The Chinese Economy

ISSN: 1097-1475 (Print) 1558-0954 (Online) Journal homepage: http://www.tandfonline.com/loi/mces20

Leasing in China: An Overview

Yanping Shi & Xiaolan Xu

To cite this article: Yanping Shi & Xiaolan Xu (2015) Leasing in China: An Overview, The Chinese
Economy, 48:5, 312-329, DOI: 10.1080/10971475.2015.1067083

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 The Chinese Economy, 48: 312329, 2015
Copyright # Taylor & Francis Group, LLC
ISSN: 1097-1475 print/1558-0954 online
DOI: 10.1080/10971475.2015.1067083

Leasing in China: An Overview

Yanping Shi and Xiaolan Xu

Downloaded by [Xavier Labour Relations Institute (XLRI)] at 05:56 25 September 2017

School of International Trade and Economics, University of International Business and

Economics, Beijing, China

While it might have already been mature in developed economies, the leasing industry is still
emerging and rising in China. The Chinese leasing market witnessed a double-digit growth in the
last decade and still has potential to sustain this rapid growth in the next decade or beyond. This
article aims to provide an overview of this ever-growing Chinese market, covering the leasing
history, the importance to the Chinese economy and its on-going economic transition, and a
comprehensive introduction to the recent market structure, performance, and legal infrastructures of
the leasing industry. It is our view that although it has experienced a dramatic growth period, the
Chinese leasing market still has a huge potential in that its market penetration ratio is still at a very
low level, less than 5%. The article ends with a discussion of the opportunities and challenges for
this market. Despite these challenges, the Chinese leasing industry is stepping into its golden era, as
encouraged by the Chinese governments at both central and provincial level, to an unprecedented
extent, together with the establishment of a corporate credit information system.

Keywords: China, financial leasing, leasing, market review

INTRODUCTION

Although leasing is actually a very ancient transaction formthe earliest equipment leasing
was recorded in the ancient Samarian City of Ur in about 2010 B.C. (Nevitt & Fabbozi,
2000) modern leasing just started in the 1950s when the first leasing company, the United
States Leasing Corporation, was founded in the United States. From then on, the practice of
industrial leasing rapidly spread to Canada, the United Kingdom, Japan, and other markets.
According to the World Leasing Yearbook 2014, the leasing market penetration in the United
States has long been around 30%,1 which means nearly 30% of all equipment is acquired
through leasing arrangements. Thus, leasing obviously plays a significant role in the countrys
capital formation and economic growth. Also, in some other developed economies such as the
United Kingdom, Canada, and Australia, leasing market penetrations are all over 20%. Overall,
leasing becomes the most popular financing alternative in the developed economies and plays
an important role in the capital formation of these countries.
Why is leasing so popular around the globe? Its key benefit is to separate the legal ownership
of an asset from its economic use. In a leasing transaction, the lessor retains ownership of the

Address correspondence to Yanping Shi, #43, UIBE, 10 Huixin Dong Jie, Chaoyang, Beijing, 100029 China.
E-mail: shiyanping@uibe.edu.cn
Color versions of one or more of the figures in the article can be found online at www.tandfonline.com/mces.
 LEASING IN CHINA: AN OVERVIEW 313

leased assets during the entire contract period, and the leased asset is, therefore, inherent
collateral in such a contract. As a result, when entering into a leasing agreement, the lessor
is protected in two ways. First, he primarily relies on the lessees ability to pay the lease rents
by use of the leased asset (rather than rely on the lessees other assets or track record/credit his-
tory). In case of any default, he is entitled to the second protection: he can repossess the leased
asset (Eis & Lang, 2012). In this context, leasing enables lessees with limited credit histories or
collaterals to access the use of equipment whereas they might not be qualified as borrowers for
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traditional bank lending. Moreover, even if a borrower has access to traditional bank lending,
leasing can still offer a number of important advantages: leasing is convenient, flexible, less
time-consuming, and often tax-advantaged. Other advantages include preserving credit lines,
increasing ones purchasing power, providing fixed-rate financing, conserving working capital,
and so on. (Amemble, 1995).
Leasing can be more important to emerging economies compared to developed economies
because the insufficiency of capital goods investment and lack of financial resources are more
common among small- and medium-sized enterprises (SMEs) in these emerging economies. By
developing additional financial tools such as leasing, emerging economies are able to deepen
the financial activities by introducing new products and/or industry players. Having recognized
this fact, the International Finance Corporation (IFC) has been introducing, leading, and imple-
menting programs to develop leasing worldwide and, accordingly, has invested over 100 leasing
companies in 50 countries (Fletcher, Freeman, Sultanov, & Umarov, 2005).
Although leasing is becoming increasingly popular in emerging economies, according to
World Leasing Yearbook 2014, leasing penetration rates are still at a very low level, generally
less than 10%. From another perspective, the low penetration rates provide tremendous oppor-
tunities for developing leasing markets. Thus, in emerging markets, equipment leasing poten-
tially is a major business opportunity for international lessors (Halladay, Fales, & Triana, 2009).
Chinas leasing history dates back to the Zhou dynasty (1046256 BC). However, modern
financial leasing was introduced from the West as a financial innovation in the early 1980s after
implementation of Chinas reform and opening-up policy. Subsequently, Chinas leasing indus-
try experienced both ups and downs, but was not on the right track before the countrys entry
into the World Trade Organization (WTO) (Shi, 2005).
What has the WTO brought into the Chinese leasing industry? The answer is the concept of less
restrictions and more market freedom, and the better understanding toward leasing by Chinese
market players, regulators, and other stakeholders. Some major breakthroughs occurred after
China joined the WTO, for instance, reopening the leasing market to domestic enterprises in
2004,2 allowing commercial banks to engage in leasing businesses in 2007,3 and further encour-
aging foreign leasing investment via improvement of its legal environment.4 With these favorable
measures and policies, plus rapid economic growth, Chinas leasing industry has been experienc-
ing a surge in recent years. The World Leasing Yearbook states that China became the worlds
second largest leasing market in 2010 and will probably be the largest one in the next 5 to 10 years.
This article aims to provide an overview of the rapidly growing Chinese leasing industry.
Briefly, it presents the history of Chinas leasing market, which is followed by a demonstration
of the significance of leasing to Chinas economy. The next topic reviews the performance
of Chinas leasing market, followed by a discussion of market infrastructures for leasing.
The last two parts of this article discuss the opportunities and challenges faced by the Chinese
leasing industry.
 314 SHI AND XU

