CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
First, this market effectively fills gaps left by traditional bank credit, providing crucial funding support particu- larly to small and medium-sized enterprises (SMEs) with weaker credit qualifications but high growth potential, such as tech start-ups and specialised, sophisticated “Little Giant” firms. These enterprises often struggle to meet banks’ traditional low-risk lend- ing standards and thus have limited access to low- cost loans. The high-yield market serves as a vital alternative source of financing for them. Second, the high-yield market has also driven innova- tion in financing instruments and contract structures. Products in this segment often incorporate more flexi- ble terms, such as “performance-linked interest rates” (where rates can be reduced by 20%–30% upon achieving certain revenue targets) and “equity con- version options” (allowing creditors to convert part of their claims into equity in the event of default). These innovations have created competitive pressure on traditional bank lending practices, prompting banks to adopt reforms. Some city commercial banks have also launched “debt-to-equity linkage loan” products, which tie loan repayment to growth in the company’s equity value, thereby enhancing their appeal to high- growth potential enterprises. 1.4 Alternative Credit Providers In China’s loan market, alternative credit providers – represented by leasing companies, commercial fac- toring firms, internet finance platforms, and private credit funds – have expanded rapidly in recent years. Their growth has exerted two notable impacts on financing product design and market structure. First, scenario-based financing innovations have con- tinued to emerge with alternative lenders deeply pene- trating vertical sectors, offering more targeted financ- ing solutions. For example, leasing companies in the manufacturing sector widely adopt the “equipment pledge with instalment rental payments” model, with repayment terms extending up to five years, signifi- cantly longer than the typical three-year loans offered by banks. Meanwhile, commercial factoring firms pro- vide “accounts receivable factoring” services, helping export-oriented enterprises to substantially shorten payment cycles, thereby reducing their reliance on working capital loans.
Second, under competitive pressure, traditional banks are accelerating service innovation and digital trans- formation. Some banks also adopted factoring-like financing models, introducing order-based credit products (such as “order loans”) that use expected revenues from purchase orders as the basis for credit, eliminating the mandatory requirement for additional collateral and significantly enhancing financing sup- port for asset-light enterprises. 1.5 Banking and Finance Techniques The banking and financial technology sector in Chi- na is continuously evolving in response to investor demands and borrower pain points, with progress mainly reflected in three directions. First, the use of holding company (HoldCo) structures has become increasingly widespread. In merger and acquisition financing, borrowers often establish spe- cial purpose vehicles (SPVs) as holding platforms to effectively isolate project risks from parent company assets. To strengthen risk control, banks typically require such holding companies to provide “share pledges” to enhance control over underlying projects. Second, the application of preferred stock financ- ing tools continues to grow. Companies facing high debt levels – such as those in capital-intensive indus- tries undergoing state-owned enterprise reform – are increasingly using preferred stock to replenish capital. This type of financing does not raise corporate debt- to-asset ratios, and its dividend payment arrange- ments offer flexibility, helping to alleviate corporate cash flow pressures. Third, digital credit tools are accelerating in popularity. The banking industry widely applies big data and AI technologies, such as “tax and invoice-based loans” – products that rely on corporate tax and invoice data. Some banks have also built “supply chain finance platforms” that integrate fund flow and logistics infor- mation from core enterprises and their upstream and downstream partners. This transforms traditional sin- gle-enterprise credit granting into comprehensive risk management and financing services centred around the entire industrial chain, effectively reducing financ- ing barriers for small and medium-sized enterprises.
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