Why China’s SMB IOUs Spell Out Troubles Ahead
Déjà vu for IOUs — and because this is China we’re talking about, it may be the world economy that ultimately pays.
First the headline numbers. The New York Times reports that amid the slowing Chinese economy, where headwinds are getting windier amid a lengthy and intensifying trade war, businesses are accepting IOUs from one another.
A lot of IOUs. More than $200 billion in IOUs. The Times spotlights real estate amid other sectors where promises to pay are accelerating across a supply chain that links architects, builders and banks, among others.
The financial term is a mouthful — “commercial acceptance bills” (we will use the acronym CAB here) — but the concept is rather basic. Consider it the economic equivalent of Wimpy from the Popeye comics, he who will gladly pay you Tuesday for a hamburger today.
Tuesday seems … far off.
IOUs are a placeholder, a promise that depends on future times getting better, where corporate coffers get full again (or get some sort of replenishment) and the chain gets stronger as companies pay each other what is owed.
In China, cash comes from banks, and banks are not lending, at least not so much to private companies that do not have the guarantee of government backstops.
And, as reported, the government itself has been busy the past few years cracking down on shadow lending, which means that these private firms cannot turn to alternative lenders.
So: One supplier that cannot pay another supplier means that the ripple effect keeps on going, until someone steps in, with cash, and that stops the chain of promises....MOREEarlier at PYMNTS:
Chinese Firms Grappling With $200B+ IOUs
