Chinese small and medium-sized enterprises (SMEs) are facing challenges to churn their operating cash flow. Bank loans are sometimes not feasible for SMEs as banks are cautious of their non-performing loans ratio. As an alternative, bank acceptance drafts (BADs), also known as bank acceptance bills (银行承兑汇票), have become mainstream trade finance products promoted by a number of Chinese banks and international banks.

Chinese companies have shown a growing appetite for bank acceptance draft financing due to its low cost. An acceptance draft can be kept by the receiver until maturity, much like a post-dated bank cheque, however, they can also be traded prior to maturity at a discounted rate, by receivers looking for extra liquidity.

Data from People’s Bank of China show that in 2016 the use of BADs in trade finance is on the rise. Currently, commercial banks such as ICBC and DBS are offering BAD issuance and discounting services to their clients. All companies or government organizations with real trading activities and a need to postpone payment are eligible to apply for the service.

Chinese authorities are also pushing ahead the digitization of bank acceptance drafts in the light of a market transition from B2C to B2B. “The People’s Bank of China (PBoC) is now focusing on digital banking acceptance drafts. Since 2017, banks are forced to issue a digital BAD if the amount is over 3 million yuan,” says a senior banker at a state owned Chinese bank in an interview with The Asset, “People can actually feel and enjoy the convenience and safety of digital bank acceptance drafts”.

In the past, digital bank acceptance drafts were not well accepted by corporates. Yet, as the market ushers in a new digital era, more multinational corporations are adopting their use. E-commerce players such as Alibaba and Suning, in particular, were the early adopters of the digital BADs. Vendors running businesses on these platforms are allowed to discount their digital bank acceptance drafts and get a corresponding amount of funds, either from banks or directly from those platforms.

Circular No. 224 issued on September 2016 by PBoC simplifies financial institutions’ review process of e-commerce enterprise applications of guarantee for commercial acceptance bills. The new regulations open up possibilities for banks to introduce innovative services by working with Chinese e-commerce platforms.

There are still concerns over bank acceptance draft financing in China as regulations are not yet sophisticated enough to address fraud issues. According to an executive at a European bank, some bank acceptance draft holders use the proceeds from BAD discounting to invest in the stock market, which underperformed over the past two years. “So when the companies need to repay the loans, they cannot take the draft back. There is only newspaper in the box,” says the banker in an interview with The Asset.