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September 23, 2011updated 12 Apr 2017 4:12pm

Enter the dragon

The equipment finance market in China is one of the few across the globe to remain a source of significant investment potential, as the countrys seemingly unstoppable economic growth carries on in the face of numerous setbacks.

By Claire Hack

Lessors eager to get a slice of China’s ever-expanding equipment finance market. Claire Hack reports.

 

Picture of, and pullquote by, Adrian Pang, managing director, 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.

It 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.

Bar chart showing global leasing market penetration rates, 2010While 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.”

Bar chart showing total annual leasing volume in China

 

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.”

Table showing China's political and macroeconomic data, selected indicators

 

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.”

Photo of a Chinese dragon danceIndeed, 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.

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