Due in part to the complexity of the credit market, the leasing industry in China is dominated by big-ticket transactions.
However, the Chinese financial specialists have taken steps to try and encourage smaller businesses to take advantage of the benefits offered by the leasing markets.
Asset Finance International spoke to Jon Fales, senior managing director of the Alta Group and chairman of the upcoming China Leasing Summit 2011 to find out what the China Bank Regulatory Commission hoped to achieve through its leasing conferences:
"The conferences were conducted by the CBRC, which licenses bank-affiliated companies,” said Fales, who is based in the US and works closely with Alta’s Chinese offices to provide equipment leasing and finance consulting services to banks, leasing companies and equipment vendors.
“The message delivered at the conferences was that the SME marketplace is being under-served both by banks and by leasing companies, and CBRC strongly urged the bank lessors to make efforts to get more involved in providing leases to this market."
The purpose of the conferences…was to let bank lessors know that CBRC wants to see more activity in the SME space, and also to provide the bank lessors with some how-to information.”
Following the CBRC official’s speech there were presentations on the benefits of operating leases, how to establish leasing operations in emerging markets (my presentation), and how to build and manage effective credit processes in emerging markets.”
China does not have a credit market comparable to what we have in the West, with easy access to credit information. Normal due diligence often takes a week, or longer, and banks and lessors obviously would rather spend that effort on a $30m transaction rather than a $30,000 deal.”
Changes to the credit market to encourage more leasing and easier access to credit information
"There have been at least two important developments in the last couple of years. One has been the establishment of a credit bureau-like facility by the People’s Bank of China (PBOC), and it now contains some credit information on most enterprises, and on several hundred individuals as well.”
We believe use of the credit bureau will continue to grow as users get more familiar with its benefits; the downside, though, is that access to the information is restricted to financial institutions approved by the CBRC.”
This means that lessors with leasing licenses obtained through the Ministry of Commerce (MOFCOM), which includes most of the captives and nearly all of the independent lessors, have no access to the information.”
The second development has been the passage of the Property Law in China, which is an important milestone in protecting the ownership interests of asset owners, notably including lessors.”
Since the concept of leasing is still not widely understood outside of the major metropolitan areas in China, lessors have been wary of leasing to SMEs in smaller locales, as repossession in the event of default was not always certain.”
The Property Law should go a long way to help leasing companies maintain clear title to the leased assets they own.”
Despite these advances, the credit due diligence process in China is arduous, and is likely to remain so for the foreseeable future. Financial statements, particularly from SMEs, are unreliable and generally are unaudited. Lessors must invest significant time researching these companies, and often the work required isn’t worth the return on a small lease…hence the reluctance to pursue SME business."
Message to international lenders
Finally, what would be his message to the international lenders requiring funding for Chinese SMEs?
"Do your research! It would be worth discussing the Chinese SME market with other lessors in China that have been there many years. Western lessors need to do a candid assessment of whether there is a strong enough business case to support a leasing business in the SME market…for those that have the ability to perform cost-effective due diligence, there could be a good opportunity.”