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ASSET FINANCE INTERNATIONAL IN ASSOCIATION WITH WHITE CLARKE GROUP
White Clarke Group China Asset and Auto Finance Country Survey
CHINA ASSET AND AUTO FINANCE SURVEY
White Clarke Group

White Clarke Group is the market leader in software solutions and business consultancy to the automotive and asset nance sector for retail, eet and wholesale. WCG solutions enable end-to-end credit processing and administration to streamline business practice, cut operational cost and deliver outstanding customer service. WCG has a twenty year track record of leadership and innovation in nance technology, consultancy and new market entry. Clients value WCG industry knowledge, market intelligence and innovation. The company employs some 500 nance and technology professionals, with oces in the UK, USA, Canada, Australia, Austria and Germany. White Clarke Group publish the Global Leasing Report, which is part of The World Leasing Yearbook. To download a copy please go to: http://www.whiteclarkegroup.com/downloads/view/global_leasing_report_2012
Acknowledgements
Brendan Gleeson, director global business development and strategy, White Clarke Group; Paul Errington, managing director, Connaught Finance; Yanping Shi, program director, Lease Research Centre; and professor in Finance, University of International Business and Economics, Beijing; Jenny Cao, vice director, Rental Commission of CCOIC and Tianjin Leasing Assoc; David Chen, head of sales & marketing, Socit Gnrale Equipment Finance; Jialin Wang, country manager, De Lage Landen; Chris Pearson, CEO of White Clarke Group Asia Pacic Jonathan Fales, senior managing director, The Alta Group; Haitian Yang, director of the Tianjin Leasing Association and director of the Rental Commission of the China Chamber of International Commerce Diwakar Singhal, senior vice president, Genpact; Khoon Ming Ho, partner in charge, KPMG China; Lachlan Wolfers, partner, KPMG China; Simon Liu, senior manager, KPMG China; Russell Brown, managing partner, LehmanBrown; Sharon Su, partner, LehmanBrown; Xiaolan Xu, PhD student, UIBE, Beijing; and Jason Zhou, LeaseOne, an Alta Group aliate. http://www.whiteclarkegroup.com/ http://www.assetnanceinternational.com Publisher: Edward Peck Editor: Brian Rogerson Author: Nigel Carn Asset Finance International Ltd., 39 Manor Way, London SE3 9XG UNITED KINGDOM Telephone:+44 (0) 207 617 7830
Asset Finance International, 2013, All rights reserved No part of this publication may be reproduced or used in any form or by any means graphic; electronic; or mechanical, including photocopying, recording, taping or information storage and retrieval systems without the written permission from the publishers.
Contents
Introduction Economic overview Macroeconomic indicators Real GDP Projected Change Business Climate Doing business in China Ease of getting credit Global competitiveness index Stage of development The leasing market in China Types of lessor NBFI Lessors approved by CBRC Auto nance Useful contacts Industry view of the leasing market Current economic situation Future growth Challenges Customer credit referencing Obtaining title to an asset Market segment performance Sector performance Government incentives Renewable energy 4 6 6 7 8 09 09 10 12 13 15 15 16 17 18 18 20 21 22 23 24 25 25 26
Industry prospects Mergers and acquisitions Pros and cons for foreign lessors Internal and Cross-border prospects Value of government incentives Eects of regulation First steps towards evolution into a mature market Diwakar Singhal, Genpact
27 27 27 29 30 31 32
Taxation update on leasing in China 34 Khoon Ming Ho, partner in charge; Lachlan Wolfers; and Simon Liu, KPMG China Accounting for leases in China Russell Brown and Sharon Su, Lehman Brown 25
Introduction
China is the second-largest economy in the world after the US, based on purchasing power parity, a position it attained in 2010; in that year China also became the worlds largest exporter. The size of China's economy in 2020 will be close to that of the US in 2012 and China's gross domestic product is expected to reach RMB100 trillion in 2020, equivalent to $16-20tn, according to an ocial Chinese forecast quoted at a press conference by the Oce of the Central Leading Group on Finance and Economic Aairs at the end of November 2012. The Chinese government's 12th Five-Year Plan, adopted in March 2011, put an emphasis on the need to maintain economic reforms and to increase domestic consumption in order to make the economy less dependent on exports. These are challenges that will take time, and the recent handover of power to a new generation of leaders will inevitably lead to a delay in policy development and implementation. Meanwhile, as part of the eort to open up the leasing industry in China, the Ministry of Commerce (MOFCOM) moved foreign-invested nance leasing companies from the restricted to the permitted category meaning no
Asset Finance International, All rights reserved.
CHINA ASSET AND AUTO FINANCE SURVEY particular restrictions rather than being subject to higher levels of scrutiny and stricter administrative requirements. However, although reforms to the nancial system are progressing, continuing the move away from central direction is imperative in maintaining incentives for foreign investment. As stated by the World Bank, The states involvement in nancial markets and institutions through ownership of banks and state-owned enterprises, management of interest rates, setting of priorities for the nancial system, and as an implicit guarantor is resulting in moral hazard, weak risk management in banks, and a build-up of contingent risk and liabilities. (Source: World Bank, China: Financial Sector Assessment, November 2011.) There are many challenges facing the asset nance and leasing industry in China such as access to funding for small and medium-sized enterprises (SMEs), access to reliable accounts for lessors, better regulation particularly regarding the rising rate of default, new tax legislation and corruption. However, the opportunities are great as well, especially for foreign-invested lessors, and becoming more attractive the more that government opens up the market. The industry has unmatched growth potential, and will undoubtedly have an ever-increasing eect on the global leasing industry. This Country Survey aims to provide a balanced view of the equipment nance and auto leasing market in mainland China (i.e. the Peoples Republic of China; although Hong Kong is closely linked, and is sometimes included with the PRC, it operates on many separate levels. Therefore Hong Kong and similarly Taiwan are not included). The survey will provide a summary of leasing activity; provide comment from key industry gures on the market, its outlook and the challenges and opportunities that face it; examine the building blocks of a successful leasing operation in China; review the latest developments in taxation and how these reforms aect leasing; and give a breakdown of the dierent types of accounting treatments of leases in China.
Economic overview
It may seem extraordinary to sound a note of caution when growth of around 89% for the coming year is forecast for a national economy, with the rate increasing further for the following year, but although China has experienced extraordinary growth while the developed economies have stagnated, analysts have sounded such notes of caution due to the underlying causes of Chinas recent and relatively prolonged deceleration in growth rate. In its latest economic forecast, the Organization for Economic Co-operation and Development (OECD) stated: Growth fell to an estimated 7.5% in 2012 the lowest rate for over a decade. This reects weak export market growth and the eect on domestic demand of government measures to cool inationary pressures. (Source: OECD, China Economic forecast summary, November 2012.) The report added: Going forward, the economy will still face external headwinds, but this is mainly due to export concerns, and the forecast is still better than the recent consensus following the spell of lower growth. It is also a long way ahead of top-end expectations for most other countries economies.
China: Macroeconomic indicators

