discounted bills of exchange. Which have existed
since at least the early 14th C. in Northern Italy. Sinister when the Chinese
use them, though, of course.

~~~
thedudeabides5
Wait till they get a ahold of the alphabet soup of Chinese financial products:

WMP DAMP TBR LGFV NCD

Each with a quasi government guarantee!

------
jokoon
Ultimately, if you're a country and you can "hide" debt, or make sure it's
such a national security secret that nobody can ever know you're using tricks
to hide it, you can effectively grow your country very quickly and
effectively.

As long as you can cover your tracks, things are good.

And in the end, if your secret is out in the street, you don't really care
because you already developed your economy, which is a huge benefit. I guess
that's an advantage of what China is doing.

~~~
SubiculumCode
If that is true then the implications to monetary policy would be astounding.

~~~
jokoon
As long as the debt remains between chinese lenders... That's a good way to
give everybody money, and in fact that is a good way to have fake capitalism.

In a country like china where everything is in government control, without any
investigative media, systematic corruption... I don't like conspiracies, but
it seems like it's possible.

------
darepublic
What if the gov just prints money and resolves these IOUs on behalf of
connected people, does it have much of an effect on the economy and if so why.
Is this what we are already doing ourselves in the west?

~~~
la_barba
Then you would have excess money supply, and if demand for the currency stays
the same, it will devalue the currency, which causes inflation. That might be
OK, as long as its below your economic growth rate.

With the US, the treasury uses the fact that the US dollar is one of the
reserve currencies (the euro is catching up), and the US government demands
payment for their security services to Japan/Korea/etc in USD, etc,etc helping
maintain the demand for the USD.

~~~
TMWNN
>With the US, the treasury uses the fact that the US dollar is one of the
reserve currencies (the euro is catching up)

No, it is not.

[https://en.wikipedia.org/wiki/Reserve_currency#/media/File:G...](https://en.wikipedia.org/wiki/Reserve_currency#/media/File:Global_Reserve_Currencies.png)

------
kazinator
> _Mr. Zhang can’t seem to get paid on time. He is now accepting the financial
> equivalent of i.o.u.s from as many as one-third of his clients instead of
> cash._

> _“It wasn’t like this before,” he said. But, he added, “it’s better than
> nothing.”_

Dude is crazy/stupid. These papers are completely worthless. How is that
"better than nothing"?

When he goes grocery shopping to feed his family, do they take these i.o.u's?

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MaximumYComb
I spent a lot of years keeping my money in the bank as I was always hearing
news about "the next big crash is coming". I finally took the step this year
to move my money into index funds and it has been going great. Last I checked
I had seen nearly 20% growth in 7 months. The trade war is just making things
appear so horrible but I also don't want to miss out on years of growth again.

~~~
gingabriska
I assume you are in US? But can international investor invest in index funds?
If yes, what vehicle to use?

For example, my friend has investment company in British Virgin Islands, if he
puts money in US index fund he ends up losing 15-20% to withholding taxes.

What are other people doing then?

~~~
nradov
US investors also have to pay about that much tax on any realized gains,
unless they hold the funds in a tax-free retirement account.

~~~
nemo44x
Not entirely true since many index funds pay qualified dividends.

------
bhouston
Also called supplier financing. A risky form of loan for the supplier but
great for the customer.

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aussiegreenie
Factoring is very common for smaller companies. 15% for 90 days is the norm.

------
ohiovr
Looks like a credit crunch to me.

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pfundstein
And how many _trillions_ in "I.O.U.S" are circulating in the US financial
system?

~~~
irjustin
The "what about"-ism doesn't really help or work here. I.O.U's are essentially
some sort of loan (with or without interest).

The point of a loan/iou is it's okay a long as you can pay later.

This works great in a growing economy. Leverage. But once things start slowing
down, the pressures start to mount and i.o.u's start never getting paid back
slower and slower to never - defaulting.

There's a limit how far one economy can grow and for China it's already begun
to slow. These types of loans are a symptom of that.

~~~
joelx
I think the parent and grandparent comments miss the point of the article.
This is basically a return to the barter system because the Chinese monetary
system is not able to meet businesses needs. This should be a giant red flag
to Chinese leaders.

~~~
krageon
Can you explain to me (and perhaps people like me) exactly what the problem
with that is? Goods are being exchanged, so it is fine - but I don't have a
huge background in financial systems. I would appreciate a different point of
view on that.

~~~
joelx
"In a barter exchange one good is traded directly for another. This form of
exchange requires a double coincidence of wants, meaning that each trader has
what the other trader wants and wants what the other has. Without a double
coincidence of wants the exchange process can become exceedingly complex,
requiring a great deal of resources to complete transactions, resources that
cannot be used for production. In fact, inefficient barter trading is the
primary reason that money was invented." \- good explanation from AmosWeb

