LEASING BUSINESS

• What is financial leasing?
• Development of Financial Leasing Industry in China- History & Laws
• What is the “Measures for Administration of Financial Leasing Companies”?
• Existing Management System of Financial Leasing Company in China
• Recent Activities of Leasing Industry in China
• Why does Chinese government keen on promoting leasing?
• Industry Study - Aero-leasing in China
• Industry Study – Ship-leasing in China
• Industry Study – Healthcare equipment

What is financial leasing?

Financial leasing is a new type of leasing originated from U.S. nearly 40 years ago. It allows the lease provider to provide lessee with equipments they need and allow the lessee to “use” the above equipments by simply paying fixed installments, while the lease provider still retain the rights and ownerships of the equipments before end of the leasing contract.

From practical point of view, financial leasing is somehow very much similar to the bank loan and hire purchase; however, it makes really big difference in legal and accounting point of senses since the property right is retained by the lease provider (e.g. leasing company) and lessee have the right to use only. At the end of terms, the lessee can return the assets, buy –back for the preset amount or finance the option. Under the leasing arrangement, the corporations need not to provide any warranty and other entanglements that are usually associated with bank loan and hire purchase. Moreover, with less upfront cash outlay, the corporations can have better cash flow management and don’t have to make any big cash payments. For the lease providers, they can shift their risks since the lease contracts are consented based on the request and choice of lease .Meanwhile, the manufacturers and suppliers benefit greatly by greater sales volumes and less credit risks exposed to creditors.

Financial leasing has become the next-best and effective financing tool in the world. As financial leasing can effectively boost the sales of productive assets (e.g. equipments), there is also a strong connection between development of financial leasing and the rate of economic growth. In U.S., over 50% of the capitals investments are financed by financial leasing and it even overtake bank loans in the areas of automobiles, aircrafts and office equipments. Most of the leasing companies usually share common background of commercial banks and manufacturers and their presence usually positively influence the economic growth of the country.

 

 

Development of Financial Leasing Industry in China- History & Laws

As early as July 1982, the Chinese government already tried to defined the standards for ordinary leasing terms in Article 23 of “Economic Contract Law of People’s Republic of China” (中華人民共和國經濟合同法). Afterwards, the government had further given some practical regulatory guidelines & regulations in the “Laws of People’s Republic of China on Chinese-foreign Contractual Joint Ventures”(中華人民共和國經濟涉外合同法) and “Contract Laws of People’s Republic of China”(中華人民共和國合同法). During the period, a couple of local banks like Industrial & Commercial Bank of China (ICBC), Agricultural Bank of China(ABC), Bank of China (BOC), China Construction Bank (CCB) and other banks like China CITIC bank, Bank of Communications (BOCOM), China Investment Bank successively participated in the leasing market directly or indirectly. The improper business environment and inappropriate management forced the Chinese government to ban the commercial banks from taking part in the leasing business since the Asian financial Crisis in 1997.

In gaining membership in the WTO, the Chinese government undertook various commitments, including opening up China’s financial services industry to foreign companies. The government also wanted to diversify its financing channels available to small and medium sized enterprises. All these factors had driven China to re-initiate its efforts to promote financial leasing industry and the National People Congress had took up the responsibility of drafting process of a new comprehensive Leasing Laws.

The procedure to produce the Leasing Law began in 2004, with the formation of a legislation steering committee (“Steering Committee”) by the National People’s Congress. Subsequently, a working group was established to draft an outline of the Leasing Law and solicited comments from the local legislatures, government agencies, business leaders and experts from all over the country. In 2005, the official draft of the Leasing Law had been proposed to the Steering Committee and the Committee re-submitted it to the Finance and Economic Commission for second review. Since then, the international businessmen started exploring the potentials of the market and the market was opened up to single foreign investor since 2004. However, the low market acceptance level and the limited choices for leasing product still greatly hindered the development of the industry, thus the leasing market was unavoidably almost dominated by the foreign companies. Nevertheless, with China’s low penetration rate and high GDP growth rate, it is believed that China is still having huge potential in leasing market.

 

 

What is the “Measures for Administration of Financial Leasing Companies”?

The amended “Measures for Administration of Financial Leasing Companies” which came effective in 1st March 2007 allowed both local and overseas-incorporated commercial banks to set up financial leasing companies. The new regulations gave financial leasing a fresh opportunity to take root in the world’s fourth largest economy. It requested that only the banks, big leasing companies, established manufacturers and other authorized business entities can be eligible for being the “major shareholder” (e.g. more than 50% of the share holdings) in the leasing companies.

The banks should have been regarded as new-blood to energize the industry, meanwhile, the reinforcement of the proper supervision of industry created a better environment for the development of the industry. All of the above, the rejuvenation on financial leasing definitely has brought banking industry into a new era.