2010 Real GDP growth (per cent of GDP) GDP deator (per cent change) Consumer Price Index (per cent change) Fiscal balance (per cent of GDP) Current account balance (percent GDP) Source: OECD Economic Outlook 10.4 06.6 03.2 -0.7 04.0 2011 09.3 07.8 05.5 00.1 02.8 2012 07.5 01.5 02.6 -2.0 02.9 2013 08.5 02.4 01.5 -2.2 02.9 2014 08.9 01.5 01.4 -1.7 02.2
Other constraints on the growth rate have been the continuing weak global recovery, the ongoing uncertainty concerning the eurozone and, of particular concern to China, volatile global commodity prices. During 2012, according to Chinas central bank, the Peoples Bank of China (PBOC), the government has adopted a more proactive scal policy and prudent monetary policy. The PBOC has also increased exibility for the banks to set interest rates and intensied open market operations, which it says have helped to sustain stable growth. In 2013, what the government terms "stabilizing growth" will remain the policy goal, and the economic growth target is likely to remain at 7.5%. In a presentation to the International Monetary Fund (IMF), PBOC deputy governor Yi Gang stated: In the face of the uncertain global environment, the Chinese government will continue to take eective measures to maintain growth stability and accelerate the restructuring of the economy. The Chinese economy is expected to expand steadily in the second half of the year and to sustain its relatively strong momentum in the medium and long term. (Presentation to the IMF International Monetary and Financial Committee, 26th Meeting, October 13, 2012.) In its October 2012 World Economic Outlook, the IMF forecasts growth in Chinas real GDP to rise from 7.8% in 2012,the slowest annual pace since 1999, to 8.2% in 2013.
China: Real GDP Projected Change

