Question 1: On November 9, the PBC released the Guidelinesfor Promoting the Development of Commercial Acceptance Bill (hereinafterreferred to as the Guidelines) that drew wide attention. Some professionals even consider it as a sign of “new era” in the development process. Would you please introduce the background of the Guidelines?
Answer: In recent years, as an important payment andfinancing instrument, the commercial bills have seen rapid development in China. With the increasingly large size of acceptance,discount and interbank discount of commercial bills, the commercial bills have played a positive role in facilitating companies’ payment and settlement,broadening companies’ financing channels and improving quality of commercialbanks’ credit assets. However, due to the weak social credit awareness, the commercial acceptance bill was not used widely compared with the uses of banker’s acceptance bills. The PBC released the Guidelines and provided policy measures to promote the development of commercial acceptance bills with a viewto promoting the uses of commercial acceptance bills on one hand, balancing the structure of commercial bills and reducing the excessive reliance on banks’ credit, and further improving the role of commercial acceptance bills in socialeconomic development and encouraging development of commercial credit on the other hand.
Question 2: What are the main contents of the Guidelines?
Answer: In line with the requirements of improving payment & settlement system and enhancing payment efficiency, improving the credit record of contract execution, accelerating the establishment of a social credit system and enhancing the credit slippage punishment mechanism in the Eleventh Five-Year Program and the principle of combining government promotion with market incentives and giving due consideration to risk control, the Guidelines provided five policy measures aimed to promote the development of commercial acceptance bills.
First, to motivate all relevant parties to establish a sound mechanism to effectively facilitate extensive use of commercial acceptance bills. According to the Guidelines, the PBC will guide the commercial banks to formulate concrete plans to promote the use of commercialacceptance bills; the commercial banks will create new business models for commercial acceptance bills; companies will actively issue and accept commercial acceptance bills.
Second, to enhance companies’ confidence in handling commercial acceptance bills through strengthening the role of enterprise credit information database. The Guidelines encourage credit rating to be conducted over issuers and acceptors of commercial acceptance bills. The credit rating results and other credit information related to commercial acceptance bills are to be reported to the enterprise credit information database. The PBC will guide commercial banks and companies to use the enterprise credit information database when conducting commercial acceptancebill business.
Third, to establish an effective default punishment mechanism to encourage acceptors of commercial acceptance bills to honor the payment obligation. According to the Guidelines, the PBC will establish a “blacklist” for payment refusal and deferred payment and impose administrative sanctions on payers who intentionally defer or refuse payment with no good reasons.
Fourth, to ward off risks involved in the commercial acceptance bill business and ensure the healthy development of commercial acceptance bill business. The PBC will provide necessary risk warning in the development of commercial acceptance bills. The commercial banks will strengthen risk management on commercial acceptance bill, strictly examine the authenticity of the trade background and include the discount, guarantee,discount guarantee etc. into their credit line management. Companies need to have risk control knowledge related to commercial acceptance bill business and conduct such business in line with relevant rules and regulations.
Fifth, to boost the publicity and training ofcommercial acceptance bill business. The PBC will coordinate with commercia lbanks to conduct relevant publicity and training activities. The commercial banks are encouraged to make full use of their direct links with companies, and strengthen training of companies’ financial staff with regard to commercial acceptance bill business.
Question3: How are negotiable instruments used in China now? What is the role of negotiable instruments invarious payment instruments?
Answer: The legitimate negotiable instruments in China include cheque, bill of exchange, and promissorynote. In terms of drawer, bill of exchange can be divided into bank bill and commercialbill. In terms of acceptor, commercial bill can be divided into banker’s acceptance bill and commercial acceptance bill.
As an important carrier of transaction media,negotiable instruments are the most widely used non-cash payment instrument,playing a vital role in the whole payment instrument system. According tostatistics, a total of 568.73 million negotiable instruments were issued in thefirst half of 2006, amounting to 98.1209 trillion yuan and accounting for around10 percent of non-cash payments in numbers and 48 percent in amounts. In general, the use of negotiable instruments has been increasing modestly inrecent years.
Question4: How is commercial acceptance bill used now?
Answer: The use of commercial acceptance bill is based on commercial credits of both the seller and the purchaser. Due to the underdeveloped social credit system in China, commercial acceptance bills are notwidely used, accounting for less than 10 percent of total commercial bills in terms of volume and value. The credit and financing role of commercial acceptance bill has not been fully played.
In addition to small amount of use, commercial acceptance bills are characterized by the following. First, the use of these bills are concentrated in several fields, such as the oil, electricity, steel and the iron, coal, aviation, electronics and pharmaceutical industries, and connected enterprises or enterprises with close upstream and downstream industrial chains. Second, they are relatively weak in liquidity. Acceptors prefer discountor claim for payment to endorsed transfer after receiving the bill. Third, they are often used intra-city. Due to inadequate knowledge among enterprises located in different cities, they are reluctant to receive commercial acceptance bills accepted or transferred by enterprises in other cities inorder to avoid risks. Fourth, their use frequency and scope are affected by the development of local economy and financial market. They are rarely used inrelatively under-developed areas such as middle and western China, indicating a big gap compared with advanced areas such as coastal area and eastern China.
Question5: What benefits will the promotion of commercial acceptance bill bring to social and economic development?