A BRIEF HISTORY OF CHINAS LEASING MARKET

Chinas first modern financial leasing company, China Eastern Leasing Company Ltd.a joint
Sino-Japan venturewas established in 1981 when Chinas reform and opening-up policy was
initiated. Compared to other industries, leasing had an early start and has long been one of two
innovative products in Chinas financial market other than bank loans (the other is trust) before
the financial reform initiated in the 1990s. This fact, on the one hand, has made leasing a very
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important window in Chinas reform and opening up process and provided Chinese enterprises
with knowledge of leasing at a very early stage. However, on the other hand, this fact has also
led to a lot of setbacks suffered by the leasing industry in the following years; when the leasing
industry was imported, the Chinese economy was a completely centrally planned economy
without adequate legal infrastructures in place for its sustainable development.
Thus, even though China had not opened its door to foreign banks during the 1980s, leasing
companies could be established as joint ventures with approval from the Peoples Bank of China
(PBOC). Many foreign financial groups or banks, mostly from Japan, took this advantage and
entered Chinas financial market. As a result, Chinas leasing transactions were branded with
a very strong financing nature at the very beginning. Many viewed leasing similar to lending.
At the early stage of its reform and opening-up, China urgently needed foreign capital and
advanced equipment to develop its economy, and so leasing was found as a suitable tool to
realize these goals. At that time, lots of leasing businesses were conducted in a way similar
as compensation trade, in which lessees can pay the rents using their products. Leasing had been
very successful and played a very important role in using foreign capitals during the 1980s:
about 1020% of the foreign capital in China was contributed by leasing projects at that time
(Shi, 2005).
Because most of the lessees were state-owned companies and many local governments
provided guarantees to leasing transactions as required by the lessors, lessors deemed leasing
businesses as low risk. Such a business model resulted in a rapid expansion of lease volumes,
but few lessors paid enough attention to asset management and risk management. Thus, many
transactions were established without careful evaluation. Moreover, because of a lack of super-
visory policies, many domestic lessors began to initiate high-risk investments other than their
main business, leasing. Thus, after a short-term boomwhen the political storm and the follow-
ing economic sanctions occurred during the late 1980s and early 1990smany lessees failed to
pay their rents, and lessors experienced severe liquidity problems. Many lessors found getting
protection from local governments, as they previously expected, difficult. Although the Chinese
government did eventually pay off a significant amount of debt owed to lessors in the early
1990s, many lessors still went out of business (Sha, 2007).
This notorious event resulted in a depression of the entire industry, and the government sus-
pended the issuance of leasing licenses for more than 10 years. In 1999, a leasing seminar was
held in China to discuss whether there were sound reasons for leasing to develop or even exist
in China. An American leasing expert, Sudhir Amembel, was invited to speak at the seminar.
This was a turning point for Chinas leasing industry. Chinese industry insiders began to realize
that leasing is far more than simply financing equipment. It also functions as a sales promotion
and investment stimulation; leasing could be more of an asset management tool than a financing
channel. With this in mind, the government, as well as many industry insiders and observers,
regained confidence that leasing would have a bright future in China.
 LEASING IN CHINA: AN OVERVIEW 315

Furthermore, Chinas entry into WTO stimulated and directly accelerated the recovery of
Chinas leasing industry because the leasing market was open to foreign investors with few
restrictions promised by China when joining the WTO. The government realized that the re-
opening of its leasing market to domestic enterprises and a better legislative environment are
necessary to help local enterprises get ready for fierce competitions from their foreign
competitors.
In 2004, the Ministry of Commerce (MOFCOM) made it clear that foreign investors could
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establish wholly foreign-owned leasing enterprises in China. Previously, the foreign investors
were only able to establish joint ventures. It was a major breakthrough, which attracted large
multinationals such as Caterpillar, GE Capital, and Siemens into the Chinese leasing market
in the same year. Meanwhile, the Chinese government opened the leasing market to domestic
investors with nine domestic pilot lessors licensed at the end of 2004. In 2007, the China Bank-
ing Regulatory Commission (CBRC) also opened the leasing market to local commercial banks.
Since then, the leasing industry has entered into a double-digit growth period in China with both
lessor numbers and lease volumes increasing dramatically each year. By the end of 2013,
Chinas lessor numbers increased to more than 1,000, the total leasing investment reached
RMB 828.613 bn, and the total leased assets reached 1,885.066 bn.5
Chinas pace of growth in the leasing industry can be seen from its global ranking over the
past five years: eighth position in 2008, fourth in 2009, and second (just after the U.S.) since
2010 (World Leasing Yearbook, 20092014).