2012 Real GDP growth Consumer process Source: IMF World Economic Outlook (October 2012) 07.8% 03.0% 2013 08.2% 03.0%
The Economist Intelligence Unit (EIU) concurs with this forecast, additionally predicting an average of 7.9% growth per year for the period 2013-17. The EIU sees improvements in Chinas business environment during 2012-16 due to eorts to reform the nancial sector. However, it predicts a potentially dicult phase for foreign investment, although China remains ranked rst in the world for market opportunities. The government is expected to become more selective in the welcome that it extends to foreign rms, asking an increasing number to agree technology transfer deals. (EIU Business Analysis, October 2012.) Positive signs Although analysts have viewed Chinas economic activity over the past year as sluggish at best, recently there have been more positive indicators. An important gauge of the Chinese economy is HSBC's manufacturing purchasing managers' index (PMI). The November 2012 manufacturing PMI was 50.5, the rst month that the index had risen above the 50 level in 13 months. A level over 50 indicates expansion in manufacturing activity, while below 50 signals contraction. Another indicator, the consumer price index (CPI), rose just 1.7% during October 2012 from a year earlier. This was a 33-month low, conrming the view of many analysts that the economy should experience a soft landing in its slowdown and possibly opening the door to more easing measures from the central bank. CPI for 2012 is forecast at around 2.7% and for 2013 it should be controlled within 4%, according to the PBOC. In November, rating agency Standard & Poor's armed China's sovereign long-term credit rating at AA- with a stable outlook. S&P said the rating reects China's "strong economic growth potential, robust external position, and the government's relatively healthy scal position," and that it did not anticipate any major change in policy direction following the recent leadership changes. China's largest trading partner in the rst half of 2012 was the European Union (EU), with bilateral trade totalling $267.82bn, a 0.7% increase on a year earlier. In the same period, China's trade with the US was $231.12bn, up 11.9% year-on-year. China's nancial institutions, including banks, insurers and securities rms, received US$1.53bn of net foreign direct investment (FDI) from overseas investors in the third quarter of 2012, according to the foreign exchange regulator, the State Administration of Foreign Exchange (SAFE).This, however, was lower than the US$1.79bn net FDI for Q2 2012. Meanwhile, the SAFE data showed the country's nancial institutions made a net equity investment worth US$901m in overseas companies during the JulySeptember period, increasing from US$357m in the second quarter. 7
Business climate
China may have the worlds second-largest economy, but serious improvements need to be made when it comes to business operation. The World Bank places China at a middle-ranking 91 out of 185 countries for ease of doing business in Doing Business 2013, the same position as in the previous years survey (out of 183). Overall, China is rated better than its BRICs peers Russia climbed eight places in the 2013 survey to 112th, whereas Brazil dropped four places to 130th and India remained the same, albeit at a lowly 132nd.
How China and comparator economies rank on the ease of doing business
United States 004 Australia 010 Japan 024 Regional Average 086 China 091 Russian Federation 112 Brazil 130 India 132 0 Ease of doing business ranking Source: World Bank, Doing Business 2013 database 185
However, Chinas position remains behind the regional average and a long way behind not just Hong Kong and Taiwan, which is to be expected, but also Asia-Pacic economies such as Australia, Japan, Malaysia and Thailand.
How economies in East Asia and the Pacic (EAP) rank on the ease of doing business
Singapore 01 Hong Kong SAR, China 02 Malaysia 12 Taiwan, China 16 Thailand 18 Samoa 57 Fiji 60 Tonga 62 Mongolia 76 Brunei Darussalam 79 Vanuatu 80 Regional Average 86 China 91 Solomon Islands 92 Vietnam 99 Marshall Islands 101 Papua New Guinea 104 Palau 111 Kiribati 117 Indonesia 128 Cambodia 133 Philippines 138 Micronesia 150 Lao 163 Timor-Leste 169 0 Ease of doing business ranking
185 Source: World Bank, Doing Business 2013 database 8
How China ranks on topics in the Doing Business index

Starting a business (151) Resolving insolvency (82) Dealing with construction permits (181)
Enforcing contracts (19)
Getting electricity (114)
Trading across borders (68)
Registering property (44)
Paying taxes (122)
Getting credit (70) Protecting investors (100) Source: Doing Business database
Progress is yet to be seen regarding starting a business in China, where it is ranked at 151 out of 185 countries, the same position as it held the previous year. Of comparator economies, only India is ranked lower. However, China has reduced business start-up costs by exempting micro- and small companies from paying various administrative fees from January 2012 to December 2014. This may free funding for asset acquisition. Another important area is corporate governance and investor protection. Doing Business 2013 puts China at 100 out of 185 economies on the strength of investor protection, although this is three places lower than the year before. While the indicator does not measure all aspects related to the protection of minority investors, a higher ranking indicates that an economys regulations oer stronger investor protections against self-dealing (expropriation by corporate insiders). Regarding access to credit, China stands at 70 in the rankings on the ease of getting credit, which is relatively strong but actually a fall of three places on 2012. It does, however, show a superior level of regulatory and institutional support for lending and borrowing when compared to the regional average, and also Russia and Brazil.
How China and comparator economies rank on the ease of getting credit
United States 004 Australia 004 Japan 023 India 023 China 070 Regional Average 091 Russian Federation 104 Brazil 104 0 Ease of doing business ranking Source: World Bank, Doing Business 2013 database 185 9
Global Competitiveness Index

