China is continuing its efforts to create a viable leasing and finance industry within the country, as China's Banking Regulatory Commission (CBRC) has lifted a ban on domestic and foreign commercial banks investing in financial leasing companies. The proscription against such investment was originally put in place to keep a separation between the various types of finance companies and the products they offered.
Effective March 1, 2007, the CBRC will allow not only banks, but also leasing companies and manufacturers to hold shares in financial leasing companies. Barriers to entry, in the form of capital adequacy, also have been lowered, as the minimum registered capital of a financial leasing company is now around $13 million (an 80% reduction from the previous requirement). A minimum eight-percent capital adequacy ratio, consistent with Basel I, is still required.
These actions come on the heels of the second round of consultation on the draft Financial Leasing Law in September of last year. One aspect of this round is a law that would open the country’s aircraft leasing sector to bank capital, which now is one step closer to adoption.
While the government has made strides in developing a favorable equipment leasing environment, there still are impediments to a strong and structurally sound industry, including a complicated regulatory environment and what has been described as an arcane tax system. As The Alta Group noted in its project with the Equipment Leasing and Finance Foundation, Knocking Down (Great) Walls; Identifying Factors for Success in the Chinese Equipment Leasing Market, the lack of adequate leasing law and regulations make both collection of these past-due rents, and repossession of the equipment, very difficult for lessors. No leasing industry can gain strength without protections in these areas.
China, which has always had a tightly regulated economy, is struggling with what level of regulation is right, and it is like walking a tight rope. Too much regulation, and growth is stifled, while too little can spell financial disaster. Experiences in other countries, however have begun to define a workable formula for success. This formula includes a non-restrictive level of regulation, standardized laws, a level playing field between ownership and leasing, and a well-established rule of law regarding lessor ownership rights. Having taught classes in China, I can tell you that a sound Chinese leasing industry is coming; maybe a bit slowly, but it is definitely gaining legs.
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