Regulatory hurdles hamper fledgling lease financing

作者：CHEN YAO

 (Business Weekly 07/08/2003) 

    The Beijing Olympics might boost China's fledgling lease-financing industry, but the sector's sustainable development hinges on the removal of more regulatory hurdles.

    The central government will spend more than 100 billion yuan (US$12.10 billion) to build infrastructure for the Games, which will be held in 2008, experts predict.

    "About 20 billion yuan (US$2.41 billion) will go directly into the leasing industry," predicted Yu Xiaomei, vice-president of Beijing Leasing Industry Association.

    "This will significantly enhance lessors' profitability and enlarge their scales of business."

    China's lease-financing companies have watched their revenues dwindle over the past three years since the People's Bank of China (PBOC), China's central bank, tightened its grip on the sector.

    Lease financing - an important channel for paying for Olympic projects - will save the government an enormous amount of money, and, therefore, will likely win the government's support, Yu said.

    "The leasing industry looks insignificant compared with China's overall financial sector, in terms of assets and in terms of business turnover," said Sha Quan, a lease expert with First China Leasing Industry Forum.

    The country's lease-financing companies represent less than 1 per cent of assets owned by all financial institutions, a PBOC report indicates.

    "China's lease-financing sector is far less developed compared with those in western countries," said Shi Yanping, chairman of the Leasing Research Centre affiliated with the University of International Business and Economics (UIBE).

    Shi is also a senior researcher with the Lease Committee of China Association of Enterprises with Foreign Investment.

    In more mature western markets, lease financing contributes more than 20 per cent of their gross domestic product, and about 30 per cent of their total sales. Lease financing has become the second-most important financing channel in international markets, after bank loans.

    "Lease financing in China is usually seen as being equivalent to bank loans," Shi said. "But this perception is fundamentally wrong."

    The lease-financing sector is booming internationally because it has certain advantages over other means of financing, Shi said.

    Lease financing entitles the client, or lessee, to use the purchased item at once, but pay for the item over time. It is like paying rent, with interest, according to the leasing provisions. Upon expiration of the leasing period, ownership of the item usually transfer to the lessee.

    For lessees, as the property is "rented" instead of "sold" to them within the contract period, their use of the property will not affect their balance sheets.

    This advantage is most attractive to lessees who face certain accounting book restrictions, Shi said.

    Another advantage is lease financing can be bundled with various products and sold as a whole package to designated clients, Shi said. 

    In this way, manufacturers often establish lease finance companies as subsidiaries. These subsidiaries have greatly improved firms' sales and expanded their leasing businesses, Shi said.

    The world's largest airplane manufacturer, Boeing, and personal computer giant IBM either have their own lease-financing businesses or have established good relationships with lease finance companies to boost sales.

    Lease-financing business, despite their advantages, are not well developed in China.

    One reason is regulatory hurdles hamper the sector, experts suggest.

    "The current threshold for doing lease-financing business in China is comparatively too high," Shi said.

    "Regulators should consider reducing it to a more acceptable level."

    PBOC in 2002 enacted a regulation to tighten supervision of the sector, and established a minimum 500-million-yuan (US$60.42-million) registered capital threshold.

    Only 12 Chinese lease-financing companies have secured licences to conduct business, while another 30 have reportedly filed applications.

    Although China has allowed foreign lessors to enter its immature lease-financing market, none has acquired a licence.

Experts argue the 500-million-yuan capital threshold is too high, even for foreign giants.

    "The threshold should be reduced for foreigners, say, by US$20 million," Sha said.

    "A more acceptable level would be US$40 million or less.

    "This would bring international experience to China and strengthen the sector's corporate governance."

    Lease financing was first introduced to China in the early 1980s, initially for the purchase of aircraft.

    The country's ambitious plans to modernize infrastructure, equipment and technology resulted in enormous demand for financing.

    China's lease-financing industry enjoyed a short-lived boom in the early 1990s, when foreign lessors established a handful of joint ventures with Chinese partners.