From the perspective of financing cost, financing the start-up and running of an enterprise through loans from relatives and friends certainly costs the least. However, guaranteed by these so-called strong ties,Footnote 12 the amount of financing is seriously limited by the relations because loans from relatives or friends and the expansion of these relations in order to start and run a business are either far from enough to meet the need or costs more with the expansion of relations. What is more, in daily production and management, constantly borrowing money from relatives and friends due to capital shortage harms trusted relationships because it signifies bad management and loss of money. For the sake of avoiding risk, most relatives and friends are unwilling to lend money. As a result, these loans are very limited and astringent with the social relations expanding gradually and the cost increasing.
Enterprises could put off capital settlement period with the help of market power and the social network of processing. In other words, in solving the problem of capital shortage, enterprises can first be in debt to the upstream and repay after the draining of capital. Distinguished from loaning, this financing channel has its own advantages with no need to pay interest. Therefore, in adjusting the capital settlement period with the upstream, the subcontractors adopt social time accepted by the community as a settlement period, which helps them acquire the largest potential for capital circulation and accumulation.
This practice led to two views in Pu Town: one is “Now every business owns its debts”; the other is “Now you can do business through being in debt as long as you have basic start-up capital.” The former signifies the debts based on social time mechanism; the latter indicates that for a certain operator, the cost of production and management can be allocated by the social time mechanism, which means that the practice of subcontractors is imitated level by level.
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(1)
Gradual debt and the capital circulation period: how to use capital effectively
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I.
“Debts are allowed” and “settle together”
Although the view that “now every business owns its debts” fails to directly explain the relationship between debts and the capital circulation period, in Pu Town, a textile mill that subcontracts the work to 700 looms has the view that the “textile business in Pu Town cannot expand without borrowing money, and every mill has its debt.” This confirms the importance of loans for the development of textile production. This view indicates that every businessman in Pu Town can borrow money. Therefore, every lender has to accept the loan relationships. In such case, money or goods can be limitedly transferred. This is a view of reciprocity that prevails in the community. The case of material supplier DZL illustrates this view.
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Case 3: DZL is the secretary of the party for the first commune-run enterprise committee. When he retired from work, he rented several stores in the textile market for his son-in-law to run a precursor fiber business. However, his son-in-law did not manage the stores well and they had few customers. After asking the details, DZL realized that his son-in-law demanded that customers pay cash and pay in full. DZL then asked his son-in-law to observe how he sold these precursor fibers. When his son-in-law saw him give some precursor fibers to a customer for free, the young man stopped DZL. DZL still insisted on selling in that way. After a while, another customer came. DZL claimed that he could not accept the transaction until the customer paid in full. After this customer left, DZL’s son-in-law asked why the former customer could keep his money while the latter could not. DZL explained to his son-in-law that it was based on his acquaintance with these people. Some were so reliable that you could easily loan the money, while others were not.
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II.
Graduated debts: the social time mechanism and its practice under market power
In the above discussion, settlement according to social time has appeared. From the perspective of each link of the longitudinal production chain, there was a large scale of structured graduated debts in the whole production and capital chain under the pattern of subcontracting, that is, from the subcontractors to the households and workers of the households, the settlement periods of processing charges and salaries were performed according to social time. The date of settlement usually occurred mainly at the end of the calendar year or important events in daily life including marriages, funerals, enrollment of children in school, or buying a house or car, all of which require a substantial amount of money. The former is fixed, while the latter is more flexible. Regarding the payment for goods, subcontractors normally acquire goods from material suppliers directly, with no need to pay all the processing fees to the households. Only when the upstream has to deal with special events are subcontractors obliged to advance a certain amount of money for the upstream. The remaining payments will still be settled at the end of the calendar year.