SIGNIFICANCE OF THE LEASING INDUSTRY IN CHINAS CURRENT

ECONOMIC TRANSITION

Although China has experienced high growth in the past 30 years, its economy relies heavily on
infrastructure constructions, the real estate industry, and other energy-consuming, highly
pollutant industries. Furthermore, it currently faces a severe structural problem that impedes
its further development. Therefore, the Chinese government now urges an economic transform-
ation to meet these challenges, and it has come to this crucial moment to shift the enormous
Chinese economy from a state-controlled, investment-led growth model to a market-led,
consumption-based model while its economic growth is slowing down. Leasing is believed
to have the potential to boost Chinas economic reform and help to form a much healthier
economic structure for several important reasons.

Leasing Is Vital for the Development of SMEs in China

So far, Chinas financial resources have been highly concentrated to a few large-scale, and often
state-owned, groups and companies. It has been very difficult for SMEs to access affordable
financial resources such as bank lending. Also, it is almost impossible for SMEs to get finance
directly from capital markets, which are also dominated by state-owned commercial groups
and enterprises. While it is well known that SMEs are the backbone of an economy, Chinas
SMEs are still a minor part of the economy because of a lack of funding resources and other
supporting infrastructures.
 316 SHI AND XU

At the moment, theoretical research and international practice convey that financial leasing
has a natural complementation relationship with SMEs, that is, if lessors focus more on SMEs,
SMEs will have a better chance to access capital equipment (Gallardo, 1997; Oxford Economic,
2011). In turn, providing services to SMEs can lead to sustainable development of lessors
because the SME market is hardly a competition of bank lending and equipment lessors. With
a comparative advantage on risk management, lessors need not compete with commercial banks
in this area where the profit margin is generally higher than that of big businesses. Therefore,
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many industry veterans believe focusing on SMEs will form core competitiveness for lessors in
China. It is evidenced in the business practice that by targeting SMEs, such companies as
Jiangsu Financial Leasing Co., Ltd. and Far East International Leasing Co., Ltd. realized a sig-
nificantly rapid growth in recent years.

Leasing Has a Better Chance to Lead Capital Flow to the Real Economy, Being Vital
to Chinas On-Going Economic Transformation

Compared to other financial products, leasing has a better chance to support the real economy. It
can also be a perfect macroeconomic policy carrier if the government decides to provide pref-
erential treatments to a range of target industries.
Unlike bank lending, the leasing concept is based on the assumption that profits are gener-
ated by the lessee through the use of underlying assets, rather than through ownership. For leas-
ing transactions other than sale and leaseback (whereas sale and leaseback is similar to a bank
loan), there is no cash available to lessees, only assets. As such, the finance provided to lessees
is secured in the real economy, which is good for long-term economic development.
Moreover, combined with adequate tax policies, leasing can be a very good tool for the
macroeconomic control to boost specific industries or even the whole economy. The U.S. leas-
ing history provides strong evidence of the benefits of tax leasing to the economy.
Having realized this advantage, the Chinese government has put forth a great effort in
encouraging the countrys leasing industry, and a large number of favorable policies recently
have been promulgated both at the state and provincial levels.

LEASING MARKET REVIEW

Lessors

Lessors Differentiated by Administrations

In China, lessors can be divided into three categories based on different approval and supervision
systems: lessors approved and supervised by the China Banking Regulatory Commission (CBRC)
as nonbank financial institutions (lessor as NBFIs); foreign-invested lessors approved and super-
vised by MOFCOM and its authorized provincial-level commerce departments; and domestic
pilot lessors6 jointly licensed by MOFCOM and the State Administration of Taxation (SAT).
So far, there are 24 lessors as NBFIs in China, but they create more than 50% of the total
business volume. The remaining business volume is created by about 150 pilot lessors and
 LEASING IN CHINA: AN OVERVIEW 317

nearly 1,000 foreign-invested lessors. Foreign-invested lessors enjoy the lowest market entry
threshold, and so this number increases significantly each year. However, two thirds of them
are actually controlled by domestic investors because of regulatory arbitrages.

Lessors Differentiated by Sources of Investment

According to international practice, lessors can also be classified according to the different
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source of investment: bank lessors, captive lessors, and independent lessors.

Bank Lessors. In China, bank lessors can be invested by both international and domestic
banks. So far, there are 13 bank lessors in China invested by domestic banks (11 of these
are listed banks and the other 2 are the China Development Bank and Chengdu Rural Commer-
cial Bank). As NBFIs, these 13 domestic bank lessors are all licensed by and under the strict
supervision of the CBRC with very high registered capital (Table 1).
The foreign-invested bank lessors, as nonfinancial institutions licensed by MOFCOM, have
a much lower market access threshold than domestic bank lessors. Compared with the 13
domestic bank lessors, foreign-invested bank lessors have arbitraged great benefits from the
different administrations for the leasing industry. That is why no foreign banks have applied
with the CBRC to establish leasing enterprises as NBFIs until now, although China made the
commitment to open this market upon its entry into the WTO.