GCI 2012-2013 GCI 2011-2012 (out of 142) GCI 2010-2011 (out of 139) Basic requirements (40%) Institutions Infrastructure Macroeconomic environment Health and primary education Eciency enhancers (50.0%) Higher education and training Goods market eciency Labor market eciency Financial market development Technological readiness Market size Innovation and sophistication factors (10.0%) Business sophistication Innovation
Source: Global Competitiveness Report 2012 - 2013, World Economic Forum, Switzerland
Rank out of 144 029 026 027 031 050 048 011 035 030 062 059 41 054 088 002 034 045 033
Score (1-7) 4.8 4.9 4.8 5.3 4.2 4.5 6.2 6.1 4.6 4.3 4.3 4.6 4.3 3.5 6.8 4.0 4.3 3.8
Competitiveness
Relative to its position in terms of economic development, and certainly in relation to its BRICs peers, China is a very competitive market according to The Global Competitiveness Report 2012-2013 produced by the World Economic Forum. As can be seen in the chart above, it rates above average in all categories for eciency-driven economies. However, this latest report ranks China in 29th position out of 144 in the Global Competitiveness Index (GCI), a fall of three places on the previous year and in fact a decline back to its 2009 level. Although the decline is small, the report notes that it aects the rankings of every pillar of the GCI except market size. The chart shows the various pillars, with particular strengths in the macroeconomic environment and health & primary education categories, and the report mentions rising enrolment gures for higher education. However, the report points out that the quality of education in particular the quality of management schools (68th position) and the disconnect between educational content and business needs (57th) in the country remain important issues. The report also highlights that the deterioration is more pronounced in those areas that have become critical for Chinas competitiveness: nancial market development (54th position, down six places), technological readiness (88th, down 11), and market eciency (59th, down 14). In this latter pillar, insucient domestic and foreign competition is of particular concern, as the various barriers to entry appear to be more prevalent and more important than in previous years. The report further notes that Chinas competitiveness is aected by poor environmental sustainability measures. On the plus side, the report states: China runs a moderate budget decit; boasts a low, albeit increasing, government debt-to-GDP ratio of 26%; and its gross savings rate remains above 50% of GDP. The rating of its sovereign debt is signicantly better than that of the other BRICs and indeed of many advanced economies.
10
Stage of development
1
Factor driven
Transition 1-2
2
Eciency driven
Transition 1-2
3
Innovation driven
Innovation Business sophistication
Institutions 7 6 5 4 3 2 1
Infrastructure Macroeconomic environment Health and primary education Higher education and training Goods market eciency
Market size
Technological readiness Financial market development Labor market eciency
China
Eciency-driven economies
Source: Global Competitiveness Report 2011-2012, World Economic Forum, Switzerland
The most problematic factor for doing business, as perceived by the Global Competitiveness Report respondents and shown in the following chart, is access to nancing. This will be of interest to lessors as it is a problem that leasing can alleviate. Other problematic factors commonly cited include nancial issues such as ination and tax rates, and inecient government bureaucracy a factor common to virtually every country. One other factor stands out: policy instability, indicating a degree of concern over the possibility that policy decisions such as liberalization of nancial markets may be reversed. Interestingly, the Grant Thornton Focus on mainland China (part of the International Business Report 2012 Economy Focus series) revealed that in Q2 2012, some 62% of Chinese businesses contacted said that lenders were supportive towards their business. However, only 11% expected nance to become more accessible, against 37% that expected it to become less accessible another indicator that there is plenty of scope for alternative sources of funding such as leasing.
11
Most problematic factors for doing business

Access to nancing Ination Policy instability Inecient government bureaucracy Corruption Tax rates Insucient capacity to innovate Inadequate supply of infrastructure Tax regulations Inadequately educated workforce Foreign currency regulations Poor work ethic in national labor force Restrictive labor regulations Government instability/coups Poor public health Crime and theft 13.1 10.1 09.9 09.7 09.2 08.1 07.6 06.4 05.7 05.2 04.2 04.0 02.2 01.9 01.5 01.0 0 5 10 15 20
Source: Global Competitiveness Report 2012-2013, World Economic Forum, Switzerland
Corruption
As can be seen in the chart above, corruption is another perceived problem one that is frequently an issue in emerging economies, and a potential constraint in a massive state bureaucracy such as China. The Corruption Perceptions Index produced by Transparency International rates countries based on how corrupt the public sector is perceived to be. Scores range from 0 (highly corrupt) to 100 (very clean). The latest Index released in December 2012 ranks China midway, at 80 out of 176 countries. However, a score below 50 indicates a high level of corruption, and China is given a score of just 39, showing that considerable progress needs to be made to make public institutions more transparent and powerful ocials more accountable.
Corruption Perceptions Index, 2012

