China Finance and Leasing Industry - An outlook on where it's headedBy Hui Liang, President NETSOL Technologies, China on 19-12-2018
In the year 2018, China's economy witnessed the slowest growth ever in the last 28 years. The year on year GDP increased to 6.6%, according to the National Bureau of Statistics. Fourth quarter GDP growth stood at 6.4%, down from 6.5% year-on-year growth during the third quarter of 2018. The economic growth has been hindered by the ongoing trade war between China and the United States, coupled with a drive to reduce corporate debt. For the first time in nearly seven years, the economy grew at a faster pace in 2017, while diminishing again in 2018. Despite the flagging economic growth, however, the growth rate in 2018 surpassed the target established by the Chinese government of 6-6.5%.
In terms of value, China's GDP hit roughly USD 13.14 trillion in 2018, constituting around 16% of the world's total GDP. Between 1979 and 2018, China witnessed above-average economic growth of 9.4% per annum, considerably higher than the global average of 2.9% during the same period.
As a result of the deleveraging campaign launched by the Chinese government in 2015, the nation's macro-leverage ratio has stabilized since 2018. The campaign was aimed at controlling the excessive borrowing of local governments, financial institutions and businesses. Earlier attempts at reducing the borrowing levels via similar methods were not widely successful, and said to have caused the economic slowdown. Later on, necessary adjustments to the pace and strength of the campaign, however, yielded favorable results in terms of curtailment of several kinds of financial misconduct in the economy. Given that the leasing sectors are well-positioned as the supplementary financing channels to banks, the economy is suited to benefit from this deleveraging campaign. The Chinese government's approach of adopting a push-and-pull monetary policy along with restraining illegal shadow banking (non-bank lenders) channels gives the leasing sector an opportunity to flourish.
In China, leasing companies are mainly established as one of the following: bank-affiliated lessors, captive lessors (subsidiary of asset manufacturers) and independent lessors. Previously, bank-affiliated leasing companies were under regulation by the China Banking and Insurance Regulatory Commission (CBRIC), whereas captive and independent leasing companies were regulated by the Ministry of Commerce (MOFCOM). Back in 2018, however, the MOFCOM announced that it has transferred the regulatory duties pertaining to supervising financial leasing companies, commercial factoring companies and pawnshops to the CBIRC. This puts the regulatory functions of banks as well as financial leasing companies in the hands of a single regulator, thus intending to improve the supervision of financial sector along with minimizing the risk of regulatory arbitrage. According to Moody's, the financial leasing sector could reap benefits in terms of greater sources of funding if CBIRC allows the companies access to the interbank market. CBIRC has revised the regulations in terms of scope of leased goods applicable to financial leasing trade and transactions. Modifications have been done with regard to the incorporation, business scope, operation rules, as well as supervision and management of companies. The requirements to establish financial leasing companies have also been altered. The rule that required principal contributor's capital contribution to be more than 50% was omitted, while the revised rule states that one initiator of commercial bank or leasing company has to contribute over 30% of the capital. In addition to that, the regulations have expanded the business scope and relaxed the control over deposits of shareholders as well as combined shareholders' awareness of risks. Leasing companies that meet certain requirements are also permitted to offer upgraded services, including issuance of financial bonds and asset securitization. Such rules and regulations encourage financial leasing companies to develop and expand in certain sectors, which in turn enhances their ability to compete in the industry. Approvals of domestic-funded financial leasing companies are still underway, especially within free-trade areas in Tianjin, Shaanxi, Shenyang, and Guangdong. At the end of 2018, 397 domestic-funded financial leasing firms were approved. Financial leasing businesses are spread all over the country, with clusters in the southeastern coastal areas of Guangdong, Shanghai, Tianjin, Liaoning, Beijing, Fujian, Jiangsu, Zhejiang, Shandong, and Shaanxi, which account for at least 95% of all the financial leasing firms. The bolstering real economy comes with the growth of the financial leasing sector. By the end of 2018, there were a total of 11,777 financial leasing firms in China, an addition of over 2,000 from the previous years. Amongst these, 69 companies were bank-affiliated lessors, 397 were domestic-funded, and 11,000 were foreign-owned companies. At the prevailing rate, this figure is expected to go up to 23,000 by 2025. Consequently, an increase in the number of financial leasing companies means an increase in business volumes; as of 2018, financial leasing contract value had totaled RMB 6.65 trillion in China. Although bank-affiliated leasing companies only represent 1% of the total number of leasing firms, these accounted for almost 37% of total loans outstanding, whereas domestic and foreign-owned leasing companies each accounted for nearly 31% of total loans outstanding. The primary reason of greater representation of bank-affiliated leasing companies is that such entities have multiple sources as well as easier access to funding.