Captive Lessors. International practice has proved that leasing is a powerful promotional
strategy for manufacturers. Promoting sales through leasing not only enhances the competitive-
ness of their products, but also improve their customer loyalty.
After the Chinese government allowed for the establishment of wholly owned foreign leasing
enterprises in 2004, a number of captive lessors, invested by multinational manufacturers,
began to enter the Chinese leasing market. Enterprises such as Caterpillar (China) Financial
Leasing Company; IBM Leasing Company; Siemens Finance and Leasing Co., Ltd.; HP

TABLE 1
Chinas Domestic Bank Lessors (by August, 2014)

Year of Paid-in capital

Name Location Establishment (bn RMB)

ICBC Financial Leasing Co., Ltd. Tianjin 2007 8.00

CCB Financial Leasing Corporation Beijing 2007 4.5
Minsheng Financial Leasing Co., Ltd. Tianjin 2008 5.095
China Development Bank Financial Leasing Co., Ltd. Shenzhen 1984 8.00
Bank of Communications Financial Leasing Co., Ltd. Shanghai 2007 4.00
CMB Financial Leasing Co., Ltd. Shanghai 2008 4.00
China Everbright Bank Financial Leasing Co., Ltd. Wuhan 2010 0.80
Industrial Bank Financial Leasing Co., Ltd. Tianjin 2010 3.50
ABC Financial Leasing Co., Ltd. Shanghai 2010 2.00
Pudong Development Bank Financial Leasing Co., Ltd. Shanghai 2011 2.70
Huaxia Financial Leasing Co., Ltd. Kunming 2013 3.00
AB Leasing Co., Ltd. Tianjin 2013 1.00
Bank of Beijing Finance Leasing Company Beijing 2014 2.00
 318 SHI AND XU

Leasing Co., Ltd.; Hitachi Leasing (China) Co., Ltd.; and Ingersoll Rand (China) Investment
Co., Ltd. became major market players. Meanwhile, relying on the domestic equipment
manufacturing industry, local captive lessors have increasingly become stronger and have
significantly progressed in their international expansion to keep pace with the internationaliza-
tion strategy of their parent companies, such as Zoomlion and Sany.
In China, businesses of captive lessors are focused on large-size construction machinery,
medical and printing equipment, and so forth, with the construction machinery accounting
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for a majority part. At present, Chinas construction machinery is leading the world in both pro-
duction and sales volume. Among the total sales volume, 40% is realized by leasing.
Despite the rapid growth in business volume, some insiders express their concern about the
prospect of local captive lessors. Especially in recent years, some captive lessors blindly
increase their sales through leasing, which make their risk control ability and expertise question-
able. According to data from the China Construction Machinery Association, in 2012 the
default rate climbed to 2530%, and some captive construction machinery lessors suffered ser-
ious defaults from lessees. During the international financial crisis, the performance of captive
lessors showed that they were better off sharing gains and burdens with customers in the long
term, which is also their core competitive advantage. However, captive lessors have to always
think about how to form such advantages.

Independent Lessors. In addition to bank and captive lessors, a large number of

independent leasing companies characterized by their flexibility and professionalism also exist.
Currently, most of Chinese lessors are independent lessors, accounting for more than 70%, and
this quantity is increasing rapidly. Two independent lessors, International Far Eastern Leasing
Co., Ltd. and Tianjin Bohai Leasing Co., Ltd., are listed on stock markets.
Unlike their counterparts in the developed markets, Chinas independent lessors try hard to
be professional leasing service providers, but most of them confine their businesses to financial
leasing or sale-and-leaseback. Two key reasons account for their survival and rapid develop-
ment in China. On the one hand, Chinas financial industry has long been monopolized and,
therefore, has relatively high monopoly profits. As private capitals can hardly enter the financial
market, many come to the leasing market to contend for these monopoly profits. On the other
hand, for private enterprises or SMEs that can hardly obtain mainstream financing, such as bank
loans, the independent lessors are able to provide supplemental financial services. However, in
the long term, with the deepening reform of Chinas financial system and increased competition
among lessors, independent leasing companies will try to become the real professional leasing
service providers and the key strength in the leasing market.

Locations of Lessors

Shanghai, Tianjin, and Beijing have evolved into three major centers for leasing companies,
gathering more than half of the nations lessors, thanks to their superior financial environment
and talent advantages. More than 70% of the total leasing investment is contributed by lessors
located in these three areas. Furthermore, many policies for encouraging and supporting the
leasing business have been promulgated in the Zhongguancun National Innovation Demon-
stration Zone, Tianjin Dongjiang Bonded Port Area, and Shanghai Free Trade Zone to further
stimulate the development of leasing businesses. Shenzhen Qianhai is also becoming a new
 LEASING IN CHINA: AN OVERVIEW 319

center of lessors with its preferential policies on the leasing industry. Furthermore, many local
governments, including Wuhan, Ningbo, and Zhuhai, are trying hard to catch up. The leasing
business is booming countrywide.

