How does the market operate under the condition of capital shortage? A study of social time mechanism of the textile industry of Pu Town

Capital shortage has always been a disturbing problem for the development of small and medium enterprises (SMEs). One of the important factors contributing to the problem is that the current financial system can barely support the development of SMEs. The restriction of the financing environment is rooted in the highly centralized financial system left over from the planned economy during the economy’s transformation that was viewed as inappropriate for SMEs (Lin and Li 2001) and which discriminated against SMEs’ loans (Lin et al. 2003). In addition, it is rooted in a relatively backward financial system that was designed to support the previous financial system and is incapable of meeting the demands of the numerous labor-intensive SMEs. For example, Fan (2000) argues that it was essential to develop small- and medium-sized local private financial institutions in order to improve the financial system and expand the financing channel of the private enterprises. However, it was not until recently that this kind of financial system for private capital developed. In fact, Growth Enterprise Market (GEM) for direct financing was established after 2000. This financing platform targets high-tech enterprises rather than private enterprises; private capital was not allowed until the State Council issued 36 guidelines in 2005 titled “Several Opinions on Encouragement of Nonstate-owned Economy Development.” Thus, from the beginning SMEs developed under the shortage of financing sources, especially the private SMEs in rural industry.¹

However, in reality, SMEs have made significant progress even in the absence of a regular financial system, which impelled researchers to turn their focus to financing channels outside the regular financial system, such as underground private banks, civil bidding, and even exorbitant usury. Taking nongovernmental finance in Wenzhou as an example, there are nongovernmental loans, industrial loans, and civil bidding (Wang et al. 2004; Zhang 2000; Guo and Liu 2002). Whether through financing channels within or outside the regular financial system, SMEs had to pay certain rates for loans since all these financial services are offered for profit. Thus, the SMEs were under the double restriction of a shortage of regular capital supply channels and the high cost of irregular capital supply (Zhou 2007). The cost of regular capital supply was also considerable. With overcapacity in China’s economic sector and the rise of the RMB exchange rate, the profit rate of export-oriented enterprises decreased more and more. Influenced by changes in international marketing conditions, SMEs entrepreneurs who depend heavily on such financing channels tended to experience cracks in the capital supply chain. A large number of entrepreneurs have gone into hiding due to the pressure to repay loans. These SMEs have collapsed on a large scale due to the guarantee chain for the credit warranty system established by banks and massive mutual interenterprise debt. Thus, the causes for the capital shortage were first, that financing approaches were seriously limited and second, SMEs entrepreneurs intended to restrict the scale of financing in order to avoid risks. This raises the question of whether there are any other approaches to tackling the capital shortage problem that emerged in the course of SME operations as market subjects.

Through analytical strategy, loans from the regular financial system and the private financial system can be classified into visible financing channels, that is, financing channels studied by economists that we can directly observe. Obviously, there is another invisible financing channel that can only be found in enterprises’ own capital supply chain,² which implies that entrepreneurs realize financing through controlling the capital circulation period in industrial chains as well as the scale of cash flow, making use of minimum expenses to stimulate the operation of the whole production chain.³ In brief, it can be concluded that the scale of cash flow must be minimized and capital circulation speed be improved as much as possible. However, improving capital circulation speed is subject to fixed conditions such as labor intensity, technology, and logistics speed. It is difficult for SMEs to evolve under these situations unless they are making innovations in their technique. Comparably speaking, it is more manageable to minimize cash expenses. This is the invisible financing channel discussed earlier, which refers to the specific phenomenon of structured deferred repayment that occurs among enterprises on a large scale through production chains. In other words, it is cost allocation based on massive graduated debt that definitely motivates the lasting development of SMEs. Nevertheless, economics has not paid sufficient attention to this phenomenon and generally regards it simply as existing debt or deferred repayment.