Regulatory Requirements for Leasing Companies
Summary from Amended “Measures for Administration of Financial Leasing Companies”

Existing Management System of Financial Leasing Company in China

In the regulatory area, China has a dual-system under which the leasing companies are under supervision of two different legal entities - China Banking Regulatory Commission (CBRC) and Ministry of Commerce (MOFCOM) now jointly conduct examination and approval rights for the leasing companies in China. The issues of “Measures for Administration of Financial Leasing Companies” and promulgated CBRC issued in 2000 (but revised in March 2007) and “Measures for Administration of Foreign Investment in the Leasing Industry” issued by the MOFCOM in February 2005 had initially provided an overview of the general regulatory regime for the financial leasing industry, the key changes introduced by CBRC Measures and major differences between financial leasing companies regulated by CBRC and MOFCOM.

Leasing Companies supervised by CBRC

There are a total of 12 financial leasing companies and some enterprise group financial companies and trust leasing companies regulated by CBRC by end of 2006. To rough estimation, the values of their leased assets would be around RMB 14.2 billion. These companies are regarded as financial

Leasing Companies supervised by MOFCOM

Up to 2007, more than 40 Sino-foreign joint ventures and a few solely foreign-funded financial leasing companies are regulated by MOFCOM. The values of their leased assets would be RMB 30 billion.

 

 

Recent Activities of Leasing Industry in China

Date	Events & Particulars
28 Dec 2007	China's biggest financial leasing company, a joint venture between China Construction Bank (CCB) and Bank of America, was officially established in Beijing. CCB has a 75.1% stake in the RMB 4.5 billions (US$616 millions) and Bank of America owns 24.9%.
28 Dec 2007	The Bank of Communications (BOCOM) Financial Leasing Company, with RMB 2 billions of registered capital, was set up in Shanghai.
28 Nov 2007	Industrial and Commercial Bank of China setup its financial leasing company in Shanghai, with registered capital of RMB 2 billions (US$266.89).
23 Oct 2007	China Merchants Bank (CMB) was given the green light to set up a solely funded financial leasing company, with a registered capital of 2 RMB billions (US$ 266.89).
15 Oct 2007	With jointly efforts with Royal Bank of Scotland, BNP Paribas and the Calyon Communications and Investment Bank, the Industrial and Commercial Bank of China (ICBC) provide debt financing for the purchase of 36 new planes by British Airways (BA). The orders were worth US$2 billion, which was regarded as the biggest leasing contract for BA in ten years and it was the first time Chinese banks taking a frontline position in the aero-leasing and debt structuring outside China and Hong Kong. It also indicated that Chinese bank firstly participated into the international leasing market.
11 Oct 2007	China Minsheng Banking Corporation Limited (CMBC), together with its partner Tianjin Free Trade Zone Investment Company got the approval to setup a joint venture of leasing company named Minsheng Financial & Leasing Company. The total investment of the new venture is RMB 3.2 billions (US$425 million).
25 Sep 2007	CIT Group announced opened Shanghai office to support its growing business in Asian countries including China, Korea, Malaysia and Singapore. CIT Group is managing assets worth US$81 billions. Whether through business financing, equipment financing or one of our many consumer financing products, it is our individual commitment to each of our clients that makes CIT a global leader. CIT Group is a Fortune 500 company and member of the S&P 500.
20 Jun 2007	Delong Holdings Limited (SGX:DELO), a Singapore-listed leasing company, has got the nod from the Chinese Ministry of Commerce (MOC) to set up a subsidiary in Tianjin Hi-tech Industrial Park. The registration capital is RMB 350 millions.
18 Dec 2006	Bank of China (BOC) acquired 100% of the issued share capital of Singapore Aircraft Leasing Enterprise Pte. Limited for US$965 million in cash. BOC has become the first bank in China to take equity stake in a leasing company since 1997.
20 Aug 2006	China Huarong Asset Management Corporation (中國華融資產管理公司) became a stockholder of a Zhejiang Financial Leasing Company (a local leasing company setup for 20 years) and held 99.71% of the stake. Afterwards, the leasing company renamed as Zhejiang Financial Leasing Company. This was regarded as the first merge and acquisition case in the local leasing industry.

 

 

Why does Chinese government keen on promoting leasing?

Advantages of Financial Leasing
China is a country of few per capita resources. Through leasing, it may save energy and resources and enable one variety of equipment to be used by several enterprises. Additionally, the equipments can be recycled as manufacturers can repair and renovate old equipment for after leasing contracts, which is also in line with the environmental protection policy of the government. Recently, the China government is heavily promoting a contractive monetary policy and financial leasing itself is totally in line with the prevailing macroclimate. Under the tightened monetary climate, the banks would inevitably tighten its credit lines and financial leasing would become the most effective use of financing.

In addition, the Chinese government would like to use this financial product to stimulate healthy economic growth since the national capital would be channeled to the creation of productivity and future incomes (GDP) under financial leasing. Particularly, it really serves the purpose of helping the small and medium corporations, especially for those with greatest difficulties in financing and hardest to provide any warranty for bank loans. These companies make up 99% of the total number of business enterprises, 60% of the total industrial productivity, 40% of the total tax incomes and 75% of the total employment.

Finally, China is encouraging the high-tech industry which is characterized by frequent replacement of equipment. Leasing would be a good choice for these companies since they need no warranty and little upfront cash for these purchases.

Rising Civil Aviation Market
What is more, the China’s civil aviation sector is expanding fast. Despite an aviation slump in the world, the prospects of China’s jet market are enormous.