Market Performance: Total Leasing Investment and Leasing Penetration Ratio

According to the statistics of the Financial Leasing Committee (FLC) of the China Bank
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Association, by the end of 2013, the total paid-in registered capital of lessors as NBFIs reached
RMB 73.95 bn. In 2013, their total leasing investment reached RMB 442.26 bn. Of the total
leasing investment volume, RMB 72.10 bn was conducted via finance leasing, accounting
for about 16%. As for the remaining partconsisting of domestic pilot lessors and foreign-
invested lessors the leasing investment reached RMB 386.35 bn in 2013, according to
MOFCOM data. Therefore, the total leasing investment of the Chinese leasing industry reached
around RMB 828.61 bn in 2013 (Figures 1 and 2; Table 2).
Thus, Chinas leasing penetration is still very low, compared with 1530% of leasing
penetration in the developed leasing markets. It shows that Chinas total investment in
equipment acquired by financial leasing is still insufficient. Moreover, in international
practices, only leasing regarded as movable assets are calculated in the total leasing investment.
In China, many so-called leasing transactions are, de facto, real estate mortgage loans in that
their underlying assets are real estate such as urban infrastructures and highways rather than
movable assets. Some international leasing experts estimate that about 35% of Chinese leasing
investments will be recorded onto the real estate industry, rather than the leasing industry.
Therefore, Chinas real leasing penetration and the ratio of the Chinese leasing investment
volume over GDP might be even lower. Chinas leasing market is far from mature and still
has a long way to go.

FIGURE 1 20082013 Overview of lessors as NBFIs. Unit: Billion RMB. Source: Statistics of FLC.
 320 SHI AND XU
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FIGURE 2 20082013 Profit indicators of lessors as NBFIs. Unit: Billion RMB. Source: Statistics of FLC.

Leased Assets

There have been no nationwide statistics regarding the distribution of leased assets until now.
However, a recent survey on Shanghai-based lessors conducted by Shanghai SLSE Research
Center (see Figure 3) provides a meaningful perspective in this area, as Shanghai represents
more than a third of national leasing businesses in volume.

Leasing Products

Although both number and business volume of lessors keep increasing, the simple finance lease
and sale-and-leaseback are still the two mainstream leasing products in the Chinese leasing

TABLE 2
Chinas Leasing Investment and Leasing Penetration in 20102013

Leasing investment Leasing Market Leasing

Year volume (RMB bn) Penetration (%) investment/GDP (%)

2013 828 4.75 1.46

2012 850 5.82 1.64
2011 600 4.97 1.27
2010 420 3.78 1.05

Notes: 1. In Chinas national statistics, there is only an item of the total investment in fixed assets, but no item of
total capital expenditures. However, its estimated by officers from National Bureau of Statistics of China that the total
capital expenditures account for about 40% of the total investment in fixed assets. According to such an estimation, the
total capital expenditures are about RMB 43,652.8 bn *0.4 RMB 17,461.1 bn, and the penetration ratio is calculated
accordingly. In 2013, Chinas GDP was RMB 56,884.5 bn according to National Bureau of Statistics of China. 2. Data
adjustment: the feedback of the World Leasing Yearbook, 2013 indicates that about 35% of Chinese leasing
investment volume shall be recorded onto the real estate industry, so we make similar estimates and adjustments here
accordingly.
 LEASING IN CHINA: AN OVERVIEW 321
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FIGURE 3 20132014 industry distribution rate of different lessors in Shanghai. Source: SLSE Research Center.

market. Notably, single aircraft and single ship special purpose vehicles (SPVs) have developed
rapidly in recent years, satisfying lessors needs of risk isolation.

The Operating Lease Has Not Become a Common Practice

In its initial stage, financial leasing was mainly in the form of a finance lease with the
development of leasing markets. Leasing products in the developed markets now focus more
on operating leases, which emphasize the lessors capability of asset management. Bank lessors
can also adopt such strategies as cooperating with asset management companies, insurance
companies, and other intermediary agencies.
Compared with what happened in the developed markets, Chinas financial leasing was
imported in the early 1980s, which enabled Chinese market players to know about some inter-
national practices when they entered the market. However, for the industry as a whole, under-
standing is far from enough. Furthermore, the corresponding institutions for the development of
leasing markets are far from adequate. Many inconsistences exist in relevant government poli-
cies. As such, three obvious characteristics have appeared in the current Chinese leasing market.
First, the majority of captive and independent lessors conduct their businesses mainly in the
form of the finance lease. Second, many bank lessors and independent lessors as nonbank
 322 SHI AND XU

financial institutions conduct their businesses mainly in the form of sale-and-leaseback. Third,
most of the current operating lease transactions are designed only to minimize the lessees debt
ratio, and lessors usually do not take on residual risks of the leased assets. More than a decade
ago, abuse of such transactions bankrupted Enron Company. Furthermore, changes to the inter-
national lease accounting standards are being planned. Nonetheless, the current lease accounting
standards in China still allow lessees to realize off-balance sheet transactions through operating
leases. Although its natural for enterprises to minimize their debt ratio by operating leases
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under the current legal system, the real problem is that in most of the so-called operating leases
in China, the residual risks of the leased assets are still borne by lessees rather than lessors. The
fact that most lessees under operating leases are state-owned enterprises shows that these are not
real operating leases. It is impossible for lessees to give up the ownership of assets upon
expiration of the lease term, and lessors have not taken on residual risks.
Overall, current leasing products in Chinas leasing market have not reflected the core
competitiveness of financial leasing, and real operating leases have not become a common
practice. From another view point, equipped with adequate infrastructures, the future of Chinese
financial leasing is quite promising.