Answer: The promotion of commercial acceptance bill will further diversify enterprise payment instruments and smooth out productionand marketing channels; it will help to mitigate arrears among enterprises and maintain favorable transaction order; it will contribute to effective integrationof bank credit and enterprise commercial credit, and ease financing difficulties in small-and-medium enterprises; and it will advance bill-based commercial credit, enrich instruments in bill market and promote bill market development;also it is beneficial to building and improving a good credit mechanism, enhancing social credit awareness and credit level.
In particular, to develop commercial acceptance bill has many advantages for enterprises. The first is its convenience. As a paymentinstrument and financing instrument, commercial acceptance bill is issued andaccepted by enterprises without going to a bank outlet or bank counter. This is a simplified procedure compared with other payment and financing instruments.Second, arrears in sales payment will be contained through bill-based paymentand credit. By the means of commercial acceptance bill, enterprise’s deferred payment and credit payment, such as oral promise, open account, and contract agreement become bill-based. This gives a specific indication of claim and liabilityand provides a basis to exercise rights and honor obligations. The bill-holdingenterprises enjoy both the right of claim for payment and the right of recourse,and thus a stronger guarantee for receiving sales payments. Third, financialcost will be reduced. Compared with bank acceptance bill, no acceptance feewill be charged for the use of commercial acceptance bill. And compared withloans, a user of commercial acceptance bill enjoys free credit of the counterparty within a certain period, as well as lower discount interest rate than loan interest rate. Fourth, enterprise’s credit record will be improved. In light with their needs, enterprises can take initiative to issue and accept commercial acceptance bill, and pay the bills on time. This will improve enterprise credit rating and help establish a reputation of honesty and integrity.
Also, the development of commercial acceptance billwill help improve bill business structure of the banks, reduce their acceptance risk and enhance payment and settlement service level.
Background information
Negotiable Instruments Business in China
As an important vehicle of transaction medium,negotiable instruments are the most important non-cash payment instruments for organizations and institutions. Negotiable instruments market has the closest linkage with the real economy. The development of this market plays asignificant role in expanding financing channels for enterprises, easing debtarrears among enterprises, improving commercial banks’ asset qualities, and strengthening the indirect macro-management functions of the central bank.According to the Law of the People’s Republic of China on NegotiableInstruments, negotiable instruments include bill of exchange, promissory note and cheque.
A cheque is a negotiable instrument that is signed and issued by the drawer, who authorizes a bank or another financial institution handling checking deposit to pay unconditionally the designated amount of money to the payee or the holder at sight. Cheque is the most commonly used non-cash payment instrument in China. Both institutions and individuals canissue cheques. A cheque should be paid within 10 days of its issuance, and isusually used within the city where it is issued and signed. In order to improve the settlement efficiency and promote the cross-city use of cheques, and provide prompt payment support for economic activities, the People’s Bank of China is organizing the establishment of a nationwide cheque image exchange system. It is expected that the cross-city use of cheques can be realized throughout the country by June 2007. In the first six months of 2006, a total of 556.47 million cheques were issued involving a total value of 90.5844 trillion yuan.
A bill of exchange is a negotiable instrument, signed and issued by the drawer, who authorizes a payer to pay unconditionally adesignated amount of money to the payee or the holder at sight or on aspecified date. In terms of drawer, bills of exchange include banker’s bills and commercial bills.
Banker’s bills are used by institutions and individuals, and shall be paid within one month after a bill is issued. Banker’s bills, due to its prompt and convenient payment, are extensively used in China and have become the most frequently used instruments of cross-city payment. In the first six months, a total of 6.64 million banker’s bills were issued and signed involving a total of 2.5333 trillion yuan.
The users of commercial bills are mostly institutions and organizations. The maximum time limit of commercial bill payment is sixmonths. In terms of acceptors, commercial bills can be divided into banker’s acceptance bills, which are accepted by banks, and commercial acceptance bills,which are accepted by non-bank payers. The commercial bills, as a kind of payment instrument whose payment date is fixed, have the function of payment, as well as credit and financing. Thus, commercial bills have become animportant instrument on the money market. In the countries where negotiableinstruments market has developed rapidly, commercial bills have become thedominant instruments on their money markets. For example, in the U.S., about 1,700 enterprises issue commercial bills, andvolume of outstanding commercial bills account for about 70 percent of thetotal volume of outstanding negotiable instruments on the money market. The commercial bill has become the number one short-term financing instrument of non-government sector in the U.S. In December 2005, outstanding volume ofcommercial bills in the U.S. exceeded 1.6 trillion dollars, equivalent to about one third of the outstanding loans in the same month. In China, commercial bills have also developed rapidly. In the past decade or so, the issue value of commercial bills increased by fourteenfolds, and the value of discount (including discount and inter-bank discount) by 29 folds. In the first half of 2006, a total of 2.87 million commercialbills were paid involving 2.5716 trillion yuan. In the meantime, a total of239.7 billion yuan of commercial acceptance bills were issued, equivalent to 1 percent of the outstanding RMB loans in the corresponding period.
A promissory note is issued and signed by the drawer, with a promise to pay the payee or holder of the note the designated amount ofmoney at sight. At the moment, only banks are allowed to issue promissory notes. Users of promissory notes include both individuals and institutions. A promissory note is to be paid within two months after its issuance. The most prominent feature is that it can be paid at sight by the non-issuing bank andthe money is transferred to the payee or holder’s account on a real time basis.Bank promissory notes are used in cities where economy is fairly developed and small-item commodities market are fully fledged.
