The pace of economic growth may have slowed, but its relative immaturity leaves plenty of scope for continued expansion of leasing in China, writes Paul Golden
China’s government is undoubtedly keen to promote the leasing industry.
Go deeper with GlobalData
The Ministry of Commerce’s official guidance on promoting the development of the industry during the country’s 12th five-year plan period (2011-15) refers to leasing as playing an outstanding role in the attraction of foreign investment and support of the technical improvement of domestic enterprises.
This commitment appears to be having the desired effect. Société Générale Equipment Finance (SGEF) points out that the industry turned over CNY1.55trn (194bn) compared to CNY930bn in 2011.
Siemens Finance and Leasing China (Siemens FL) observes the market penetration rate exceeded 5% by the end of last year, while CIT Vendor Finance points to an 8.6% increase in the leasing portfolio share of foreign-owned companies in the first three months of 2013 (figures from the China Leasing Alliance).
China ranked second
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThe 2012 White Clarke Group Global Leasing Report ranks China second only to the US in terms of international markets. But that is not to say that the industry doesn’t face challenges.
Christian De Pastre, managing director SGEF Greater China, says the slowdown in economic growth in 2012 affected some industrial segments, such as construction, and that the overall quality of the customer portfolio has probably decreased due
to liquidity issues, causing increasing delinquency rates and overdue payments, specifically among SMEs and individuals.
According to Adrian Pang, managing director CIT Vendor Finance Asia, issues around proper risk management and leasing property registration are top of the agenda for the Chinese government, which continues to take measures to strengthen supervision of the industry.
"Issues affecting the market include VAT reform, funding source diversification (such as asset securitisation) and regulation," Pang says.
Chris Person, White Clarke Group Asia-Pacific chief executive, highlights undeveloped leasing regulation as a particularly pressing issue alongside the lack of properly-audited company accounts and credit references, problems getting title to assets and increasing defaults.
"[These factors] can ratchet up the risk level in a market which is only beginning to understand the opportunities that leasing can present as a financial instrument," Person says.
However, he adds that government policy to restrict access to credit lending as part of its inflationary control measures is opening the doors to the leasing market and for leasing companies to offer new funding opportunities in an expanding economy.
"Government incentives are encouraging leasing companies to develop activities in aircraft, shipping, power generation, construction, renewable energy and equipment sales, among others," he says.
Siemens FL general manager, Yang Gang, observes that the number of leasing companies active in the market increased by 90% last year and is confident that double-digit growth can be sustained over the next five years.
"In addition to the Ministry of Commerce’s support, provincial and municipal governments have issued various preferential policies, such as simplifying the application process and offering preferential income tax treatment for leasing," says Gang.
Banks’ market domination
Of the 560 leasing companies in China, China Leasing Alliance data indicates that around 20 are owned by banks, which contributed to approximately 40% of earning assets in 2012.
The remainder of the market was split between local lessors (which accounted for around 35%) and foreign lessors, with captives especially dominant in the construction equipment market.
"Local governments, such as Tianjin and Shanghai, are very interested in attracting foreign investors that can demonstrate a strong industrial background and a deep knowledge of the leasing industry," adds Gang.
"The Ministry of Commerce provides particular support for foreign-owned leasing companies during the company set-up phase, which simplifies the approval process and the requirements placed upon the investor."
He describes the performance of foreign leasing companies in China as being dependent on the companies’ strategy in chosen market segments, risk approach and operational expertise rather than any regulatory restrictions.
Gang says: "Given the low penetration rate and increasing awareness of financial leasing, the market has a very positive outlook. Many local or regional players are rushing in.
"Competition has increased in the last two years, as some of the domestic companies and local operations of experienced global lessors are showing positive growth and quickly establishing a strong footprint in the market."
SGEF’s De Pastre says the central bank’s strategy of continuing to relax its policy – combined with both national and regional bodies introducing incentives for leasing companies – were key factors in the number of new market entrants in 2012.
When asked whether there is any difference in the way domestic and foreign-owned firms are treated, he suggests that the difference is more between non-bank financial institutions regulated by the China Banking Regulatory Commission (CBRC) and other leasing companies regulated by the Ministry of Commerce.
"Generally, foreign-owned leasing firms operated well in China in 2012, but their market share was far behind domestic firms.
"The challenges foreign-owned firms faced were liquidity issues, imperfect law (ownership title of the equipment, vehicle registration and tax issues) and immature customer credit information systems."
De Pastre adds that the increase of outstandings for foreign-owned leasing firms was lower than the other categories, which could be explained by that fact that a lot of foreign investors are setting up companies in mainland China to prepare for the future but do not activate them immediately, and that they are also more focused on SME financing with smaller average amounts.
"China’s financial leasing market penetration rate is only 5%, while this number in European and US markets is around 20% to 30%," says De Pastre. "In terms of the international horizontal comparison and the economic growth of China as the world’s second
largest economy, its financial leasing industry has huge space for development.
"This is the reason why the leasing figures were so fast-growing over the last few years. Nevertheless, there are still some significant challenges," De Pastre says.
