To bolster its economic resilience amid trade headwinds, China has made no shortage of attempts to shore up its private sector – lately by passing the first-ever law to promote the private economy. But real progress demands swift and concrete action to resolve the day-to-day challenges facing small and medium-sized businesses, chief among them payment delays. Crucially, Beijing should phase out the widespread use of commercial papers, following Japan’s recent example.
Commercial papers are debt instruments used by companies to push back payments to contractors and suppliers – often by up to a year – with a formal guarantee of full repayment at maturity. According to central bank data, 38.3 trillion yuan worth of commercial papers were issued in 2024 – equivalent to over a quarter of China’s GDP. Their use is hard to ignore.
While commercial papers are intended to ease cash flow, their overuse has led to widespread payment delays and liquidity strain for small and medium enterprises (SMEs). Acting on such concerns, Japan announced plans in April to abolish promissory notes – its equivalent of commercial papers – by 2026, bringing an end to a practice dating back over a century.
Much like in Japan, commercial papers in China have been widely used – and frequently abused by large companies to defer payment, to the detriment of their SME partners. The worst offenders include major real estate developers, whose own liquidity crisis in recent years left them unable – and unwilling – to honor their obligations.
In all fairness, outright defaults are relatively rare in the aggregate. Still, for companies in financial distress, defaulting on a commercial paper is easy. Such defaults are far less damaging than missing payments on bonds, which can trigger credit downgrades and spike borrowing costs, or on bank loans, which can lead to collateral seizures. Unfortunately, SMEs on the receiving end are left with few options but to wait and hope for eventual repayment.
More concerning are rising commercial paper defaults by local government financing vehicles (LGFVs) – entities created by local authorities to borrow off-budget and finance public works. As local finances deteriorated, the number of LGFVs defaulting repeatedly on commercial papers more than tripled from 2022 to 2024, according to the Shanghai Commercial Paper Exchange. Again, SME suppliers have little recourse when payments are missed, yet most can’t afford to turn down commercial papers at the risk of losing government contracts.
Phasing out commercial papers seems imperative – after all, Beijing has already launched a crackdown on overdue payments by local governments and state-owned enterprises. Yet authorities appear hesitant to take that leap. In response to industry calls last year, central bank officials cautioned that banning commercial papers outright could exacerbate funding pressure for SMEs, citing the lack of more reliable tools to finance outstanding receivables.
These concerns aren’t without merit. Despite improvements in China’s legal infrastructure, large firms and state-owned enterprises still wield significant bargaining power in transactions. SMEs, meanwhile, struggle with persistent information gaps and contract enforcement issues. Compared to the uncertainty of chasing payment through courts under open account terms, commercial papers offer a more tangible form of commitment, even though enforcement may be a drawn-out process.
But the central bank’s reasoning highlights exactly where reform is needed: alternative mechanisms for ensuring timely payments to SMEs. Factoring, commercial credit insurance, and supply chain finance platforms are mechanisms used in abundance by SMEs in developed economies. Under these mechanisms, payment defaults are often handled by institutions – such as insurers or banks – that have the resources and legal power to pursue claims efficiently. This not only improves the SME’s cash flow but also shields it from the financial health or behavior of dominant firms.
Sadly, the adoption of such tools in China has been uneven and not yet embedded in the everyday financial operations of most SMEs. Most small businesses are either unaware of these tools or don’t meet the eligibility criteria. In contrast, commercial papers are familiar and widespread, making their use the path of least resistance for both payers and payees. This is compounded by the structural risk aversion of China’s financial institutions – particularly state-owned banks and insurers – which continue to favor large, state-backed borrowers over smaller private firms. This bias is a legacy of China’s state-centric growth model, and has been unintentionally reinforced by the government’s focus on financial de-risking.
To truly empower SMEs, authorities must cut through path dependence and bureaucratic inertia. Scaling up alternative trade financing mechanisms will require not only continued investment in the financial and credit infrastructure that supports them, but also a broader cultural shift – one that treats private firms as equally bankable and insurable as their state-owned counterparts. Beijing has already recognized the need to move in this direction. The Private Economy Promotion Law, passed on April 30, put in writing a clear mandate for financial institutions to improve fair and equal access for SMEs.
Addressing these systemic challenges will take time – a luxury China can ill afford amid mounting external pressures and the looming threat of a protracted trade war. The government must act now to restore private sector confidence by addressing the everyday concerns that matter most to small businesses. Abolishing commercial papers would be a powerful place to start.