Knocking Down (Great) Walls
A Q&A on the Latest Developments in the Chinese Equipment Financing Market
Featuring the thoughts of Jonathan L. Fales and Jason Zhou
What impact has the world credit crisis had, if any, on China’s economy?
In response to the world credit crisis and desire to keep the Chinese economy strong, China’s government approved a $586 billion domestic stimulus package in late 2008, with funds to be allocated over the next few years. Most of the funds are targeted toward infrastructure projects, which are creating large funding opportunities for equipment finance companies there.
Has China’s equipment finance industry grown significantly during this time? What have been the driving factors?
At the end of last year, lease originations in China reached RMB 125 billion (US $19 billion). For 2009, current estimates put lease originations at RMB 210 billion (US $31 billion), which include bank-affiliated leasing company originations of RMB 100 billion (US $15 billion).
Part of the growth is a result of the expansion of vendor finance programs. Some of the larger manufacturers that have established leasing programs in China include Caterpillar, Cisco, GE, Hewlett-Packard, IBM, Hitachi and Doosan.
Large-ticket financing transactions have grown rapidly. Multinational and Chinese lessors have both financed equipment used in China’s infrastructure and transportation expansion campaign. The aircraft sector in particular has received attention from lessors. Some airplane manufacturers estimate China may order more than 2,800 aircraft over the next 20 years.
Another significant development in this area is the launch of several captive finance programs owned and operated by Chinese manufacturers. Equipment providers in the construction, power generation and transportation industries, among others, have created their own captive subsidiaries in China. It also should be noted that several captives also have plans in the next few years to support their parent companies in international markets.
Healthcare equipment financing in China is still in the early-growth stage for international lessors. Companies such as GE and Siemens have set up their presence in China, but, business volumes are low. Domestic Chinese leasing companies that specialize in healthcare equipment leasing have established a dominant presence in the China market through their intimate knowledge both of the market and of their end users. So in the healthcare sector, the main players are still the domestic companies.
Have China’s banks helped drive this growth in the equipment finance industry?
Absolutely. Over the past couple of years, six large Chinese banks have obtained leasing licenses from the China Bank Regulatory Commission (CBRC). Their combined paid-in capital totals more than RMB 27.2 billion (US $4 billion). There is a long waiting list for banks that are applying for their leasing licenses. News reports say the CBRC is planning to add ten banks within the next two years. However, the CBRC is trying to limit the speed of issuing new licenses. The first six bank lessors are acting as a test pool to test the system. In the foreseeable future, banks that have nationwide operation licenses and are in good standing regarding capital capacity under the new Basel II accord are likely to be approved.
Has the availability of credit information improved in China over the past few years?
Reliable credit information is still difficult to obtain and this is arguably the biggest reason the small and medium-sized business sector in China remains largely unpenetrated by lease finance companies. Many credit decisions must still be made by manual research and this makes the SMB market uncompetitive from an expense perspective for most Western lessors. Growth in this sector could come soon, however, for the large Chinese banks do have significant data on SMB companies and experience in extending credit to many of them.
What is the status of legislation in China to help regulate leasing operations?
Leasing legislation designed to authorize, regulate and govern lease finance operations in China – originally slated for approval by the National People’s Congress in 2006 – has not yet been passed into law. The key issue delaying this appears to be that the NPC does not recognize the necessity of the law; given there already are both an existing property law and a contract law that cover some of the same issues as the proposed leasing law. For many Western lessors, this delay means tax incentives for manufacturers may not pass automatically to lessors. Also, certain funding options for nonbank lessors, such as the issuance of corporate bonds, aren’t available until the legislation passes. In addition, the repossession rights of lessors also are still murky.
Are operating leases gaining popularity in China?
Operating leases are quite desirable in China. A lot of customers request this form of financing. However, there are a lot of problems within the actual procedure. This is due in large part to the misperception that a five percent business tax is applied to the entire amount of operating lease payments. Actually, the tax only applies to the interest portion of capital lease payments, and to the imputed interest portion of operating lease payments; there are discrepancies when it comes to the actual practice at the local level. Chinese leasing associations and the CBRC are lobbying the state and local administration of taxation for a more standardized and better-understood process.
As the market has grown in China, has the pool of available talent in the industry done the same?
Experienced leasing personnel still are in scarce supply in China. Just like it was in the United States in the early days of the industry, most of the employees of Chinese leasing companies have only a few years of experience. It’s better than it was five years ago, but finding qualified and experienced leasing staff is still a major concern for most lessors.
Jonathan L. Fales is a principal in The Alta Group, while Jason Zhou is managing principal of The Alta Group in the Great China region.
