Credit Rationing, Market Power And Trade Credit Of Rural Small And Medium Enterprises

Since the1990s, with the deepening of china’s reform and opening and the gradual implementation of the economic diversification policy, SMEs in China have given full play to comparative advantage and been rapidly developed by virtue of its unique and flexible operating system and operating mechanism. SMEs play an increasingly important role of promoting technological innovation, releasing employment pressure and accelerating the transfer of rural surplus labor. Rural SMEs are not only the products of market economy development, but also the sustainable and stable driving force to promote marketization, industrialization and urbanization. Rural SMEs have double meanings with development and reform in our national economy.Though China’s financial system is not fully developed, the economy has maintained a high developing speed. The outside system of financing is an important reason to support economic growth besides other reasons. With the development of social and economic, trade credit is widely used in the enterprises which has been played an important role in their survival and development. Trade credit are both a commodity trading system and a lending system. As a receiver (accounts payable), trade credit plays a role of financing as an important source of short-term capital. As a supplier (accounts receivable), trade credit plays a role of investing and become means of Competitiveness.Rural SMEs are particular compared with large enterprises. Due to lack of qualified mortgage collateral and the owners and operators are the same in most cases, there is serious information asymmetry between the lender and the borrower when rural SMEs are difficult to obtain loans from banks. Especially in the context of the current financial crisis, rural SMEs which depend on the bank loans as the main external financing channels confront severe financial constraints, thus making a lot of difficulties on production and management. In addition, because of the limit of scale, the rural SMEs are generally in a lower level of the industrial division, which engaged in low value-added production and business activities. Except the very small number of high-tech enterprises, the majority of rural SMEs invest less than normal in R&D, with low level of technical equipment and lack of professionals. The products have low percentage of technology which affects the development of enterprises. Rural SMEs are undertaking great pressure for survival because market competition is becoming fierce.The differences between rural SMEs and large enterprises in these areas, resulting in particularity of the development of trade credit to rural SMEs. Study the working situation and role of trade credit to rural SMEs in China, and then analyze its development path, providing a scientific basis on the policy-making and arrangements, which ultimately helps to promote the economic level of the rural areas. It has important theoretical and practical significance. Most studies of trade credit are for enterprises mainly in Britain, the United States and other developed countries, especially for listed companies. For emerging countries, especially with China as the representative of the countries with economies in transition there is a large space.This dissertation based on the analytical framework of development economics, finance, information economics and institutional economics. First, describe and compare trade credit of different types of enterprises of rural SMEs. Then, analyze the operation of trade credit in the survey sample. On this basis, on the one hand, we study their role as a receiver on the basis of suffering credit rationing from formal financial institutions of rural SMEs. On the other hand, we study their role as a supplier because of lower for rural SMEs in general competitiveness situation. Aim at fully reveal the beneficial and negative aspects of the trade credit in rural SMEs and finally propose the development path of rural SMEs. The full text is divided into seven parts, the main contents and conclusions of the study are as follows:Research content one:the development of rural SMEs and the situation of SMEs’ trade creditFirst, introduce and compare trade credit situation of different types of corporate business. Then recognize and analysis the micro data of the survey of190rural SMEs. Finally, analysis accounts payable and accounts receivable from the amount, duration and terms at the micro level. The results are as follows:190sample enterprises indicete accounts payable to total assets account for18.68%and the proportion of accounts receivable to total assets was25.34%. Whether as trade credit recipient or provider, the widespread use of trade credit in rural SMEs reflects its importance. Trade credit terms for rural SMEs mainly include simple term and favorable term, but the two-part term which is popular in foreign countries rarely exists in rural SMEs. In all sample enterprises,171enterprises have accounts payable that is bought on credit to buy raw materials.38enterprises receive favorable credit terms from their suppliers in which the average discount rate is3.3%and the average duration of accounts payable is45days.181enterprises have accounts receivable that is sold on credit. Among them,60enterprises provide favorable credit terms to their customers in whom the average discount rate is3.45%and the average duration of accounts receivable is62days.Research content two:trade credit and credit rationing of rural SMEs-the perspective based on accounts payableThis section draws on information economics theory to measure the degree of credit rationing of rural SMEs based on Direct Elicitation Methodology. The survey results show that37.37%of the sample enterprises suffer credit rationing by formal financial institutions,62.63%of the sample enterprises don’t. And24.21%of the rural SMEs are part of the ration,13.16%of the rural SMEs were all rationed.On this basis, the next step is to verify the relationship between trade credit (accounts payable) and bank credit. The empirical results show that:the relationship between trade credit and bank credit substitutes and the alternative level is27.96%of the rural SMEs which are subject to credit rationing; the degree of substitution between trade credit and bank credit in the total sample enterprises is22.79%. This shows that there is a large difference of the degree of substitution between trade credit and bank credit in different types of enterprises. Rural SMEs suffer to relatively high degree of credit rationing by the formal financial institutions. When they can not obtain the necessary loans, trade credit is a vital means of financing which can improve their financial strain. In previous studies researchers did not make a distinction whether the enterprises are subject to credit rationing and they directly study the effect of trade credit to ease financing constraints. In this way, it is easy to underestimate the degree of mitigation of trade credit to financing constraints.Research content three:trade credit and market power of rural SMEs-the perspective based on accounts receivableWhen comparing to accounts receivable and accounts payable we find that rural SMEs show more net provider of trade credit. On this basis, this chapter starting from the theory of market power explains why rural SMEs suffering relatively high degree of financing provide more credit. In this part we portray market power from the two dimensions, one is the degree of the products substitution and the other is the proportion of the first five customers’sales.On this basis, we study the impact of customer market power to the amount and terms of trade credit of rural SMEs. Higher product homogeneity and strong substitutability of rural SMEs lead to the lack of core competitiveness. Less asset, small-scale and low output of rural SMEs lead to product sales are concentrated in a small number of customers, which makes rural SMEs relative to their customers, market power is weak. The results show that: the number of rural SMEs will provide customers with much more amount and more favorable terms of trade credit as a means to enhance their own competitiveness in the market place. However, because they themselves are vulnerable to suffer credit rationing from formal financial institutions and have fewer sources of funding, whereas provide customers with trade credit, equal to transferring out of their own liquidity, which will further exacerbate the funds tensions of the enterprise.Research content four:the development path of trade credit for rural SMEsBased on the research findings of above three parts, we mainly proceed from the following four areas regarding how to strengthen the positive aspects of trade credit to rural SMEs, reduce the negative aspects and propose the development path of trade credit, mainly proceed from the following four areas:(1) Promote the credit system, business credit included;(2)Through the financial product innovation, reflux the loss of liquidity by trade credit;(3)Improve the supporting system of trade credit laws and regulations;(4) Rural SMEs strengthen self-construction and enhance their own competitiveness.