This paper discusses this borrowing behavior that has received insufficient attention from economics. Although deferred payment or borrowing is a common phenomenon in social economic life, this paper’s focus lies neither on borrowing and lending money, which is essentially of mutual help in daily life, nor on borrowing and lending behaviors in rural areas influenced by borrowing and lending cultures (Geng 2014). Instead, in regard to SMEs’ lasting development, it concerns how borrowing and lending money is facilitated with a capital circulation period in the productive process in order to solve the problem of capital shortage. Given that contract theory is one of the most essential dimensions to comprehending the marketing relationship and debts exist among different market subjects, this paper will follow this approach.

In the economics literature, contract theory was gradually developed first by Oliver Williamson and later Oliver Hart and finally formed a more systematic theoretical system applied to analyze issues from market and organizational relations to property (Zhou 2003). In order to clarify market integration issues from the perspective of transaction cost, Williamson distinguishes three kinds of contract forms at the level of legal governance: classical, neoclassical, and relational contracts. On the premise of incomplete contracts, relational contracts transform legal governance structure into a concrete bilateral governance structure or governance structure within an organization, thus providing an analytical frame for organizational behaviors and internal governance (Williamson 2002; Zhou 2003; Macneil 1978). Simply speaking, by introducing relational contracts, Williamson brought problems such as asset specificity into interorganizational behavior studies, including threats and possible moral risks after signing a contract. However, Hart insisted that in the incomplete contract the remaining power of assets would be the very key to tackle all sorts of contractual problems (Hart 2006). In this way, he transformed the problem of organizational boundaries studied by Williamson into property assignment.

Generally speaking, enterprises need a great deal of liquidity. They will not being in debt unless they suffer radical changes in the macroenvironment, such as a depression. Even if enterprises encounter the challenge of deferred payment, they can resort to a credit guarantee from a third party such as the installment of a commercial bank and acceptance bill commonly used in transactions. In fact, transactions without a third party as a credit guarantee generally use cash in order to avoid risks. There is a great deal of mutual borrowing and lending behavior among enterprises. For enterprises in communities (Zhe and Chen 2004), this behavior is taken for granted as the reason that contract constraints between transaction subjects have been softened compared to transaction relationships in an unfamiliar environment.

Many studies on the transformation of township enterprises focus on the softening of contract constraints. For instance, Liu (1999) explicates how contract constraint relations have softened and how business agents have acquired residual control of property rights from the perspective of re-embedding between the business agent and his/her interpersonal network. For township enterprises, the situation is more complicated. Zhou (2005) analyzes the ambiguous and evolving phenomenon in township enterprises from the view of the relation of property rights, claiming that it is mainly attributed to township enterprises adapting to a complex environment in order to attain resources. Liu (2003) explains the complexity through three dimensions of possession. The softening of property rights constraints proves from another aspect that constraint relations could be softened by resorting to a certain mechanism of the community. This mechanism functioned because economic relations have been embedded into social relations (Polanyi 2013; Granovetter 2008). Therefore for transaction relationships between acquaintances, the trust mechanism is not generally established on the basis of strict contract relations.

As Durkheim (2000) points out in regard to contracts, contract relations can be maintained because of other more fundamental impersonal factors. These impersonal factors are essentially social conventions. Zhe and Chen (2005) hold that social contracts are based on reciprocal relationships implemented in communities. Therefore, the transactions of SMEs in communities are impacted by various social relations and thus influenced by social contracts. In a certain sense, as the foundation of credit, the trust mechanism is also a kind of social contract. In the case of the transactions of YQS discussed below, he usually reached agreement with the households verbally. Therefore, being in debt is generally dependent on social contracts. What is more, a premise is implied in these social contracts that goods or money can be borrowed, that is, under certain conditions and for a designated period of time, one party can transfer its property to another party free of charge, which has been the essential point for discussing the internal mechanism of realizing contract relations.

