Lessors eager to get a slice of China’s ever-expanding
equipment finance market. Claire Hack reports.
Go deeper with GlobalData
The
equipment finance market in China is one of the few across the
globe to remain a source of significant investment potential, as
the country’s seemingly unstoppable economic growth carries on in
the face of numerous setbacks.
China has been hit by growing
concerns over rising inflation, tightening monetary policy and
fears over unemployment, but continues to see GDP growth of about
10%.
Despite spreading debt crises
worldwide, China, like many of its far eastern counterparts, has
remained more or less immune to the continuing downturn.
Accounting for between 50% and 70%
of the world’s commodity consumption, its economy has continued to
flourish, albeit at a slightly slower pace in recent months as it
is faced with swelling inflation.
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By GlobalDataIt has, furthermore, more or less
completely avoided the knock-on effects of the latest crisis in
America and, as demand for development remains intact, so too does
demand for leasing.
As the world waited nervously for
US Federal Reserve chairman Ben Bernanke’s annual speech from
Jackson Hole, Wyoming, and the eurozone chaos remains unresolved,
it has been business as usual in China.
While market participants elsewhere were disappointed by
the lack of an announcement on a third round of US quantitative
easing, and no firm resolution has been made on sovereign debt in
Europe, the Chinese economy has seen only a ripple caused by these
issues.
“There has been no direct
consequence of the US or European debt crisis on the Chinese
leasing industry, which continues to grow rapidly,” says John Rees,
managing director of Société Générale Equipment Finance (SGEF) in
China.
Rees concedes, however, that
quantitative easing has had some impact on the Chinese market,
albeit incidentally.
“Indirectly, the quantitative
easing policies of the US have resulted in Chinese regulators
trying to control inflation caused by inflows of US capital into
China to take advantage of the countries higher interest rates and
currency appreciation,” he adds.
These measures, implemented by the
China Banking Regulatory Commission (CBRC), have in fact reduced
liquidity, Rees says, which has made funding for Chinese leasing
companies more difficult to find – but could increase the number of
people seeking asset finance arrangements.
Adrian Pang, managing director of
SME-focused CIT Vendor Finance, Asia, adds: “A future impact is
possible, especially in the Chinese export-oriented industries.
“It depends on how long the debt
crisis will continue and whether the Chinese government would
intercede again, like it did in 2009.”
In the meantime, the market in
China continues to grow swiftly, as investors rush in,
internationally and domestically.
CIT said new business volumes have
tripled in the first half of 2011 compared with the first half of
2010, despite a significant drop in total income to $17.6m (€12.3m)
from $326m over the same period.
“We have seen strong demand in
equipment acquisition and, as a result of liquidity constraints,
more liquid competitors have been able to grow faster,” Pang
says.
An overall picture for the
industry, however, is more difficult to come by, Rees adds, as
there is no single unifying body to represent it.
He says: “It is exceptionally
difficult to get accurate figures for the Chinese leasing industry,
as there are several industry associations.
“However, there is a general
acceptance that as a young and developing industry the leasing
volumes in China continue to grow year-on-year.
“The financial crisis in the
Western world has not changed this growth of the leasing industry
in China.”
The penetration rate of leasing
within capital expenditure in China remains low in comparison to
Western markets, Rees adds, but it is anticipated that major
expansion will continue.
“SGEF China has continued to
experience strong growth in business volumes from the first half of
2011 to the second half of 2011 and anticipates further growth in
2012,” Rees says.
Jason Zhou, a senior partner in
leasing consultancy The Alta Group’s Chinese operation, adds that
the company has grown its new business volumes by between 30% and
40%, although there are no firm figures for the industry.
“There are two drivers,” Zhou
says.
“First, the CBRC and the PBOC
(People’s Bank of China) have tightened funding, and there are more
needs for the ‘shadow banking system’ including the leasing
sector.
“Secondly, the CBRC is controlling
the funding from leasing companies which it regulates, which means
incremental funding in 2011 cannot exceed incremental funding in
2010.”
The shadow banking system to which
Zhou refers includes all forms of lending not commonly supplied by
China’s large state-owned banks.
Zhou, Rees and Pang all agree the
health care and machine tool segments have performed the best thus
far in 2011, as the country’s population continues to rise and
demand increases.
“IT leasing is not significant in
China as Chinese companies don’t yet perceive the benefits of
leasing IT equipment,” Rees says.
“Vehicle leasing is developing, but
there are many challenges to manage regarding this sector, such as
limitations on the issue of vehicle registration plates in
many
cities.”
Rees adds that SGEF has a strong
presence in the construction and printing sectors, thanks, in no
small part, to its global vendor relationships with manufacturers
within these areas.
The shipping segment, meanwhile,
has slowed down somewhat, owing to the current state of the global
economy, Pang says, as freight transport requirements diminish.
The nascent market has,
furthermore, been able to put down roots more or less unhindered,
as there have been few changes to legislation in China directly
affecting the leasing industry in recent years.
It is possible, however, that this
may change in the coming months and years, Rees says.
“There is constant speculation
about new leasing industry legislation but this is long
anticipated,” he adds.
“It does not seem a proactive
investment strategy to wait for such legislation before starting or
further developing leasing businesses in China.”