Special Purpose Vehicles Develop Rapidly

Special purpose vehicles (SPVs), as an internationally accepted mode of large equipment

leasing, is mainly designed for purpose of risk isolation. For companies engaged in leasing
for aircraft or ships, an independent SPV can be set up for a single aircraft or ship according
to the leasing contract. This arrangement will enable lessors to manage and account for the sub-
ject matters separately. Through SPVs, companies not only enjoy preferential tax treatment in
free trade zones, but also can effectively isolate risks. Even if the SPV project company suffers
losses, it will not cause significant damage to parent companies. Thus, the leasing companys
competitiveness and anti-risk capability would improve accordingly.
In China, SPVs have been developing rapidly in the last 2 years. Tianjin Dongjiang Bonded
Port Area, Shanghai Comprehensive Bonded Zone, Beijing Tianzhu Bonded Area, and Ningbo
Bonded Port Area all issued policies encouraging the establishment of SPVs, among
which, Tianjin Dongjiang Bonded Port Area has become the largest center for single aircraft
and single ship projects. By the end of 2012, there were more than 300 single aircraft and
single ship companies in China, and 90% of them were registered in the Dongjiang Bonded
Port Area.

MARKET INFRASTRUCTURES FOR LEASING

Supervision

In China, any entity intending to conduct a leasing business must first be licensed, either by the
CBRC in accordance with Measures for the Administration of Lessors as NBFIs (the latest
version was published in March 2014), or by MOFCOM or authorized local commerce
departments in accordance with Measures for the Administration of Foreign Invested Leasing
Company (the latest version was published in March 2005). Domestic enterprises may also
 LEASING IN CHINA: AN OVERVIEW 323

apply for a license to be a pilot lessor as jointly licensed by MOFCOM and State Tax
Administration (STA) in accordance with a notice issued by the two authorities in 2004.
Measures for the Supervision of Financial Leasing Enterprises, published in October 2013
by MOFCOM, focuses on post-establishment operations of lessors, either foreign invested or
domestic pilot. It is a goal that a unified entry threshold can also be made to foreign-invested
lessors and domestic lessors in the near future to provide a level playing field for these lessors
and to eliminate the current unfairness and supervision arbitrages.
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Accounting

Overall Picture of Accounting Standards in China

In 1993, MOFCOM promulgated Accounting Standards for Enterprises, on the foundation of

which Accounting Standards for Enterprises No.15-Leases was issued in 2000. These standards
basically adopted categories and criteria used by International Accounting Standards No.17-
Leases. However, they were not accepted extensively because of low-level marketization in
the Chinese market at that time.
In February 2006, the Ministry of Finance promulgated new enterprise accounting standards
in line with international accounting standards, which are shown in Figure 4. These accounting
standards effectively listed companies and large enterprises beginning January 1, 2007. Fortu-
nately, after years of practice, the implementation of these accounting standards has produced
satisfactory results. In the new Enterprises Accounting Standards issued in 2007, accounting
standards for leases, in terms of content, were consistent with international accounting standards
and adjusted in accordance with the Chinese laws and regulations, as well as the realities of the
Chinese enterprises.

FIGURE 4 Current Chinese accounting standards system.

 324 SHI AND XU

Impacts of Proposed Modification of International Accounting Standard

The modification of international leasing accounting standards has drawn some attentions
from Chinas leasing industry. In particular, YanKai Qu, former Vice President of the Leasing
Working Committee of the Association of Foreign Invested Enterprises, takes the view that the
reform of the international accounting standards for leasing might be a good trend.
However, restricted by Chinas current legal system, its leasing market evaluation system
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and also the underdeveloped securities market, the used-equipment market in China is still
under development. Under such circumstances, if Chinese leasing accounting standards directly
converge with international standards, there will be some adverse effects on the growth of
Chinese financial leasing industry. Therefore, Qu suggests that we should make a prudent
decision on the timing and manner of the convergence of Chinas lease accounting standards
with international standards after a comprehensive assessment on the possible impact on
Chinas economic development.

Taxation

In China, a dual system of indirect taxes has been in place for many years. The business tax is
applicable to the service industry, and the value added tax (VAT) is applicable to sales of goods.
During this time, both the business tax and VAT were applicable to financial leasing transac-
tions. VAT is paid when the leased assets are purchased, and the business tax is paid by the lessor
when it receives rents from the lessee. The business tax rate of the licensed lessors is the same as
with the banking industry: the business tax will be paid by spreads, at the rate of 5%. However,
this situation is going to be completely changed by a reform, launched by the government
recently, to replace entirely the business tax with VAT for the services industry.
On January 1, 2012, the government commenced the reform with a pilot program in Shang-
hai for the modern service and transport sectors. Later, similar pilot reforms started in several
other cities and provinces including Beijing, Tianjin, Jiangsu, Zhejiang, and Guangdong. Since
August 2013, such pilot reforms extended throughout the country. The leasing industry was
included as part of the pilot reform, so that leases are now subject to VAT.
However, a number of problems and challenges were revealed by the pilot reform in the leas-
ing industry. In fact, a big problem occurred when the No. 37 tax policy (issued in May 2013)
required that the tax base of sales-and-leaseback transactions shall include the rent principal,
which was previously exempted. Many lessors stopped their sale-and-leaseback transactions
because of the change of tax policy. Luckily, after various consultations and communications
with the tax authorities by the leasing industry, this problem was solved by the end of 2013
when the Ministry of Finance and the State Tax Administration issued the No.106 policy
and repealed the No. 37 tax policy. No. 106 policy states that for sale-and-leaseback transac-
tions conducted by lessors legally established with registered capital of more than RMB 170
million, the VAT tax base shall not include the principal of the underlying equipment. There-
fore, the tax barrier regarding sale-and-leaseback transactions has been removed, and the new
No.106 policy has applied since August 2013.
Until now, the impact of the VAT on financial leasing has been a difficult task, confusing the
whole industry, and the complex regulatory regime of the industry makes this task even tougher.
 LEASING IN CHINA: AN OVERVIEW 325

How to make a tax policy truly reflect the financial and turnover nature of financial leasing,
while simultaneously facilitating the future development of the leasing industry, is still a
problem that policymakers and researchers need to address further.