The notion of a limited assignment of property indicates that, distinguished from financing within a financial system as well as private financing, being in debt directly minimizes cash input with no need to pay interest. On the other hand, with the time restriction of a social contract, being in debt is indeed limited. Therefore, the reason why borrowing is sustained is that debts can be repaid within the time limit prescribed in social contracts. Timely repayment is equal not only to repayment ability but also to lasting borrowing. Therefore, enjoying good credit does not mean taking on debts easily. It is highly relative that the counterparty with good credit is able to repay with enough financial strength. In market transactions, especially after market practice, the debtor clearly knows that the purpose is to advance money to others with no expectation of gaining interest from the deferred payment. Thus, the only condition they could receive is that the counterparty volunteers to repay within the assigned time limit, usually prescribed by the social contract. Thus, credit refers to repayment ability, as a result of which being in debt is an after-set credit mechanism. This is so even in the case in which there is no third-party credit guarantee.

Enterprises in communities are able to resort to personalized social capital, embedding trading relations into social relations, with no need of a third-party credit guarantee for deferred repayment. The implementation of market power further strengthens deferred repayment. For example, suppliers in the upstream of the production chain would experience the risk of poor sales if they demanded due payment from downstream firms. Nevertheless, the key to delay in payment is to use the capital spending cycle in social and economic activities. As a result, social time has been the critical link for exploring the subtle relationship between borrowing money and capital circulation period in the capital chain of the SMEs.⁵

Social time essentially refers to a time unit formed in a certain social or collective life rhythm. In this text, it mainly includes periodic holidays and time points at which significant family events occur. The former typically refers to the Spring Festival that determines the end of a year, and the latter principally includes events⁶ surrounding marriages, funerals, and children’s enrollment in school. In addition, it covers routine time arrangements on the basis of social conventions, such as capital settlement in a season and settlement in half a year according to the customs of rural communities.⁷ A large number of studies have focused on social time (Marx 2008; Durkheim 1999; Mead 2002; Giddens 1984). For example, Durkheim (1999, p. 12) argues that “the differences between date, week, month and year are corresponding to the periodicity of rituals, festivals and public ceremonies,” that is, “the calendar conveys the rhythm of collective activities and guarantees the functions of the regularity in these activities.” Additionally, Hubert (1999) explains how the duration of time is interrupted by the divinity at important time points. As Sorokin and Merton (1938) note, institutions concerning time arrangement are directly related to social cooperation. All of the above studies constitute the essence of social time as defined in this paper. It can be seen in the text that rhythm and important festivals are formed on the basis of social economic life, which is distinguished from astronomical time or physical time in nature. Social time is characterized by discontinuity (Mukerjee 1943) that is reversible and periodic.

The time system for industrial capitalism, which differs from social time, was essentially developed based on linage time and commercialized time evolved from calculating rationality (Hassard 2009; Marx 2008; Thomson 1967; Thrift 1981). According to Mukerjee (1943), social economic rhythm in an industrial society is dominated by the speed of the machine system rather than life rhythm. The rhythm of production, transactions, and other economic activities for different enterprises and markets, such as the speed of capital circulation and the logistic system, is more compact due to unified time arrangements after which the links are more accordant with economic rationality. It is suggested that time was made into a timing system, the fundamental system of economic production and development, such as the time arrangement of Taylor and hourly wages (Marx 2008). According to Polanyi (2013), this time system would necessarily be replaced by a more rationalized form when encountering the rhythms of social time. However, this is not so. Nyland (1986) argues that a series of arguments and political movements emerges when the rationalization in time arrangements according to economic benefits extends to production, circulation, and exchanges, that is, workers struggle to achieve time for social life (free time) within the economic time system. But indeed, the salary settlement period such as monthly salary and weekly salary is not a time system naturally made by the economic system but a system made by social time, which operates in the economic system.

As a result, we see that Algeria’s farmers are dependent on natural time rhythms as Bourdieu (1963) notes, which also indicates that social time still functions by creating a certain mechanism in another system. As Young (2002) argues, time is not only a dimension of social interaction but also an instrument of social interaction. Therefore, when social time occurs as a capital settlement period in a contract relation with no impact on the social economic life of either party, they are able to make remarkable progress. Thus, this capital settlement period according to social time is defined as social time mechanism. In the following text, the textile industry of Pu Town is taken as an example to clarify how SMEs that cooperate with the capital circulation period in production resort to the social time mechanism in solving the problem of capital shortage.

