China is rapidly becoming one
of the world’s largest asset finance markets. Yet while there are
numerous opportunities for money-making, it still has its
challenges. Antonio Fabrizio reports.
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Despite enduring the world’s largest recession since the
end of the World War II, last year China’s GDP grew by 8.7%,
according to the Chinese National Bureau of Statistics. Experts are
already predicting that growth will bounce back to its usual
double-digits this year.
Last year’s expansion was spurred up by a
massive stimulus programme of CNY4trn (€438bn), which included
government investments in infrastructural projects, as well as
funds for industrial restructuring, scientific innovation and
support to the country’s SME base.
All this has meant that, despite the global
downturn, China has become a fertile ground for leasing companies
to flourish.
Domestic lessors (subsidiaries of major banks
such as China Merchant Bank, Industrial and Commercial Bank, and
China Construction Bank) and adventurous foreign-owned lessors have
rapidly developed over the last few years.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataAccording to the Leasing Business Committee of
China Association of Enterprises with Foreign Investment (CAEFI),
there were more than 160 leasing companies in China at the end of
2009 – of which 110 were foreign-invested ones approved by the
Ministry of Commerce.
Last year, total new business volume amounted
to almost CNY300bn. CAEFI estimates that over the next three years,
the number of lessors could rise to 1,000, with a total annual
business volume of at least CNY600bn.
European arrivals
The number of European leasing
companies opening Chinese businesses has risen rapidly since 2005.
Largely they have been helped along by several key legislative
improvements.
Siemens Financial Services (SFS) was granted a
leasing licence by the MOC in November 2004, becoming one of the
first wholly-owned European lessors in the Chinese financial
services sector.
It has since traded as Siemens Finance and
Leasing Ltd (SFLL), and now has offices or representatives in
Beijing and five other cities, and a staff of nearly 60 people. A
year ago it employed 50 staff.
Other European lessors include Deutsche
Leasing, De Lage Landen, SG Equipment Finance, Royal Bank of
Scotland (with its ABN Amro Leasing China), BNP Paribas Lease Group
(BPLG) and a number of major captives.
Preferred route to market
Most European lessors have opened
offices after their vendor partners have done so. They have
benefitted from the fact that local Chinese leasing companies are
more focused on end-users than on vendor finance.
For example, DLL, which has been in the market
since 2006, has been primarily involved in supporting global
manufacturers already partnered with DLL elsewhere.
A DLL spokesperson said: “We have been very
successful. For two vendors, the China programme managed by us has
become the second-largest in the world in just a couple of
years.”
More than half of DLL’s business in China is in
the health care industry, where it fi-nances diagnostic equipment
sold by Philips under a private label programme.
Similarly, for Deutsche Leasing, vendor finance
has been the main route to market.
Lu Qigan, general manager of Deutsche Leasing’s
Chinese arm, explained: “At the moment, we are working with our
vendor partners from Europe – the same ones with whom we have been
working for years at home, and are following them in China.”
The company, which has offices in Shanghai and
Beijing, signed €145m of new business last year and is looking to
develop new vendor partnerships in order to expand.
Deutsche Leasing’s main focus is on
construction equipment – heavy-lifting machinery, mobile cranes,
equipment for piling, concrete mixers, and so on.
A particular focus of the German leasing
company over recent months has been in Shanghai. The lessor has
been involved in a major construction project in the city last May,
and it is due to end some time next month.
Other sectors it covers include printing
machines, plastic moulding machinery, equipment of production line,
and also some trucks and trailers. It is not involved in the
agricultural sector yet, but has started investigating it because
it sees “a lot of potential in there”.
SFLL possibly covers the widest variety of
sectors. The company, overseen in China by Axel Scholz, CEO of SFS
Commercial Finance Asia-Pacific, covers health care, construction,
agriculture, vehicles, IT and the industrial sectors.
BPLG, on the other hand, has not written any
business yet, but is in an advantageous position to do so. It
already has a business licence inherited from the company’s Fortis
Lease acquisition and a “modest local presence”. This, according to
BPLG CEO Philippe Bismut, means “we already have the infrastructure
to start in that market.
“We know how difficult it is to enter that
market, but we are there already thanks to Fortis”.
Not as easy as it looks
Entering the Chinese leasing market
has not proved easy for most European lessors.
The first big issue, as Qigan explained, is
that prospective leasing companies have to apply for a business
licence from the MOC. They also need to comply with many regulatory
requirements and produce a bulk of documents before they start
writing business.
For Deutsche Leasing, it took almost six months
from the application date to the final approval date, and it
“wasn’t an easy process”, according to Qigan.
Lessors also have to cope with a varied legal
framework.
Qigan said: “There are lots of other
regulations that govern the financial services industry, especially
in the area of enforcement of legal verdicts. You can win a lawsuit
in China, but then it is very difficult to enforce, because there
are different regulations, as well as local protections for firms
in some areas.”
DLL added that, in China, leasing companies
cannot provide loans, which prevents them from providing floor-plan
financing, which is often an important component of lease
financing.
All in all, Chinese leasing remains very
different from European leasing. Leasing is still a new financial
product in China, and many industry practices have not consolidated
yet. As DLL put it, often lessors must “operate in a grey area,
where regulations and policies have not been established yet”.
Challenges vs
opportunities
The biggest difference with European
leasing is that while in Europe leasing culture is seen as somehow
‘fixed’, in China it is evolving very rapidly and is still
perceived as ‘fluid’ and continually changing.
John Allen, director at Copernicus, a UK lease
software house which has ambitions to grow in China and which has
already won several local clients, said European leasing companies
that want to be on top of these changes need to have systems able
to cope with them.
For instance, if the Bank of China changes
interest rates, all the agreements have to be rescheduled, Allen
said.
He added: “Broadly speaking, the Chinese view
the entire contract as flexible. The rental profiles – duration,
monthly instalments – often change. Companies are constantly
rescheduling, and when the rental profile changes, everything has
to be recalculated.”
“Some companies have had issues with this, as
their systems were used to dealing with more fixed types of
contracts,” Allen continued.
Allen said software systems also need to be
able to cope with a completely different language – and screens
should be optionally in English and Chinese – so that lessors can
easily switch between both languages.
Naeem Ghauri, president of NetSol, another
software provider with a significant presence in the Chinese
market, agrees that the market is in a “constant state of change”.
He said there is a view to deregulate leasing at the moment, “but
ironically, deregulation means new regulation”.
“This flexible approach is going to be one the
major things for international lessors to understand,” Allen
said.
“European and US companies wanting to go there
have to be more open-minded, they can’t impose their way of doing
things, they can advise, but ultimately you end up doing it the
Chinese way.”
But, as both Allen and Ghauri highlighted, once
lessors are able to cope with these issues, the opportunities are
“immense”.
In a few years’ time, for example, Deutsche
Leasing expects double-digit annual growth, while DLL forecasts
having a staff of 100 people and a business volume of $1bn (€747m)
a year.
As SFS puts it, the equipment leasing industry
in China has the potential to develop strongly, and as leasing
penetration increases, there are going to be sizeable opportunities
“yet to be tapped”.