Laws and Regulations Governing Leasing Transactions

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Until now, Chinese lawmakers have not promulgated a specific law on financial leasing, and
the most relevant laws and regulations with leasing transactions would be Chapter 14 of
1999 Contract Law, 2007 Property Law, and Interpretation on Issues of Application of Laws
with respect to Disputes on Financial Leasing Contracts (the Interpretation) made by the
Supreme Court of China, which went into effect on March 1, 2014.
Many argue that along with the rapid growth of Chinas leasing market, a leasing law will be
promulgated to protect the market players better and address many pending issues. Particularly,
for most leased assets, a lack of a registration system seriously damages the development of
leasing in China.
In 2007, the Property Law established the bona fide acquisition system. While the
fundamental features of financial leasing is separate from ownership and occupation of the
leased assets, such a bona fide acquisition system resulted in a disastrous impact on financial
leasing because of the lack of a corresponding legal systems, specifically, a competent regis-
tration system for the leased assets. In the most common case, the lessee may sell the leased
assets or mortgage such assets to financial institutions without the lessors knowledge or con-
sent, in order to refinance for themselves and, thus, seriously infringe upon the ownership of
the leasing company. According to statistics, ever since the implementation of the Property
Law, disputes of malicious disposal of the leased property by lessees have become the second
largest leasing dispute in court practice. If such disputes are submitted to courts, most courts
will support the bona fide third parties according to the bona fide acquisition system provided
in Article 106 of the Property Law. Thus, this situation is becoming a material operating risk
for lessors in China.
In international practice, the establishment of a bona fide acquisition system is usually
equipped with a set of registration systems for movable properties that enables the balance
of legal rights for both the real owners and third parties in good faith. However, in China
the system of bona fide acquisition was set up without a property registration system in place,
which is the most important cause of the related legal imbalances.
In 2009, the Credit Reference Center of Peoples Bank of China (the Credit Center) set up
the Financial Leasing Registration System based on the existing credit investigation system.
However, without adequate empowerment endowed by relevant laws and regulations, the Credit
Center is not a statutory registration body regarding the property rights related to the leased
assets. Hence, such registrations cannot establish a right for the general public to honor. There-
fore, it is very hard for the courts to validate such registrations.
Based on a large number of investigations and research, Tianjin has made a meaningful
attempt to solve the registration difficulty since the end of 2011 by issuing relevant local reg-
ulations governing leasing transactions. Tianjins method is basically as follows: as bona fide
third parties would be financial institutions under most circumstances, the problem can be
solved by imposing these financial institutions the duty for inquirying registration status as
 326 SHI AND XU

compliance requirements rather than duties stipulated by law. As such, the legal barriers are par-
tially overcome without breaking the provisions of the Property Law.
Tianjins attempt has positive practical significance in the current legal regime. However,
its limitations are also obvious. First, it only binds specific organizations such as banks and
nonbank financial institutions. Furthermore, it is only effective in the Tianjin area.
Therefore, some industry insiders recommend that the National Peoples Congress or the
State Council should legislate such issues by laws or regulations. A uniform registry system
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should be set up (if possible) to settle the encumbrances existing on movable assets in order
to solve disputes arising from the severance of possession and ownership of movable assets
(Shi & Xu, 2013).

OPPORTUNITIES IN THE CHINESE LEASING MARKET

The last decade has seen a 30-fold expansion in size of the Chinese leasing market. Doubtlessly,
this trend will last for a while, and the Chinese leasing industry currently is presenting some
major opportunities.

The Market Potential Is Huge

With the second largest economy in the world, a two-digit growth in fixed asset investment each
year, and a leasing penetration rate less than 5%, there is a lot of space for lessors to grow in
China. Also, there is a huge potential for leasing companies to help Chinas massive equipment
manufacturers export their equipment to the other countries.

The On-Going Economic Transition and Upgrade Provide Major Strategic

Opportunities for Leasing Industry

Through financing equipment, leasing provides financial services closely linked to a countrys
real economy. It can promote the use of advanced technologies and eliminate lagging production
capacities. Therefore, such a move can be one of the best tools to boost Chinas traditional manu-
facturing industries into more advanced, high-end upgrades. The unique nature of leasing makes it
possible for manufacturing to become the most prominent industry in this economic transition.

An Unprecedented Support From Both Central and Provincial Level

China is now fostering the leasing industry nationwide. Currently, the importance of leasing has
been constantly addressed at the central government level: In December 2013, the State Council
issued an opinion to boost aircraft leasing in China. In April 2014, the State Council pointed out
in its executive meeting that agricultural leasing is vital to foster the rural financial markets in
China. Guiding opinions of the State Council on accelerating the development of producer
services to promote industrial structure adjustment and upgrading,7 in which leasing is listed
as one of the priority industries for development. For the first time, leasing is recognized to
be of great importance to the Chinese economy at the central government level, an apparent
 LEASING IN CHINA: AN OVERVIEW 327

signal that the government will boost its development in China. Another favorable policy was
issued in September 2014 allowing eligible export goods in leasing transactions enjoying export
tax rebate policies. Also, the government allows for preferential treatment to be granted to leas-
ing companies established in areas such as the Tianjin Dongjiang Bonded Area, Shanghai Free
Trade Zone, and Shenzhen Qianhai Special Economic Zone.
In the meantime, many local governments across the country have rushed to put forward
favorable policies for leasing investment, such as preferential land or tax treatment and fiscal
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subsidies.