Prospects for the future look
favourable, moreover, as investors continue to flock to what is now
arguably one of the most robust leasing markets in the world.
“Local and foreign investors are
still entering the market. There has been little or no
consolidation in the market and few participants have left the
market,” Rees says.
“It would be a difficult strategy
to justify to shareholders to withdraw from one
of the world’s fastest growing leasing markets.”
Indeed, demonstrating China’s resistance to global economic
stresses, the largest influx of new participants into the leasing
market was during 2008 and 2009, at the height of the financial
crisis elsewhere.
Further expansion of the industry
is also predicted for 2012, Pang says, as foreign, domestic
independent and bank-affiliated leasing companies continue to enter
the market.
There is still room, however, for
already established players to increase their market share, as
demand remains high for alternative financing arrangements, he
adds.
“Although we don’t release
financial data for individual geographical markets and our 2012
plan is not yet finalised, we predict significant growth for
existing segments,” Pang says.
“Other growth drivers are new
segments [construction, software, etc] and new products [sales and
lease back]”.
This is not to say, however, that
the market has not faced difficulties during 2011, Alta Group’s
Zhou says, and especially for independent lessors.
“Funding sources are key challenges
for independent lessors in 2011,” he says.
“There are enough market needs, but
independent lessors cannot get funding if they are not affiliated
with large state-owned enterprises.”
Rees adds that the relative newness
of the Chinese leasing industry has been both a blessing and a
curse, leaving a dearth of specifically skilled leasing industry
experts, who would be employed to drive forward the expected growth
of the leasing companies.
“This means that HR considerations
are critical in growing a leasing business in China,” he says.
“Notwithstanding these challenges,
there are great rewards to be made from a well managed leasing
business in China.”
In terms of the Chinese leasing
industry’s involvement with other world markets, there has been
little to no cross-border trading as yet.
Rees attributes this fact to the
Chinese industry’s youth, as it is not yet as developed as it would
need to be in order to reach out internationally on a sustainable
basis.
But this, like many other areas of
the industry within the country, is changing, according to
Rees.
“The Chinese leasing industry is
still immature. The industry is starting to develop its contacts
with the leasing industry outside China,” he says.
“There is a nucleus of foreign
invested leasing companies in China including SGEF, De Lage Landen,
Deutsche Leasing and CIT, which ensure good contact between the
Chinese leasing industry and foreign markets.”
Rees adds that a number of captive
funders at Chinese manufacturers have started to develop their
leasing capabilities outside the country.
The CLBA – one of several industry
associations in China – has also begun working to develop its
relationships with industry associations outside China, including
the UK, the US and Australia, Rees says.
“The Chinese equipment leasing
market still needs several years to go to foreign markets, as it
normally follow sales of Chinese equipment,” Zhou adds.
“So far, it involves Europe, the US
and Australia, but will have more business in Latin America.”
But domestically, the industry will
be boosted by China’s higher-than-average GDP growth and, as in
many markets globally, Chinese manufacturers increasing investment
in higher value, newer manufacturing equipment to replace old and
obsolete items, cheaply and quickly.
“There are very low penetration
rates of leasing in capital equipment investment,” Rees says.
“The current Chinese regulations on
liquidity in China will have a continuing impact on the ability of
Chinese leasing companies to fund their growth.”
Tightening monetary policy, which
is expected to continue into 2012, will also mean, furthermore,
that those seeking financing will have to look to alternative means
in order to meet their expenditure needs.
“The liquidity policies of the
Chinese authorities are making funding harder for foreign invested
leasing companies to source, so a proactive treasury policy is
crucial for the future,” Rees says.
“The Chinese shadow banking system,
including leasing, will provide more funding to the economy than at
any time, as the banking system will maintain tight money supply
and the central bank will still control interest rates,” Zhou
adds.
“Chinese equipment investment will
still have double-digit growth, maybe over 20%, which will drive
the growth of new business, even if leasing penetration remains the
same.”
The equipment financing industry in
China is now at a stage, in Zhou’s opinion, where companies will be
able to transform their business models.
“[They will go] from production to
more service oriented, and finance and leasing will play a key
role,” he says.
Hopes remain high, moreover, for
continued growth within the Chinese leasing market into the third
and fourth quarters of 2011, as well as into 2012 and even
beyond.
“SGEF expects continued strong
growth in the second half of 2011 and into 2012,” Rees says. “As a
developing market, there remain strong opportunities for growth in
the Chinese leasing industry.
“With a GDP growth rate of about
10%, a growth in leasing volumes of 20% is not unachievable,” he
adds.
CIT’s Pang, however, was somewhat
more circumspect in his assessment of the future for the Chinese
equipment finance market.
“Lease growth may slow down a bit
due to the cooling down of the overall economy, while competitor
numbers will remain stable and pricing will be driven by
liquidity,” he says.
Finance leases, which currently
make up 98% of the market, will also continue to be the dominant
contract format, Pang adds, and penetration rates are also expected
to continue rising as the industry develops.
“We will still see a 30% to 40%
rise in new business growth in the second half of 2011, and even
for 2012,” Zhou says.
Although emerging markets have remained the star performers
within the global economy in recent months, much will nevertheless
depend on the Chinese ability to remain resistant to the economic
turmoil suffered by other large players.
