Navigating China’s Financial Leasing Industry – Setup Procedures and Market Opportunities

By Dezan Shira & Associates
Editor: Jake Liddle

China’s financial leasing market is the world’s second largest, behind only the U.S., and has been rapidly developing since the country’s reform and opening-up in the 1980s.

Financial leasing in China has been colored by two new regulatory changes in the past six months. In October last year, China’s Ministry of Commerce (MOFCOM) revised the Measures on Administration of Foreign Investment in the Leasing Industry, removing the US$10 million minimum registered capital for foreign-invested financial leasing companies and thereby simplifying making market entry for foreign companies. However, in January this year, the Chinese government restricted the approval of investment related registration applications following recent illegal fundraising scandals. With these two contrasting developments in mind, in this article we examine current opportunities and setup procedures in China’s financial leasing industry.

How do financial leasing companies in China work?

Financial leasing companies ultimately provide finance, and serve to purchase assets on behalf of a user and lease it to them, usually for an agreed period of time. The lessor retains property rights of the asset, but the lessee enjoys exclusive use of the asset, provided they observe the terms of the lease and make rental payments over the agreed period of time to cover the original cost of the asset, in some cases at an inflated rate. At the end of the leasing period, the lessee has the option to acquire ownership of the asset following payment of the final installment of the lease. This type of financial intermediation is common in industries that require high rates of capital investment, such as aviation, construction, medical and logistics.

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Setup Procedures and Requirements

Foreign investors may either set up a wholly foreign-owned enterprise or cooperate with a Chinese partner to enter China’s leasing industry. MOFCOM is in charge of the approval and examination of foreign leasing companies. The new measures outline the following documents required to be submitted with an application form:

• Feasibility study report executed by the investors;
• Contract and articles of association (foreign-funded enterprises shall submit articles of association only);
• Certificate of creditworthiness, registration certificate (photocopy), identity document of the legal representative (photocopy) of the investors;
• Audit report of the investors issued by an accounting firm for the preceding year;
• Name list of board members and letters of appointment of directors by the investors;
• Qualification certificates of senior management personnel; and
• Approval notice on reservation of enterprise name issued by the industrial and commercial administration authorities.

The application and accompanying documents should be submitted to the relevant provincial commerce administration authority, which will execute a preliminary examination of the application and then submit it to MOFCOM within 15 working days. MOFCOM will complete examination of the application within 45 working days from receipt of all application documents. When successful, the ministry will issue an “approval certificate for foreign investment enterprise”.

This renders foreign-invested financial leasing companies at liberty to engage in the following industries:

• Finance leasing;
• Leasing;
• Purchase of leased assets in China or overseas;
• Scrapping and servicing of leased assets;
• Consultancy and guarantee for leasing transactions; and
• Other industries approved by the examination and approval authorities.

Obstructions and opportunities in the industry

In September last year, a circular was published stating the government’s intent to ‘promote and accelerate the healthy development of the financial leasing industry’, with an outline to establish a unified administrative system for the industry. However, in January this year, the Chinese government decided to restrict the approval of investment related registration applications nationwide in light of recent illegal fundraising scandals. These restrictions differ from city to city:

In Beijing, registration for all companies whose business scope contain words such as “investment,” “capital & fund,” “equity investment,” and “finical management” have been suspended.

In the Shanghai Free Trade Zone (FTZ), restrictions were put in place on the approval of investment management, asset management and financial leasing companies. Specifically:

• The shareholders of the company (be it domestic or foreign-invested) will be interviewed by the government officer before incorporation;
• Different from the policies in Beijing, it is still allowed to set up consulting companies such as an investment consulting company; and,
• Approvals of finance information service companies and internet finance information service companies are suspended.

However, these restrictions are lifted in certain remote districts in Shanghai, including Fengxian district and Baoshan district.

In contrast, the Tianjin Ministry of Commerce issued an announcement stating that the Tianjin FTZ will implement a record-filing system for the establishment of foreign-invested financial leasing companies. This means a “Foreign-invested Enterprises Filing Certificate” will be issued to all foreign invested financial leasing companies upon completion of registration and filing procedures, where previously pre-approval from the FTZ administration committee was required.

Looking ahead

Foreign investors should note that more change in China’s financial leasing industry is likely – the Administration for Industry and Commerce (AIC) has stated that the length of the industry’s new restrictions are indefinite. With these restrictions lifted in Tianjin, the financial leasing industry remains a profitable option for foreign investors. In 2015, turnover reached over RMB 3,500 billion – up RMB 220 billion compared to the end of 2014 – with 2,440 foreign leasing enterprises, representing an increase of 420 over the previous year.

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