China cleared triangular debt by seeding cash through chains

By 1991, Chinese state-owned enterprises were caught in a nationwide web of unpaid inter-company debt known as '三角债' (triangular debt): factory A owed factory B, which owed factory C, which owed a supplier further down the same chain, in loops with no clear start or end. By some estimates the total had grown to roughly a third of the entire banking system's outstanding credit, freezing production at plants that had built and shipped goods but still couldn't get paid, because the money owed to them was itself tied up several links further down the chain.

The intuitive fix is to mediate: bring two firms together, negotiate a settlement, move to the next pair. But every pairwise settlement only worked if the firm being paid could then use that money to pay whoever it owed in turn — and with thousands of enterprises and hundreds of billions of yuan involved, no negotiator could realistically trace, let alone coordinate, every chain link at once.

Injected bank loans into firms at the start of tangled chains with a rule to pass cash on quickly, letting the cascade clear debts link by link without mediation.

A single injection cascades through multiple links, clearing several debts at once.

The pass-through rule forces the cash to move, preventing it from being absorbed as working capital.

Targeting the most tangled chains ensures the injection unblocks the actual bottleneck.

The multiplier effect (3-5x) shows the network untangles itself efficiently.

When many parties owe each other in a chain, inject liquidity at strategic points with a pass-through rule instead of mediating each pair.

Over 1991 and 1992, the campaign injected roughly ¥55.5 billion of funds, most of it bank loans, and cleared approximately ¥219 billion of overdue payments nationwide — each yuan injected clearing on the order of three to five yuan of debt as it cascaded down the chain, since a single injection could close several links at once. Combined with a similar earlier round in 1990 that cleared more than ¥160 billion, the campaigns together unwound hundreds of billions of yuan of frozen inter-enterprise debt across the early 1990s.