Therefore, the rules of loaning can be simply concluded to advance daily spending but save the remaining capital. There is thus a great difference with the air-for-assets in loaning argued by Ai and Zhou (2013). For the whole debt bill, there is still a sum of money that cannot be borrowed because it covers the expenses that maintain basic production and life order upstream. For example, when the large subcontractor YQS mentioned above talked about settlement with clients upstream, he especially emphasized feeding households, that is, maintaining daily life and settling the remaining processing fees at the end of the calendar year. This is also a very important precondition for debts. As a result, the payment list was forced to separate into two parts and each part carried out according to different social time periods. Social time, that is, different settlement periods, was enforced among the households and then introduced to the workers of the households. Household loom worker JSJ presents an example:
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Case 4: JSJ became involved in the domestic weaving industry in the early 1990s and began to do subcontracting work on processing fabric for subcontractors in 1996. According to JSJ, in the 1980s, the bosses purchased cloth in Pu Town with cash. From 1990 to 1995, he also sold his cloth in cash transactions, but beginning in 1996, he only charged a processing fee when cooperating with the locative subcontractors. The processing fee was separated into two parts. The first part was paid in advance every month and then regularly settled on the 25th of each month. However, it was usually put off to the 28th because electricity bills were due on the 25th. Due to the 3-day delay, they had to pay a fine for delaying payment. For example, in 2014, the payment was 1000 yuan each month for the daily basic fee, including the daily expenses of workers in the households. The remaining processing fee was settled at the end of the year, but so far, the processing fee has decreased to 3 cents per meter. In his workshop, JSJ recruited several people from Anqing. Migrant workers usually lived in his house. These workers’ salaries were generally settled at the end of the year, but they could receive advance payments under special circumstances such as marriages, funerals, or enrollment of children. At the end of the 1990s (probably from 1996 to 1999) when workers received 5000–6000 a year, they were extremely happy to receive their salary.
JSJ’s case suggests that since 1996, with the order-oriented production and management patterns practiced, debts are more immobilized and out of choice. JSJ carried out the capital settlement among workers in the same way because he was unable to pay these workers in full since subcontractors only paid basic fees for each transaction. In Pu Town debts were graduated from the subcontractors to the households and even the workers of the households. Additionally, the subcontractors owed money to the material suppliers upstream and the workers. The specific debt relation is presented in Fig. 4:
The market transaction relations shown in Fig. 3 developed into the capital settlement relations in Fig. 4, in which the dotted line refers to the debt and the arrows point to the debt relations, that is, the arrow points to the debtor. Figure 4 shows that the subcontractors are at the core of all the debt relations. In other words, the graduated debts surround the subcontractors in the production chain. We can also see that debt relations exist between the clients and the subcontractors because of the different clients. We will not discuss this further here because it extends beyond Pu Town. Nevertheless, different clients are directly related to the subcontractors, who adjust different graduated debt relations in order to take effective advantage of their present capital.
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III.
Utilizing and saving capital more effectively: two different kinds of capital circulation periods
The debt relations are to make use of the social time mechanism to create time differences between the two kinds of capital circulation periods. The first time period is the capital use period, that is, the social time period that maintains the daily social life of the workers of the households (such as the machinists) and the households. The second time period is the capital circulation period in the process of order production and transactions for the subcontractors or enterprises. As for the capital circulation period of enterprises, it is highly restricted by the repayment time point. Therefore, making the period of social time the most efficient capital circulation period for production and management ultimately becomes an important way for the party who holds market advantage to utilize and save capital effectively.
In the period of subcontracting there are two different kinds of capital circulation periods in the production capital chain (Fig. 3 presents more details). The first capital circulation period is between the material suppliers, the subcontractors, and the clients. The second is the circulation period between the subcontractors and the households. The latter adjusts itself according to the period from production to sale, which means adjusting according to the period of orders. Generally speaking, in Pu Town, the period from the material purchase to the production of white fabric and delivery to the clients lasts from 2 to 3 months. In the case of foreign transactions, the time for dyeing and finishing as well as export transportation must be added into the whole period, which amounts to about 45 days. Thus, for subcontractors working on foreign transactions, the capital circulation period of a batch of goods is roughly 4 months, while domestic transactions are about 2 to 3 months. The social time for the second capital circulation period in settling puts off the payment time as much as possible in regard to the speed of capital circulation, which makes the speed of the first capital circulation period go far beyond its circulation speed. It is basically suggested that the first capital circulation period does not need to pay the processing fee in full for the households timely after getting profits in trading. Instead, it saves a large part for daily circulating or capital accumulation.
Let us take a look at the first horizontal capital circulation period. The period for the value realization from material to product lasts about 3 months. Therefore, many textile enterprises (the large subcontractors) do not pay their workers in the first 3 months: the payment for the first month is distributed in the fourth month and so on. The remaining 3-month payments are distributed at the end of the year,Footnote 13 which suggests that the payment for the first batch of goods at the beginning of a year is deferred for 3 months. As a result, the production and management period of orders is just right for the conventions of settlement prevalent in the community, such as settlements according to season. The 3-month payment is deferred by taking advantage of the social time mechanism. The batches of production are lastingly cumulative, as a result of which the draining speed of capital in upstream transactions is still faster than the capital settlement period upstream. The social time mechanism plays a crucial role because the time period is settled according to the cooperation between the upstream and the downstream, that is, settled according to the settlement conventions instead of the consistency of economic production and the transaction period. Depending on these two kinds of capital circulation periods, the subcontractors not only accumulate capital but also effectively utilize their present capital.
