Illustration: Peter C. Espina/GT

In a fresh attempt to relieve the fundraising difficulties facing China's private enterprises, the country's central bank has called for more efforts to bolster financing for smaller companies based on their accounts receivable, or money owed to them by their clients.

This might be a good idea in theory, but such efforts might prove to be laborious and could add to concerns over nonperforming loans, which are still rising in banks around the country.

The fact that small and micro-sized businesses are inherently in a weak position when it comes to bargaining power is one reason for the pileup on their balance sheets of accounts receivable, referring to money owed to them by their clients for products and services offered on credit. This inevitably weighs on small businesses' capital chains, especially amid an economic slowdown.

One solution might be factoring, in which businesses sell their accounts receivable to a factoring firm. They have to sell at a discount, but it enables businesses to boost their cash flow, while also transferring the risk of nonperforming loans to the factoring firm.

The authorities have apparently realized the potential for this business to ease the burden on small firms.

Speaking at a fundraising seminar in Tianjin, Yang Ziqiang, assistant governor of the People's Bank of China (PBC), the country's central bank, said that the central bank has pushed for more balance in the factoring sector and an improvement in relevant laws and regulations, according to a statement the PBC posted on its website on Tuesday. The PBC also said it has already built a special platform for factoring.

However, there are still many problems in releasing the cash flow restraint confronting private small businesses.

First of all, there is a structural imbalance in terms of the availability of factoring for small businesses. Domestic banks have dominated the marketplace for the factoring business, but they intrinsically favor large enterprises with good credit reputations rather than smaller businesses with often dubious creditworthiness, even though the latter may be able to provide high quality assets in the form of their accounts receivable.

Factoring firms weighted toward smaller businesses appear to be a workable solution to the problem, but they only account for a tiny fraction of the market.

By the end of 2014, the number of factoring firms registered in China had reached 1,220, and had absorbed a total of 80 billion yuan ($12.53 billion) in accounts receivable, according to a yearly report on China's factoring industry released earlier in November by the China Banking Association (CBA). But this amount is tiny compared to the total domestic factoring business also including banks, which absorbed 2.17 trillion yuan in 2014 alone.

However, the figure of 2.17 trillion yuan represented a decline of 12.15 percent from the previous year.

Last year, China was overtaken by the UK as the world's largest market for factoring, with the downturn in China's factoring industry partly due to an increased default risk associated with loans collateralized by accounts receivable, said the CBA report. 

It's noteworthy that this decline for the sector coincided with cooling growth in the economy.

Enterprises are actually seeing a larger amount of overdue accounts receivable, according to the results of a survey of China's nonperforming financial assets released on Tuesday by China Orient Asset Management Corporation.

The country's commercial banks have been faced with increased risks on their newly added loans this year, according to the results of the survey.

Admittedly, China's increasingly popular peer-to-peer (P2P) lending platforms have been accepting accounts receivable as collateral for loans.

However, not many P2P platforms in the country have engaged in the factoring business, making the factoring services available through P2P lending platforms nearly invisible in the overall factoring landscape.

Meanwhile, P2P platforms that accept accounts receivable as collateral for loans are exposed to even higher risks, as borrowers may use one invoice to raise funds from multiple P2P lending platforms, which are less capable than banks when it comes to verifying the authenticity of the invoices.

Therefore, the main issue for smaller businesses in utilizing accounts receivable as collateral for funds is the lack of an efficient framework to deal with potential defaults. Currently, there are not yet any specific laws for the factoring business in China. Commercial banks' factoring business is under the purview of a set of provisional rules that were announced by the China Banking Regulatory Commission in 2014, while the Ministry of Commerce published draft regulations for the oversight of factoring firms earlier this year. The draft rules will reportedly become effective by the end of this year.

Only if a unified and effective legal framework is laid out can there be a genuinely bright future for factoring for smaller businesses.

It would be of particular significance in the context of a cooling Chinese economy that has already led to growing worries about nonperforming loans.

The author is a reporter with the Global Times. bizopinion@globaltimes.com.cn