Research On The Usage Of Trade Credit In China During The International Financial Crisis

The rapid growth of China’s economy has brought great opportunity to the development of the SMEs, but the banking monopoly and the lack of financial development have seriously hampered the further growth of SMEs. In this environment, trade credit has been shown to play an insignificant role to ease financing constraints. In the past20years, trade credit has accounted for19.3%of total assets, which has become second only to the banking financing.To further understand the role of trade credit in business activities, in this paper, first, associated with the nature of the transacted good, we analyzes the role of moral hazard,asymmetric information, signal transmission theory and other factors affecting the trade credit supply. On the basis of a systematic analysis on the motivation of trade credit supply, second, this paper analyzes the role of trade credit under the environment of banking monopoly, and the difference of different kinds of firms. Third, this paper analyzes the heterogeneity effects of monetary policy, and investigates the role of trade credit in the transmission of monetary policy. Finally, this paper studies the effect of2007-2008financial crises on trade credit suppply. With the increased external uncertainty of the firms, whether the trade credit can be still an substitute to bank credit, to help their customer tide over the difficulties. And then from the trade credit perspective, this paper analyzes the fluctuations in inventory investment to better understand the reasons for the post-crisis economic fluctuations.Our findings provide some support for existing trade credit theories, they also challenge received wisdom.First, we provide further evidence that the extension of trade credit is linked with the characteristics of the transacted good. Supplier firms have an advantage relative to banks in financing their customers, as a repossessed good is worth more to suppliers than to banks and suppliers might act as intermediaries between buyers and banks because the first possess superior information. So, the moral hazard problem is the important factors affecting the supply of trade credit. We also link trade credit extension with Chinese firms’ ability to obtain external funding via their ownership. Specifically, we investigate whether ownership and firm size which affect the ability of firms to get bank loans affect trade credit supply to their business customers.Second, bank competition will affect financial constraints of firms, where trade credit is used as alternative financing choice for firms. The empirical results show that the large firms and state-owned firms’ financial constraints are not affected by bank market structure, but higher concentration in bank marker is associated with higher financial constraints of SEM and non-state-owned firms, whose account payable ratio is relatively high. Compared to large and state-owned firms, financial deepening plays a greater role to alleviate SEM financing constraints. Monetary policy has bigger influence on SMEs and there is a big increase in trade credit among them. Banking monopoly is the major reason leading to credit transmission channel distortion of the monetary policy. In this article, we have offered new evidence for understanding the asymmetric effect of monetary policy among enterprises of different size, which provides a new insight for the implementation of monetary policy.Third, we find that firms extend and receive less trade credit after the bank credit crunch. SEMs that are financially more vulnerable suffer great negative impact. Firms constrained in bank finance receive less trade credit also. Industries of standardized goods have a larger drop of trade credit than industries of differentiated products. Due to the strong cooperative relationship, firms in differentiated products industry are more willing to overcome the difficulties with their customers. With the credit contraction after the financial crisis, firms’ inventory investment declined significantly, as the financing constraints increased. While the uncertainty outside the enterprise after the crisis increased, the willing using trade credit to manage inventories will decline. In order to avoid the accumulation of inventories, firms, especially SMEs will reduce production, and then reduce inventory. So the fluctuation in trade credit is also a major cause of inventory investment volatility.The above conclusion has important policy implications:firstly, state-owned banks prefer to lend to state-owned enterprises and large enterprises, which leads to the financing constraints of SMEs, and restrict the capability of trade credit supply of SMES. And banking monopoly is the major reason leading to credit transmission channel distortion of the monetary policy. So, deepening the reform of the banking sector and increasing the proportion of local bank are necessary. Secondly, moral hazard is the important factors affecting the supply of trade credit, therefore, completing relevant laws and regulations to improve the information disclosure mechanism of firms is the key to ensure the trade credit market’ development.Finally, for different firms, we need different rescue measures. More policy support and financial support should be provided for private enterprises and SMEs, in order to reduce the impact of the crisis and alleviate the economic fluctuations.