As China’s financial environment has deteriorated, the performance of its financial leasing industry has been mixed. Financial leasing companies associated with banks have continued to receive adequate liquidity, especially because banks that lend to these firms face lower loan provisions since leasing companies are by their nature heavily collateralized. Many financial leasing companies not associated with banks have lost access to funding.
Financial leasing companies have been in existence since China’s reform and opening-up, in various forms. These firms purchase equipment and lease it to firms. This kind of financial intermediation is popular in the aviation, construction, medical, and automotive industries, which require high levels of capital investment. The property rights remain in the hands of the lessor.
Bank-owned financial leasing companies are considered safe borrowers since they have the guarantee of the parent company. The Industrial and Commercial Bank of China (ICBC) was the first financial leasing company associated with a bank, and was founded on November 28, 2007, after the China Banking Regulatory Commission (CBRC) allowed the creation of bank-owned leasing companies. China Development Bank and ICBC, two very large state-owned banks, are currently the largest Chinese lessors.
By contrast, many financial leasing companies that are not associated with banks have found it difficult to obtain funding in an environment of low growth and tight liquidity. Sources of revenue stemming from three areas, including interest margin revenue, or interest earnings on leases, residual value revenue, or price earnings on the leased item, and service revenue have shrunk in recent months. Ordinary financial leasing companies regulated by the Ministry of Commerce may fare worse than special financial leasing companies, which face more exacting regulation. For the latter, the CBRC laid out the new Administrative Measures for Financial Leasing Companies on March 13, 2014, lowering the barriers to entry into the financial leasing industry, while requiring at least one eligible commercial bank, domestic large manufacturer, or overseas financial leasing company to hold a minimum 30 percent stake in the company. Ordinary financial leasing companies in particular are feeling the funding pinch.
Potential financial leasing firm failures would recollect the wave of leasing firm collapses that occurred between 1997 and 2000, as turnover fell sharply. The situation subsequently improved, and as regulations were revised in 2007, the leasing industry was rejuvenated. As the economy boomed, financial leasing loans enjoyed in excess of 54 percent compound annual growth between 2009 and 2013 under loose leverage restrictions. The economic slump that hit once again in 2014 increased risk and funding costs in the industry, particularly for leasing firms lending to trade-sensitive industries such as shipping and packaging.
Both bank-affiliated and non-bank affiliated financial leasing firms have bolstered their methods of controlling risk, improving both asset allocation and asset management. In an environment of rising non-performing bank loans, some financial leasing companies have also revisited their asset disposal procedures. This is important, as the new regulations for financial leasing companies laid out by the China Banking Regulatory Commission in March 2014 require bank-affiliated financial leasing firms to shore up liquidity where necessary because of solvency problems or operating losses. This increases the obligations on bank-affiliated financial leasing companies. It’s a good thing these firms are safe in the arms of banks, as non-bank affiliated leasing firms continue to suffer.