Located in the north of Zhejiang, the Hangjiahu plain, Pu Town has developed its textile industry since the late 1970s. After 30 years of development, Pu Town has developed into an important textile industry base in the Yangtze River Delta. For example, the lining output in Pu Town in 2009 occupied 2.5 % of the gross national production. In terms of development scale, the industrial scale of Pu Town has increased remarkably, from 100 to 200 looms in the early 1990s to over 35,000 looms in 2014, and from 100 households in three to four villages to more than 2200 households in 11 administrative villages (a total of 14 administrative villages) today. From January to December 2013, the total output of Pu Town’s textile industry reached 235 billion yuan. According to economic indicators designed in Pu Town, there were 84 enterprises whose revenue from sales exceeded 20 million yuan in 1 year (14 % of all other enterprises’ revenue in the county), while there were 196 enterprises whose revenue was less than 20 million.

Despite the development of the textile industry in Pu Town at the end of the 1970s, a small local textile market was not built up until the early 1990s. Before that, most individual households were restricted by capital produced and sold to external domestic markets, respectively. As Fei (1999) argues, there are two forms of rural industry: one is the cottage industry, which developed with the slack season in farming; the other is the workshop industry. The difference between these two kinds of industries is that the former resorts to surplus labor force while the latter makes use of surplus capital. Obviously, after the 1990s, the workshop industry developed in Pu Town.

WLC’s case demonstrates that foreign assemblers who collected cloth depended on local agents and were obviously making use of WLC’s social network. WLC bought cloth from people he knew when purchasing for nonlocal assemblers and from the volunteer households in their villages or neighbor villages. In short, WLC was familiar with these merchants. As business grew, WLC formed a more fixed purchase network. The social network constituted by social relations is typically similar to a circle, from processing the supplied material (Wang 2013; Tian 2014) to laying the foundation for WLC’s subcontracting in the mid- and late 1990s (Fig. 1).

The textile industry in Pu Town gave rise to more divisions in labor, contributing to a large number of fabric orders and the restriction of time limits for delivery. This is shown in more detail in Fig. 2.

Subcontractors who took orders played a critical role. Driven by subcontractors, a new organizational structure emerged in Pu Town’s production chain. First, when subcontracts occurred, the mercenary relationship between the households and material suppliers was replaced by a trading relationship between the subcontractors and material suppliers, while household looms previously took the role of manufacturing. From the particular productive process, subcontractors purchased materials according to the demands of the orders. Organzines and trams that were processed in the previous procedure⁸ were distributed to the households. The households produced white fabric with these organzines and trams and delivered them to subcontractors. They would be sold after uniform processing. This is the main transaction relation shown in Fig. 3 ⁹:

Thus, at the stage of subcontracting, production driven by domestic orders and direct or indirect orders from the international market was greatly changed. For example, local agents responsible for purchasing gradually played the role of operators just as in the material process within the putting-out system (Fu 2014; Tian 2014). The previous social network of purchasing was developed into the social network of processing. In other words, the structure of the order-oriented production chain signified the combination of market power represented by orders and the personalized social network of purchasing. In the process of reorganizing the structure of production and management in Pu Town, those small traders at the previous stage of market sales were replaced, forming a similarly recessive factory system (Xie 1992). It has been suggested that if the households failed to cooperate with the subcontractors, it would have been difficult for them to join in the recessive factory system and survive in the market. The households who made a family living by weaving would be totally on their own in such a case, where they could neither satisfy the production need of orders nor afford a textile mill on their own.¹⁰ Subcontractors at the core position of the production chain would be forced to face the challenge of capital shortage. First, in order to acquire orders, subcontractors have to purchase fabric, exceeding their own capital ability. With market competition strengthening and productivity improving, the profit margin of fabric was decreasing year by year in the mid-1990s. For example, the profit of fabric went down from 2 to 3 yuan per meter at the end of the 1990s to about 3 cents per meter in 2014. The weakening of profit-making ability gave rise to capital shortage. Therefore, faced with the double restrictions, the entrepreneurs of the SMEs who held market power and personalized social networks for purchasing, i.e., subcontractors,¹¹ began to adjust the capital settlement period within upstream contracts in order to tackle the problem of capital shortage.