Falling demand levels in the two largest automobile markets of the world - the U.S. and China - have compelled global automakers to slow down production. A major automobile manufacturer based in South Korea has recently announced its plans of ceasing production at one of its assembly plants located in China, owing to dampening local demand. This slowdown is also being reflected in car sales, as the Chinese consumer becomes more and more risk averse and is forfeiting bigger purchases, while being prepared to pay a price for mitigating risk. Stats show that between January and May 2019, total vehicle sales in China declined by nearly 13% to around 10.3 million, and by 16% to approximately 1.9 million vehicles in May alone. This risk-averse attitude of the Chinese client presents a window of opportunity for providers of operational leases, where they can hope to increase their market share despite the slowing economy. Recent figures of operational lease volumes suggest that it only comprises of approximately 0.1% of annual car sales in China, roughly translating to about 25,000 cars each year. On the other hand, Lease-loans - or Finance Leasing - have remained a popular source of financing in China, mainly owing to lower risk for the lessor.
Considering the fact that China is the world's largest market in terms of automobile sales, the auto-finance and leasing industry has a lot of room for development and has a long way to go before reaching its zenith. While other developed markets typically boast finance penetration rates of 50 to 80 percent, China is significantly behind with a penetration rate of around 38%. Finance leasing has recently started gaining popularity in the region, and figures suggest that in 2018, around 800,000 lease originations were generated in the Chinese automobile market. Out of these, more than 95 percent fell in the category of auto-loans that were signed as lease-loan contracts, resulting in a significantly lower actual lease penetration rate.
Aircraft Leasing Industry
In 2017, the global aircraft leasing market was valued at approximately USD 45,000 billion, and is expected to witness steady increases in the upcoming years. China has grown to become one of the major markets of the world in terms of airline passenger traffic volumes over the years, and is set to dominate the global aviation industry by 2022. A multitude of factors have contributed to the emergence of cut-throat competition within the aviation market in China, including but not limited to rising fuel prices, a slowdown in economic growth, and increased customer expectations that compels airline service providers to remain ahead of each other.
The Asia Pacific region is expected to witness the most rapid growth in aircraft leasing market between 2018 and 2025, and China is predicted to be at the forefront and become the potential center of commercial leasing of aircrafts during this period. Bearing testimony to this, the China Aircraft Leasing Group Holdings Limited (CALC), along with the involvement of 17 banks, has recently closed a USD 840 million Aircraft PDP (Pre-Delivery Payments) Syndicated Loan deal for new aircraft orders, gleaning the status of Asia's largest aircraft PDP financing till date and giving a significant boost to the regional aviation finance market. According to PwC regarding the market outlook, China is expected to lead the Asia Pacific region in terms of new deliveries of aircraft in the coming years due to an overall expected rise in air traffic in the region. As per their research published in 2015, over the next two decades Chinese carriers will require around 6,000 new aircrafts, valued approximately around USD 780 billion, which constitutes over 40 percent of the forecasted deliveries in Asia Pacific. Consequently, there is a huge scope of aircraft leasing and financing in the Chinese market in order to meet the expected surge in demand in the coming years, considering the increasing reliance on lease financing historically.
Compared to preceding years, the current environment for financial leasing companies has become more stable in China. However, the impact of rising interest rates along with the evolving trade war between the United States and China remains uncertain for a large part of the leasing sector. Presently, China is the second largest market and predicts strong growth for financial leasing with business volumes comparable to the United States and greater than those of United Kingdom. The Chinese leasing market is still experiencing overall growth, with volumes being driven up by large ticket transactions. The aircraft and vessel industry are up and coming investors and expected to play key roles within the leasing sector, while the auto-leasing market is also predicted to evolve in the coming years.
Hui Liang, President NETSOL Technologies, China
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