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Trade credit in China in the early 1990s

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Abstract

We investigate whether, in the early 1990s in China, trade credit changed gradually, from a socially problematic Triangle Debt situation to a financially sound situation to which existing theories of trade credit are applicable. Econometric modeling confirms anecdotal observations of a Triangle Debt problem in the early stage of our sample period. It is also confirmed that the problem vanished and the nature of trade credit in China moved so as to approximate that in developed or Western economies by the later stage of our sample period. Our models also show that intensified market competitiveness in the early 1990s was likely to be the factor leading to the change.

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Notes

  1. Better would be to extending the time period for research to more recent years. Availability of data (1992–1994) does not allow us to do so, however. We have access to trade credit data for only very few firms after 1995. Thus, the present paper focuses on whether the changes really took place in the early 1990s just before the change might have been completed already.

  2. Their empirical observations do not support the hypothesis, however.

  3. In calculating the ratio of current assets to gross assets, we exclude accounts receivable from the current asset. We do this to control the endogeneity caused by inclusion of the accounts receivable in the original current asset data. Similar treatment is applied to current assets included in variables.

  4. McMillan and Woodruff (1999) have treated trade credit in developing economies; others include Fisman and Love (2003), Vandenberg (2003), Fafchamps (2004), Fisman and Raturi (2004), and Hyndman and Serio (2010).

  5. Schwartz (1974) developed a model which suggests that firms with easier access to finance have a motive to pass on their available credit to customers. Petersen and Rajan (1997) and McMillan and Woodruff (1999) provide empirical support for Schwartz’s model.

  6. The amount of trade credit received, namely accounts payable, is an endogenous variable in our models.

  7. A similar approach is taken by Petersen and Rajan (1997).

  8. In this paper, a province or city government is defined as an urban government, and a county government as a rural government. Consequently, “urban–rural” here can be interpreted as “upper-lower” in a hierarchy of governments in China. Also, the “urban–rural” dummy variable (indicating “upper-lower” level of government) can be taken to represent the government’s political power.

  9. Diamond (1989) argues that the relationship with banks is itself a measure of a firm's reputation in debt markets.

  10. Investment for fixed assets generally needs to be financed by long-term funds, whereas most trade credit is short-term. Trade credit seldom directly finances investment. It can finance investment indirectly, however, since a firm which receives trade credit can save internal cash and redirect the cash to investment.

  11. Petersen and Rajan (1997) attach importance to credit from banks as determinants of demand for trade credit. They do use not the volume of bank loans, but several indexes for availability of credit from banks; these include the length of relationship with banks, since Petersen and Rajan (1994) found that relations between firms and financial institutions led to relaxation of credit rationing in USA. Our data do not permit the use of indexes for credit availability from banks, so we adopt the volume of bank loans as our bank credit availability variable.

  12. An over-identifying restrictions test (the Sagan test) confirms the exogeneities for instrumental variables used by us; it accepts the null hypothesis that the instrumental variables are exogenous.

  13. For the insignificant estimated coefficients of number of employees, we suspect that the interpretation of the variable should be reconsidered.

  14. The insignificant estimated coefficients of depreciation/gross assets could be because depreciation was merely an accounting figure and did not measure the correct amount of funds retained in a firm for reconstructive investment, since some of the depreciation reported in accounting was actually paid to government.

  15. We find that market competitiveness has far stronger explanatory power than all of the other variables we have investigated relating to the changing nature of trade credit. We are unable to use a competitiveness variable and the variables representing other causes as simultaneous independent variables in an empirical model, because of multicollinearity.

  16. Also, it is known that the Chinese government began to implement policies aimed at solving the Triangle Debt problem in 1993 and 1994. The present investigation can be seen as clarifying which factors made that policy effective.

  17. Their theoretical expectation is supported by empirical evidence from their African data.

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Acknowledgments

We thank Haiging Hu and anonymous referees for helpful comments; all views and errors remain our own. This work was funded by Grants-in-Aid for Young Scientists (B) No. 21730229 and No. 21730233 from the Ministry of Education, Science, Sports, and Culture of Japan (MESSC); Go Yano and Maho Shiraishi acknowledge these financial supports.

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Authors and Affiliations

  1. Faculty of Foreign Studies, The University of Kitakyushu, 4-2-1, Kitagata, Kokuraminami-Ku, Kitakyushu City, 802-8577, Japan

    Maho Shiraishi

  2. Faculty of Integrated Arts and Sciences, University of Tokushima, 1-1, Minamijosanjima-Cho, Tokushima City, 770-8502, Japan

    Go Yano

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  1. Maho Shiraishi
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  2. Go Yano
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Correspondence to Go Yano.

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Shiraishi, M., Yano, G. Trade credit in China in the early 1990s. Econ Change Restruct 43, 221–251 (2010). https://doi.org/10.1007/s10644-010-9086-4

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