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,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.

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.

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 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,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.

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.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. 5.¹⁵ 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:

• 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.

Even though more stable graduated debts and cost allocation were built through the social time mechanism, the upstream material suppliers or the households upstream still occasionally encountered capital shortage due to accidents. These financial needs possibly emerged because payment from the downstream subcontractors did not occur before the capital settlement period based on social time or because the daily expenses exceeded the payments advanced by the subcontractors. In order to keep the upstream alive, the downstream subcontractors were obliged to support the upstream, forming a countervailing mechanism between the subcontractors and the households as well as between the subcontractors and material suppliers, that is, resolving the capital shortage by debts or loans.

The dimension of the countervailing mechanism obeying a distinct logic is different from the debts shown in Fig. 4. Specifically, the countervailing mechanism was not intended to repay material suppliers and the upstream households in advance but to build a new mutual debt mechanism between the subcontractors and the households or the subcontractors and the material suppliers on the premise of keeping the original capital settlement period based on social time. It is distinguished from debt relations with subcontractors in which the material suppliers and the households had to pay some costs for their debts. The costs were caused by the market-dominant position of the subcontractors within the production and management frame. For example, in Pu Town there were some subcontractors lending money to households to purchase looms when these households faced capital shortages due to the expansion of scale or economic hardship and deducting the debts from the processing charges. The reverse debt relations were based on the cooperative relations between the subcontractors and the households. Additionally, capital settlement between them was also based on social time.

The specific operation method for counterloaning, taking March to June 2014 as an example, was as follows: (1) the payment settlement period settled on was every 6 months, that is, the draining period for the capital of suppliers was half a year and the payment for the first month was settled after 6 months, which indicates that the payment for March was not settled until September; (2) the borrowing amount of suppliers could not exceed the total amount that DSH owed. Assuming the March to June period as the calculating unit, the borrowing amount of suppliers in June could not exceed the total amount of 1.04 million in 3 months; and (3) the interest for the debts was 3 cents. If the supplier borrowed 1 billion, taking the amount for 3 months as a borrowing period, the supplier would need to pay 90,000 for each loan. In fact, material suppliers tended to adopt the full borrowing amount to realize the effect of similar cash transactions. From this behavior of borrowing and lending that emerged in this case, we can see first, DSH’s borrowing scale was restricted within the total amount of payment he owed to the material supplier, as a result of which he not only did not need to take risks but he could also earn some interest. The worst situation for him was to conduct transactions in cash. As for the supplier, despite the 90,000 paid for interest, every deal he made was a cash transaction so he relieved the stress of capital shortage due to debts. This was similar to the agreement by both parties. The cost of cash transaction was lower than a loan; thus, the material supplier agreed to DSH’s strategy. In 2014, when I learned of this case, the amount of debt was still short of 1-month debt to reach 1 million. Therefore, the material supplier would rather pay interests more than 1 month to DSH in order to borrow 1 million from him to resolve the capital shortage. Therefore, the practice of the countervailing mechanism also made up for the problem of capital shortage.

Obviously, the countervailing debt is different from “chain debts.” “Chain debts” are a circulation chain of lending to each other. In the condition of capital shortage, it would lead to the accumulation of debts as a kind of cumulative debt relations. However, the countervailing debts discussed here and loans on the basis of social time mechanism form a kind of mutual debt relation with no cumulative relations as in chain debts. Additionally, the character of mutual debt relations also indicates that it dispels debt relations: first, there is no need to pay interest depending on the social time mechanism; second, countervailing debt dispels or countervails the problem of capital shortage caused by previous debt relations even though it requires some costs, for example, higher interest rates have to be paid because of the fixed cooperation relations or debts. Therefore, with the counterdebt mechanism, there is no large scale of the capital chain collapsing due to capital shortage upstream. It is also a crucial part of maintaining the constant operation of SMEs.