China Rank: Score: Source: Transparency International
80 /176 39 /100
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The leasing industry in China

Leasing in China has experienced exceptional growth in the 21st century, following the landmarks of China joining the World Trade Organization in 2001; the governments opening of the market to domestic investment in 2005, and the China Banking Regulatory Commission (CBRC) allowing domestic bank involvement in 2007. However, the global nancial crisis has had an eect on lending everywhere. In 2011 China introduced tighter monetary controls, which made it harder for both domestic and foreign investors to get loans from banks, and at the same time regulators introduced new legislation regarding Business Tax and VAT (see also the later section of this survey). Apart from changes to tax regulations, another hazard for lessors is the challenge of qualifying nancial accounts of companies to ensure they are a true reection of the trading position of a company. Even if the auditors are one of the big four, the information they get at present is still only what is provided by the company being audited. A further challenge is the need for lessors to get accurate customer credit references, which has been an ongoing problem. The economic downturn has led to a higher incidence of defaults, a situation exacerbated by the continuing view of many lessees that a nance lease is the same as a loan for rental, a view also taken by some domestic lessors, particularly in the auto sector. Added to this is the problem for lessors of identifying leased equipment and keeping track of it. This is allied to the issue of gaining title to a leased asset which can lead to diculties in the case of repossession. And there is the additional constraint of widespread corruption, from government bureaucracy to state-owned enterprises and SMEs.
China leasing industry business volume, 2006-10

NBFI nancial leasing (RMB bn) Foreign leasing (RMB bn) Domestic leasing (RMB bn) 2010
2009
2008
2006
50
100
150
200
250
300
350
Source: China Rental Union (CRU) China Leasing Blue Book, ResearchInChina
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2007
CHINA ASSET AND AUTO FINANCE SURVEY So in fact since 2010, a period when traditional bank loans were decreasing, which would seem to oer a fresh opportunity for non-bank lessors, the growth rate for the leasing sector has slowed compared with previous years. Statistical breakdowns on the sector come from a variety of sources, and cover varying time frames, but the overall data and trends are the same. Unfortunately, more comprehensive breakdowns of data by sector type and business segment are not available. The rst of the charts (above) gives the development of new leasing business volume from 2006 to 2010, growing from a total of just RMB8bn to RMB700bn. This chart also shows the considerable rise in non-bank nancial leasing, to the position of taking 50% of the total market. (Note: historic conversion rates are, end-2006: RMB1=US$0.128; end-2010: RMB1=US$0.152; end-2011: RMB1=US$0.159; Dec 2012: RMB1=US$0.160.) The next chart shows the progress made from 2010 to 2011, with the overall growth rate beginning to slow from the previous years. However, also revealed is the relatively greater increase in foreign-owned business, taking this segments share of the total market to well over 20%.
China Leasing Development, 2010-11

Business Vol. 2010 (RMB bn) 350 220 130 700 Business Vol. 2011 (RMB bn) 390 320 220 930 Growth % 11.4 45.5 69.2 32.9 Business Vol by Sec. % 41.9 34.4 23.7 100
NBFI nancial leasing Domestic leasing Foreign leasing TOTAL Source: CRU, China Leasing Blue Book
The latest breakdown is for the rst nine months of 2012, and shows a pick-up in growth rate, which may in part be attributable to the burgeoning number of licensed leasing companies. From this, it is easy to see that an estimate for the full year 2012 of over RMB1,500bn is more than likely.
China Leasing Development, end Sept 2012

Business Vol. Jan-Sep 2012 (RMB bn) 0,600 0,500 0,300 1,400 Business Vol. 2011 (RMB bn) 390 320 220 930 Growth % 53.8 56.3 36.4 50.5 Business Vol by Sec. % 42.9 35.7 21.4 100
NBFI nancial leasing Domestic leasing Foreign leasing TOTAL Source: CRU, China Leasing Blue Book
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Types of lessor
There are three basic types of lessor in China: bank lessors (which can be domestic or foreign-owned), captives, and independents. There is no overall system of regulation of leasing companies, with licences being provided through three sources: the CBRC, the Ministry of Commerce (MOFCOM), and jointly by MOFCOM and the State Administration of Taxation (SAT). The CBRC covers non-bank nancial institutions (NBFIs); MOFCOM covers foreign-invested leasing companies either joint ventures or wholly foreign-owned companies; and MOFCOM/SAT cover domestic pilot project (i.e. trial) leasing companies. In 2011, as can be seen in the table, there had been an increase in the total number of nearly 50%. There are 10 domestic bank-invested lessors, strictly regulated by the CBRC. These NBFIs prefer the sale and leaseback option, as it is treated more like a straight bank loan and is also popular with SMEs as a method of aiding liquidity. Captive lessors are mainly involved in plant and machinery leasing, primarily for the construction industry, with 40% of equipment acquired through leasing. The greatest number of lessors are independents, which have expanded partly to provide funding for SMEs and also through the expansion of the market into regions outside the main areas of Beijing, Shanghai and latterly Tianjin.
Number of lessors licensed under dierent authorities