Winston Xu, country manager for De Lage Landen China, identifies a number of near and medium-term challenges for the equipment and automotive leasing markets in China, including:
- Lack of leasing law to support leasing activities;
- Limited credit information on individuals or small to medium-sized businesses;
- Different local practices in different areas of China;
- Over-competition from 600-plus leasing companies;
- The steady slowing down of China’s economic growth.
"China is a big country and obtaining accurate credit references can be difficult for standard leasing companies," says Xu.
"We have addressed this by operating on a vendor model, which enables us to leverage the support of our vendor partners for information about their customers."
When asked to quantify the extent of the problem of lenders obtaining title to an asset, Xu acknowledges that it varies by equipment sector due to different local policies.
"We balance this by focusing on selected industry sectors. For example, the majority of our business in China is in the health care sector, where our partnership with Philips Medical has been significant.
Public hospitals are exempt from buying or selling second-hand equipment, hence we are less subject to this issue."
CIT’s Pang also credits the government with encouraged financial innovation while advancing financial reforms and realising financial modernisation.
"In recent years, central and regional governments have promulgated a series of favourable policies for the leasing industry that have been aimed at solving the financing problems of small and medium-sized enterprises and serving the real economy as well.
"Among them are tax refund policies and lowering the requirement of registered capital so as to encourage the creation of domestic-owned leasing companies."
Licences
There are two government offices – the Ministry of Commerce and the CBRC – that can issue business licences to leasing companies. A leasing company with a Ministry of Commerce licence is not treated as a financial institution in China, although the first joint venture was established as long ago as 1981.
As of today, there are 21 leasing companies with a CBRC licence, none of which are foreign-owned even after some local governments lifted restrictions on foreign ownership in January 2012.
"The permitted business scope of foreign-owned leasing companies is narrower than for domestic-owned companies," says Pang.
"Foreign-owned companies can only lease movable property, transportation and relevant intangible assets (such as software, technology etc.), while the domestic-owned leasing companies can lease immovable property.
"In addition, bank-owned [foreign] leasing companies are licensed by the CBRC and monitored more closely by the Chinese government given their financial institution nature.
"On the other hand, they are able to access the public credit information system and operate other financial businesses, such as inter-bank lending and bond issuances. Non-bank-owned foreign leasing companies are licensed by the Ministry of Commerce."
Largest joint venture
In early April, China Daily reported that the largest financial leasing joint venture to be based in China had commenced operations.
Shanghai Yufeng Financial Leasing Co has $30m (23m) in registered capital and has obtained approval from the Shanghai Municipal Commission of Commerce to provide financing for projects involving large machinery and equipment, high-end goods such as sports cars and luxury yachts and chemical products.
The new venture is targeting small and medium-sized companies and Shanghai Yufeng Financial Leasing Co’s chief executive He Jie says it hopes to provide finance to a range of businesses including Dalian Renewable Resources Exchange, Guangdong Evergain Chemical Co, Furi Group, Time Leader Co and German firm Advanced Superconductors.
On the question of whether there are still opportunities for European leasing firms to expand into China, Pang points out that while over the past two decades the leasing market in China has gone through significant growth both in terms of sales volume as well as the number of leasing companies entering the market, "penetration is relatively low and the leasing product structure and service is relatively simple so there are still opportunities for foreign-owned leasing firms in China."
"As for whether Chinese leasing companies could become major players in Europe in the future, they will have to develop business on a global scale.
"However, as it relates to product development capability, understanding foreign markets and regulations, risk management and the diversification of funding sources, the gap between Chinese and Western leasing remains."
Siemens FL’s Gang says the interest of Chinese leasing companies in entering the European market is increasing, but that immediate direct entry is unlikely. He reckons acquisition of, or co-operation with, existing European players might be a preferred option to obtain the required expertise and experience.
In the short term, Chinese leasing companies will not be major players in Europe, concludes De Pastre: "They might currently lack people who are familiar with international markets, although it is very likely that the main Chinese manufacturers will set up captive leasing companies to support their sales in Europe."
Given the likely growth of their domestic market, it’s possible that international aspirations could be put on hold.
De Pastre says: "Despite the Chinese GDP growth slowdown in 2012 and expectations of around 7.5% to 8% growth in 2013 and onwards, it’s expected that the scale of the overall leasing industry in China will exceed CNY10trn in 2020, with CAGR of about 30% and a leasing penetration rate in excess of 10%."
The reality is that there are many other places that European bank leasing companies would be more comfortable investing and this lack of understanding is potentially an even more significant factor than capital constraints, says IAA-Advisory chairman Derek Soper.
"Also, leasing is not yet a mature market in China – it is still growing very rapidly," he says.
Soper reckons there’s no chance of any European leasing company investing in China unless it’s a captive. "Manufacturer-backed lessors are more likely to look at this market. One of the most successful captives in China is Caterpillar, which is particularly good at applying its business model (which is fairly standard across the world) in new markets," he says.
While Chinese leasing companies have money to invest internationally, Soper is not convinced that they will be spending it on European leasing acquisitions in the near future.
"They have looked at this market, but right now they don’t see the returns in leasing that other investment opportunities (such as property) offer.
They will become international players eventually, but they will first want to address the huge growth in their own market."