Better Social Awareness and Market Infrastructures

Along with the rapid expansion of the leasing industry, more people have become aware of
leasing in China. Increasingly, more enterprises are willing to consider leasing as one of their
financing approaches. Many of the impediments that once existed in the leasing industry have
been removed, and market infrastructures are improving during the development of leasing.
Although lots of improvements are yet to be made, a preliminary foundation for a sustainable
development of leasing has gradually been formed in China.

The Long-Lasting Lack of Credit Information Is About to End

One of the main barriers to the leasing development in China has been the inaccessibility of bor-
rowers historic credit data, which is vital for lessors to determine the risks of the underlying trans-
actions. In particular, insufficient credit information makes leasing to SMEs extremely difficult.
Fortunately, since October 1, 2014, this long-time problem has come to an end. An online
national public notice system of corporate credit information (http://gsxt.saic.gov.cn/) has been
established in accordance with the Provisional Regulations on Public Notice of Corporate
Information, which became effective on the same date. Accordingly, the public has free access
to the credit information of any particular enterprise nationwide. The newly introduced credit
information system should reduce the lending risks of SMEs, which are the traditional bread-
and-butter customers for lessors.

CHALLENGES FACED BY THE CHINESE LEASING MARKET

Of course, like any other developing market, the Chinese leasing market faces both opportu-
nities and challenges.

Chinas Economic Growth Is Slowing Down, Facing a Structural Transformation

The past high growth rate of the leasing industry was backed by the quickly developing macro-
economy, but Chinas economic growth is now slowing down. As we have pointed out, leasing
has the potential to take the risk and play a vital role in the countrys economic transition.
However, this is just the positive side of the story. On the negative side, the fact that the
 328 SHI AND XU

economic growth is slowing down and the fact that the economic transition are full of uncer-
tainties might increase default risks at the market; thus, big challenges are always faced by
the industry.

The Market Size Increases Dramatically but the Development Quality Is Still Low

Although Chinas leasing market is approaching a trillion-level in volume, the market is still in
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its infancy in quality. The sale-and-leaseback transactions are still dominant in the industry,
accounting for more than 60% of the volume. Because the sale-and-leaseback transaction is
similar to a bank loan, its dominance in the market shows that the core advantages of leasing
products as important asset finances and management tools have not been formed in a majority
of Chinese leasing companies. Thus, a sound foundation is lacking for sustainable development.
So Chinese lessors shall not be blinded with todays prosperity but shall always be forward-
looking and manage to build their own core advantages.

Lack of Qualified Personnel

Because the leasing industry has expanded too quickly in the last few years, a huge lack of
qualified personnel for the industry exists. For example, in a recent survey by the Shanghai
Leasing Association, 75% of Shanghai-based lessors complain that insufficient staffing has
been a major obstacle to their operations. Many newly established leasing companies cannot
even start their operations simply because they cannot recruit qualified people for the right jobs.
This situation can be even worse in less developed areas.

Insufficient Funding Sources Faced by Chinese Lessors

Because the Chinese financial market is still underdeveloped, funding sources for lessors are
very limited in China. While lessors in more developed financial markets enjoy the benefits
of lower costs, more sustainable funds from the capital markets, Chinese lessors only have
two major sources: bank loans and self-funding. Other sources are either too costly or inaccess-
ible. The overreliance on bank loans and money markets results in a massive maturity mis-
match. This problem and the inability to raise funds in capital markets are severe constraints
for long-term development.
New funding channels, such as factoring and leasing asset securitization and stock IPOs, are
gradually becoming available to Chinese lessors, thanks to the deepening reform of Chinas
financial market. However, China still a long way to go.
In summary, in the Chinese leasing market, the challenges often contain opportunities. Hav-
ing recognized these challenges, the market players and stakeholders are proactive in removing
barriers, which is a major step forward for a healthy expansion of the Chinese leasing industry.

FUNDING

This work was supported by the The co-author, Xiaolan Xu, acknowledges the financial support
from the 2014 Joint PhD Funding Program as sponsored by the Graduate School of UIBE.
 LEASING IN CHINA: AN OVERVIEW 329

NOTES

1. According to World Leasing Yearbook 2014, the U.S. leasing market penetration was around 30% from 1993
to 2007, but decreased sharply in 2008 because of the financial crisis. Its market penetration recovered to 22% in 2012
and hopefully will continue to recover in the following years.
2. Upon issuance of Notice of the Ministry of Commerce and the State Administration of Taxation on Relevant
Issues Concerning Leasing Business on October 22, 2004.
3. Upon effectuation of Administrative Measures on Leasing Companies as Non-Bank Financial Institutions by
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China Banking Regulatory Commission on March 1, 2007, and these measures were amended on March 13, 2014, to
adapt to the rapid changes that occurred in the market.
4. Upon effectuation of Administrative Measures on Foreign Investment in the Leasing Industry on March 5,
2005.
5. Data comes from the Ministry of Commerce and China Banking Regulatory Committee.
6. The pilot lessors can only be licensed among existing enterprises having relevant businesses.
7. GUOFA [2014] No. 26.

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