Year Administration departments Foreign Department of CBRC Investment Circulation Industry Department, Development, MOFCOM MOFCOM and SAT 136 45 17 74 21 3 210 66 20 Total
At end-2010 Newly approved in 2011 At end-2011 Source: Yanping Shi, own calculation
198 98 296
NBFI Lessors approved by CBRC (at end 2012)

1 ICBC Financial Leasing 2 CCB Financial Leasing Corporation 3 Agricultural Bank of China Financial Leasing 4 CDB Leasing 5 Bank of Communications Finance Leasing 6 CMB Financial Leasing 7 Industrial Bank Financial Leasing 8 EverBright Financial Leasing 9 Minsheng Financial Leasing 10 China Huarong Financial Leasing 11 CINDA Financial Leasing 12 The Great Wall Guoxing Financial Leasing 13 China National Foreign Trade Financial & Leasing 14 Kunlun Financial Leasing 15 Jiangsu Financial Leasing 16 Hebei Financial Leasing 17 Shanxi Financial Leasing 18 Wan-jiang Financial Leasing 19 Beibu Gulf Financial Leasing 20 SPDB Financial Leasing Source: CBRC, UIBE
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Auto nance
By 2009, China had become the worlds largest market for auto sales and production, leaving the US and Japan in its wake. With auto nance being so important, there is enormous potential for leasing in this sector. In 2010, banks provided 78% of auto loans, with auto nance companies (AFCs) taking a 22% share. However, the number of AFCs is increasing, as is the availability of nance. In 2009, the PBOC and CBRC announced that permitted NBFI lessors and auto nancing companies could issue nancial bonds, which is an attractive new funding source, although there are a number of regulatory hurdles to be negotiated. Through such bonds, AFCs could reduce their cost of funds by moving away from bank loans, thereby avoiding a mismatch between their short-term borrowing needs and longer-term lending availability, and making them more competitive in the market. The annual growth rate of the auto nance market in China is predicted to be between 14% and 15% from 2011 and 2015, with the banks losing 15% of the market by end-2015 to AFCs, giving AFCs a 37% share. In a summary of the outlook for auto nance, BBVA Research stated: While auto nance has been led by banks so far, the role of AFCs is likely to increase over time as nancial sector liberalization leads to an increase in their access to a wider range of funding sources, and as enhancements are made to credit information sharing within the nancial system. Overall, we project growth of the auto nance market to outpace the growth in auto sales as a larger share of purchases are nanced with credit. (Source: BBVA Research, Automobile Market Outlook for China, June 2012.)
Auto nance companies in China