Compared to the first capital circulation period, there are two approaches in settling in the second capital circulation period: monthly and yearly, that is, paying for fundamental charges every month and settling the remaining processing charges at the end of the year. Fundamental charges are paid in advance to maintain the operation of the households and include electricity, tax, sewage charges, and salaries. The debt relation between the subcontractors and the households and then the workers of the households according to the social time mechanism saves much capital for the subcontractors. Therefore, as in the debt relations shown in Fig. 4, the horizontal capital chain mainly presents the relations that are more convenient for subcontractors to effectively make use of cash flow, while the longitudinal capital chain mainly presents the relations that are beneficial for them to save cash flow. Both of these two directions of capital chains that save capital and make use of present circulating funds are dependent on the social time mechanism.
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(2)
Cost allocation: collective or social cost
In the production chain, the subcontractors improve efficiency of capital use horizontally and longitudinally by the capital settlement period on the basis of the social time mechanism. However, from another point of view, the subcontractors also realize the cost allocation in production and management by the social time mechanism. The cost allocation implies that the subcontractors make the other party in the transaction take on the cost of production and management that originally belongs to them by loans. In other words, depending on the social time mechanism, the subcontractors not only realize graduated debts in the production capital chain but also achieve cost allocation in a sense.Footnote 14 This measure is also imitated level by level. As a result, there is no need to pay any interest for the financing in the case where the same cost allocation also occurs in the condition of market power and social network of processing.
Take the subcontractor as an example to illustrate in the following text. Figure 4 shows the debt relations between market subjects. From the perspective of the total amount of debts, that is, after the direction of arrows representing the transaction relations between economic subjects changes, the relations of cost allocation are detailed in Fig. 5.Footnote 15 As Fig. 5 shows, when subcontractors take orders, the costs of an order such as the cost of material or the cost of labor are taken on by the material suppliers, the households, the workers of subcontractors, the workers in textile mills, or the workers in the households, indicated by the dotted line. Simply speaking, the subcontractors are able to allocate a large part of the costs of every order to the production and management subjects through loans. Take ZXZ’s textile mill as an example:
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Case 5: The fabric of ZXZ’s textile mill was processed by local households by subcontracting. According to ZXZ, the materials were bought on credit from material suppliers with whom he had cooperative relations for many years. The fabric was assembled on credit from the subcontractors when the production was insufficient or through subcontracting (in 2004, there were about 700 looms). Self-raised capital made up one fifth of the cost of daily production and management; material occupied one third to one fourth, and processing charges took up one fifth.
The capital settlement relations between ZXZ and material suppliers as well as the subcontractors adopted the social time period. Therefore, ZXZ’s case shows that the actual cost only composed 20 % of the total cost. In other words, it was possible for ZXZ to utilize less capital to activate the entire enterprise by making use of time differences between the capital settlement periods for production and management of orders and the social time settlement circles caused by the social time mechanism to achieve production and management that could not be reached with the enterprise’s own capital. Thus, it is distinguished from the graduated debts that promote the development of textile production in Pu Town through the orders from subcontractors in this situation where the pressure of capital shortage is longitudinally transferred level by level. The cost allocation further illustrates how the costs of production and management for the households and subcontractors in the production chain are allocated horizontally and longitudinally. The allocation mechanism also conveys that the capital requirements for establishing enterprises are reduced, that is, you could do business by borrowing money as long as you have start-up capital.
From the industrial scale, taking the 2011 statistics as an example, the textile industry in Pu Town included 80 persons who subcontracted 100 looms, 25 persons who subcontracted about 300 looms, and 10 persons who subcontracted about 500 looms. These numbers cover all the subcontractors who own looms. The reason why they could support the whole textile industry was that they resorted to the cost allocation mechanism. It also suggests that graduated debts and cost allocation resolved the capital shortage for Pu Town’s textile industry, promoting its development. In other words, the development of the textile industry in Pu Town was highly dependent on the collective or social cost on the basis of the social time mechanism.