by Brendan Gleeson, Group Executive Vice President, White Clarke Group
The leasing market in China has expanded from a business volume in 2007 of around US$1 billion with just 30 licensed lessors, to around US$500 billion with over 2,000 lessors at the end of 2014.
Although China’s economy is currently undergoing a much-publicized slowdown, its leasing industry looks set to continue to grow healthily. For the economy, the slowdown means that predicted GDP growth will be around 7% rather than in the double digits of the last few years. This new level of growth is being called the ‘new normal’ by Chinese leaders, meaning it is a level that should really be seen as being less extraordinary than what has been recently experienced, and which everyone is being told they should get used to.
But how ‘normal’ is the outlook for leasing?
Awareness of leasing is growing amongst China’s businesses and consumers, but is still relatively low. Sources of leasing data vary on the detail but it is generally accepted that, excluding sale and leaseback and big ticket transactions such as aircraft, vessels, infrastructure projects, subway train networks and power plants, the overall leasing penetration rate is less than 5%. In fact, for most sectors it is more like 1.5%, but the overall rate is inflated by being considerably higher for construction and medical equipment.
Nonetheless, compared with penetration levels of nearer 20% in more developed markets, the scope for further growth in China is huge. There is little reason to view predictions of the total leasing market exceeding CNY10 trillion in 2020 as over-optimistic.
The auto sector is continuing to thrive. China has been the world’s largest car market for several years, and recent sales growth has been strong. Passenger and commercial vehicle sales totalled 23.5 million in 2014, a year-on-year increase of 7%, with passenger car (PC) sales rising by nearly 10%.
Up to now, PC sales have been driven by a burgeoning, wealthy middle class with an appetite for conspicuous consumption of luxury items, and the status symbol of ownership has meant sales have been mostly cash purchases. However, attitudes are changing: massive congestion and pollution problems are softening attitudes towards leasing, and the benefits of a strong auto finance market are now recognized by the authorities.
Government incentives
Meanwhile, there have been favorable initiatives to aid the development of asset finance. China’s government has a positive view and encourages investors in the local leasing market, and there have been improvements to regulation, especially in the area of licensing.
Backing has come from the top, with Premier Li Keqiang openly supporting China’s leasing industry and its ability to provide alternative financing to SMEs, farmers and export finance.
There is much talk surrounding the recent launch of China’s ‘One Belt, One Road’ policy, the basic premise of which is a network of regional infrastructure projects such as road and rail routes, and oil and natural gas pipelines, as well as port and maritime infrastructure projects – all aimed at providing international connectivity and cooperation. Such a strategy is expected to provide Chinese manufacturers with equipment export opportunities and expand the global market, which will require the expertise and experience of lessors with a track record in international asset financing.
Another positive move by the authorities has been a new wave of free trade zones (FTZs), which will feature relaxed customs, trade and foreign exchange rules. In these FTZs, company registration will be simpler and have fewer requirements. China's Ministry Of Commerce recently issued 20 measures aimed at facilitating and managing foreign investment in the new FTZs. One of the main functions of the zones is to act as a testing and proving ground for economic liberalizations. If successful, these could be expanded across the country.
Opportunities for lessors
In the new White Clarke Group China Asset and Auto Finance Country Survey, asset classes such as IT, passenger vehicles, agriculture and energy are identified as currently underdeveloped and holding good prospects for foreign-owned lessors. Vendor business is also underdeveloped in China at present. With the right vendor business model, foreign lessors can cultivate a large pool of vendors, both Chinese and foreign.
More captives are emerging as the general awareness of equipment leasing increases and foreign-owned suppliers with overseas success in captive finance enter the market.
Government policy has supported the growth in the leasing market, which has resulted in many manufacturers establishing their own asset finance capabilities. This will increase choice for those SMEs seeking asset finance, though obtaining credit for some SMEs will continue to be an issue.
There are, of course, challenges. These include margin compression due to the slowdown in economic growth and increasing competition in the leasing market. Also, economic uncertainties make it harder to assess the long-term creditworthiness of customers. Provision of credit information remains a problem in the industry.
But the potential far outweighs the challenges. In the opinion of the experts, the outlook is very positive. Their collective insight is available, along with much more data and analysis, in the latest White Clarke Group UK Asset and Auto Finance Country Survey 2015, which is free to download.
About White Clarke Group White Clarke Group is the global first-class provider in end-to-end automotive and asset finance software solutions and consulting services. It is a global organization employing around 600 professionals, with offices in the UK, China, USA, Canada, Australia, Austria and Germany. The company’s award-winning CALMS end-to-end platform provides a flexible workflow approach that automates the entire business process from origination through contract to portfolio management ? trusted by more than 100 customers in 30 countries around the globe. For more information, please visit www.whiteclarkegroup.com