Approved Date Company name Aug 2004 GMAC-SAIC Automotive Finance Company Ltd. Aug 2004 Volkswagen Finance (China) Ltd. Dec 2004 Toyota Motor Finance (China) Co. Ltd May 2005 Ford Automotive Finance (China) Ltd. Aug 2005 Daimler Chrysler Auto Finance (China) Ltd. May 2006 Dongfeng Peugeot Citroen Auto Finance Co. Ltd. Jun 2006 Volvo Automotive Finance (China) Ltd Oct 2007 Dongfeng Nissan Auto Finance Co Ltd Dec 2007 Fiat Automotive Finance Co. Ltd. Mar 2009 Chery Motor Finance Service Co. Ltd. May 2010 GAC-SOFINCO Auto Finance Co. Ltd. Sept 2010 BMW Automotive Finance (China) Co. Ltd. Oct 2010 Sany Auto Finance Co. Ltd. Dec 2011 FAW Auto Finance Co. Ltd. Aug 2012 Mercedes-Benz Auto Finance (China) Co. Ltd. Source: CBRC Registered capital 500 500 500 500 500 500 500 500 500 500 500 500 800 1000 500 Registered Province Shanghai Beijing Beijing Shanghai Beijing Beijing Beijing Shanghai Shanghai Anhui Guangdong Beijing Hunan Jilin Beijing Funder type Sino-foreign JV Wholly foreign funded Wholly foreign funded Wholly foreign funded Wholly foreign funded Sino-foreign JV Wholly foreign funded Sino-foreign JV Wholly foreign funded Sino-funded foreign JV Sino-foreign JV Sino-foreign JV Wholly sino-funded Wholly sino-funded Wholly foreign funded
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Useful contacts
Name Tel (China prex: +86) 010-65197962; 010-65197875 010-85093671 Fax Email Website wz_oce@mofcom.gov.cn http://wzs.mofcom.gov.cn/
Department of Foreign Investment Administration of MOFCOM Department of Market System Development of MOFCOM CBRC, Department of NBFIs
010-65197829
010-85093680 http://scjss.mofcom.gov.cn/
010-66279137 (Mr Ke Kasheng)
http://www.cbrc.gov.cn/
SAT Beijing Leasing Association
010-63417114
http://www.chinatax.gov.cn
010-64636797 010-64661440 (Mr Zhang Juguang) http://www.chinaleasing.org/hyzz/beijing.htm 021-58766238 021-58405114 shrent@126.com English - email Jenny Cao http://www.slta.org.cn/ chinaleasing@126.com http://www.zgzllm.com/ gyk46@263.net http://www.ciba.org.cn sx-fei@vip.sina.com
Shanghai Leasing Trade Association
Tianjin Leasing Trade Association
022-27224166 (Mr Haitian Yang) 010-85226255 (Mr Hua Zhuang) 010 67150700 (Mr Yankai Qu)
022-27317755
Financial Leasing Committee of CBA
Leasing Business Committee of CAEFI (China Association of Enterprises with Foreign Investment)
Asset Finance International acknowledges the assistance of the following in this section:
Yanping Shi, program director of Lease Research Center and Professor in Finance University of International Business and Economics, Beijing. Email: uibeyanpingshi@yahoo.com.cn www.leaseresearch.org vice director of the Rental Commission of CCOIC and Tianjin Leasing Association. Email: starfanyi@126.com PhD student, UIBE, Beijing. Email: happyaries@126.com
Jenny Cao,
Xiaolan Xu,
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The industry view of the leasing market