From the perspective of relational contracts, debt is a phenomenon that emerged from the adjustment of the capital settlement period when the upstream and the downstream make use of social relations or market power. However, in fact, it is more complicated than that. For the enterprises in the community, if the time dimension within the contract is overlooked, it would be hard to illustrate clearly why the settlement period presents the character of social time only through social relations and market power As a result, by introducing the time dimension to explore the production capital chain in Pu Town, in reaching a settlement time on the basis of agreements, a more fundamental social economic life rhythm within the community is obeyed, even though both of the two parties resort to the relational contract to adjust the capital settlement period. It is also suggested that the result of consultation between individuals is a kind of nonindividual and social institution. Thus, occurrence of the social time mechanism indicates that the transaction relations motivate more fundamental social resources or institutions, bringing the contract relation into a deeper social mechanism. More significantly, the cases discussed in the text demonstrate that the social time mechanism further develops the discussion of contract theory.

When New Institution Economics introduces the important analytic concept of transactions, it also breaks the hypotheses of instant transactions within New Classical Economics. The relational contract from the dimension of time presents the process of constant adjustment driven by the incompleteness of contracts in order to deal with the constant emergence of new situations. However, time has not been emphatically analyzed within contract theory. In other words, even though time is introduced into the contract relation instead of being in the background in the enforcement of contracts, it is still regarded simply as a certain appointed term in contracts, such as the capital settlement period mentioned in the text. After introducing the time dimension of contracts as an analytic concept, it effectively strengthens the explanatory power of the relational contract. In fact, it has been proven in this text.

As emphasized above, the frame of contracts discussed in this text is different from that discussed by Williamson and Hart. In this text it is the social conditions involved in the agreement of contracts and the internal mechanism that are discussed. Some scholars such as Liu Shiding have focused on the relation between social conditions and contracts. Liu (1999) explores the content of the relational contract and discusses the issue of embeddedness. Many of this text’s discussions concerning the structure of market transactions in Pu Town are based on this issue. In order to introduce time into the analytic concept, it is necessary to raise it to the same position as “specialties of investments” and “residual ownership,” which is to say that the concept of time has analytic significance only when covering the core interest or power relations.

In fact, the concept of time has occupied this status when it involves the issue of capital settlement, for the reason that during market transactions especially under the condition of capital shortage the capital settlement period is directly related to the existence and development of enterprises. When taking the concept of time into consideration in individual cases, we further find that the different time periods have different significance and social time becomes the core of the whole relational contract. Therefore as the relational contract is embedded into social relations, its analytic concept of time naturally becomes social time. More interestingly, there is no similar issue such as the residual rights of control, but it directly develops into a mechanism that motivates the relational contract because social time becomes a kind of social nstitution. Obviously, the significance of social time in maintaining and controlling is no less than the time that is not discussed in this text. For example, subcontractors control the quality of production produced by the households and the upstream suppliers through deferred payment in order to maintain cooperative relations with the upstream.

What is more, the social time mechanism developing from the social time dimension of contracts effectively explains how SMEs are able to develop rapidly when facing capital shortages. From the perspective of social time, the previously deferred payment developed into the time difference caused by two kinds of capital settlement periods, demonstrating that the production chain based on social relations and market power can provide a financing channel with low costs for the SMEs. In fact, it is through graduated debts and cost allocation on the basis of the social time mechanism that SMEs are able to realize capital accumulation that cannot be reached in unfamiliar market transaction relations.

Finally, the social time mechanism also indicates that the trust relations between two parties have greatly changed. Social time reflects the lowest measure of the repayment period. In other words, when capital settlement relies more on the social mechanism, which is more binding and legitimate than individuals, the fundamental measure of deciding the debt transaction relations to be maintained by the lending party depends on timely repayment within an acceptable period delayed to a great extent and repayment capacity. Obviously a trusting relationship depending on the social institution reflects the difficulty of maintaining trusting relations between individuals in present economic interactions. When both the transaction parties begin to depend on the institutional trust mechanism of social time, comprehending the possible influences that changes in the trust mechanism bring and other effects of the social time mechanism needs to be further studied.