In order to get a broader picture of the equipment nance and leasing industry in China, Asset Financial International spoke to a number of senior executives involved in the market to gain an inside assessment of its current state and the many opportunities and challenges facing it in the coming year. It is interesting to note that on some topics there is consensus whereas in other areas opinions vary, giving an indication of the vibrant nature of this developing market. The eect of the current economic situation on the market It has often been claimed in the West that the Chinese symbol for crisis is similar to that for opportunity, and these issues were certainly linked by several of the experts. Although the Chinese economy has not been aected by the global nancial crisis in any way as seriously as those of the developed economies, it has at least experienced a slowdown over the past year. In the context of an economy that is not so much stagnating but merely expanding less fast, however, this can present an opportunity for new forms of asset nance such as leasing. The overall sentiment coming from those interviewed for this survey is that, in spite of the fact that Chinas economy hasnt stopped growing, the slowdown caused by global conditions has had a denite eect on the leasing industry. In the words of David Chen, head of Sales & Marketing, Socit Gnrale Equipment Finance (SGEF) Greater China: The slowdown of Chinas economy obviously generates a negative impact on leasing companies business. The heaviest impact has been on the construction industry (average 40% drop) where a high nance penetration rate exists, and the machine tool sector has also decreased to some extent. A similar opinion was voiced by Jialin Wang, country manager of De Lage Landen, who stated: The Chinese economy has been slowing down since 2011. The cooling economy has had a direct impact on real estate, infrastructure and even the mining industry. As a result, we are witnessing lower demand for construction, mining, and transportation equipment. This view was backed up jointly by Jonathan Fales and Jason Zhou of The Alta Group/ China, a global consultancy that serves equipment leasing and nance companies, investment professionals, manufacturers, banks and government organizations: The economic slowdown is having an impact on portfolio quality for many lessors; also, demand for new equipment nancing is down in many sectors, particularly construction equipment.
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CHINA ASSET AND AUTO FINANCE SURVEY Paul Errington, managing director of Connaught Finance Investments, gave a balanced view, with an eye to the future: On one side of the scale there will be a negative impact on business and demand from the European slowdown, but on the other side, leasing has only recently started as an alternative source of nance for equipment. Brendan Gleeson, director global business development and strategy of software solutions and consulting services provider White Clarke Group, commented: The market is becoming more aware as vendors, foreign banks and multinationals drive the business. This will result in the balance going in favor of growth rather than retraction of the leasing market. This was elaborated on by Haitian Yang, director of the Tianjin Leasing Association and director of the Rental Commission of the China Chamber of International Commerce (CCOIC): Due to the inuence of national and international economic factors, Chinas economic growth rate slowed in 2012. However, this has opened a door for leasing companies and the leasing market in China, because the governments reason for restraining economic growth is to control ination. He continued: Tightening up monetary policy is a method of taking control of banks monetary supply. In this case, it is hard for companies to get loans from banks, so instead they turn to nancial leasing which provides a good opportunity for the development of the nancial leasing industry in China. Wang too sees positive signs, observing that the economy is on track for a soft landing, with the consumer price index currently lower. The government has started to deploy new investment to stimulate the economy, although not on the scale of 2008. These stimulus packages and the possible turnaround of the economy could also indicate a stabilization of demand for leasing in the aected sectors. Also looking forward, Diwakar Singhal, senior vice president and business leader of consultancy Genpact envisages a steady growth in mid- and low-ticket leasing volumes in China in the next ve years. This would primarily be driven by increased domestic demand and consumption across industries, with the auto sector playing a signicant role in fuelling this growth.
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Future growth
There was agreement across the board regarding the growth prospects for leasing in the coming 12 months. Diwakar Singhal took up from his previous comment, stating that growth will be seen especially in the auto/eet side; this would be driven by the launch of value-added services in eet and the launch of operating leases by some auto nancers. Paul Errington was also condent: Without a doubt the market in China will grow for leasing. Even with the Chinese economy slowing to 7.5% growth, this still represents 30% of the worlds growth. This is a massive market that has nowhere near reached its potential. Optimism for continuing growth was echoed by Jialin Wang, who said: The overall China leasing market has been in exponential growth mode for the last two years. The lower barrier to entry has resulted in a total of more than 400 registered nance lease companies, of which over 150 have been established in the last two years. He continued: With the shortage of bank liquidity available to SMEs and microbusiness, leasing will continue to be a major complement to bank loans. As a result, we expect a higher total leasing market new business volume and more leasing players in the coming year. David Chen concurred with this on the whole, but foresees a slightly longer timeframe: SGEF forecasts a recovery for leasing in the second half of2013; however, real economic growth may be from 2014.Some 7.5% GDP growth is the target for 2013 with a high probability that this will take the economy back to an acceptable level. We forecast and expect higher GDP growth rate in 2014 of around 8-8.5% in order to keep the economy growing. Haitian Yang also had no doubt there will be growth in the coming year, and provided an analysis of recent trends (see also charts reproduced earlier in this survey, under The leasing industry in China). He stated: Chinas nancial leasing industry grew dramatically from a trade volume of RMB8bn in 2006 to RMB700bn in 2010, an 86-fold increase. In 2011, due to the need to curb ination, the rate of increase decelerated to 32.9%, giving a total leasing trade balance of RMB930bn. At that time, I said to the media that from 2011 onward Chinas nancial industry will enter into a consolidation period. Yang continued: In 2012, Chinas central bank has relaxed its policy regarding the nancial leasing industry and Chinas Department of Commerce has taken an encouraging position towards it. Moreover, more cities in China have paid attention to the development of this industry. By the end of September 2012, the total leasing trade volume had reached RMB1,400bn, an increase of 50.5% on the previous year. It is estimated that 2012s total trade volume will be over RMB1,500bn, an increase of 61% on 2011. And Yang concluded: Taking the national and regional government incentives into consideration, in the coming year Chinas nancial leasing industry should continue to see a rapid increase which will not be less than 50%. Although slightly less condent in statistical terms, Jon Fales and Jason Zhou also predict growth despite the slowdown. We believe new business volumes will increase in the range of 30-50% in 2013.
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Challenges for the leasing market

Unsurprisingly, for an emerging market that is leaping forward in terms of expansion but is constrained by its very newness, a variety of challenges were described. First, Fales and Zhou highlighted the challenge of creditworthiness, aected by the economic slowdown: The need to address portfolio quality is a key concern. The slowdown of Chinas economy is aecting the ability of many lessees to pay, and credit underwriting standards in China are not yet at the levels of Western Europe and North America; delinquent and non-performing loans and leases have increased over the last several quarters. The construction industry has been particularly aected by delinquencies, with a 3040% rise in 2012. This stems partly from the multitude of provincial projects, where locals gain a sub-contact for which they lease equipment, but with the falling away of a lot of these sites the locals nd they cannot make repayments and delinquency results. Jialin Wang was concise in his breakdown of near- and medium-term challenges: Near-term challenges include: Lack of leasing law to support leasing activities; Limited credit information on individuals or SMEs; Dierent local practices in dierent areas of China create a standardization challenge. Medium-term challenges include: Too much competition from 400-plus leasing companies; The steady slowing down of Chinas economic growth. From a nancing point of view, David Chen listed two: leasing companies liquidity and SMEs risk control. Of the rst, he said: Leasing companies need to manage their liquidity very carefully, both to cater for huge market demand and tighter liquidity control from the PBOC. For instance, in the second half of 2011, the PBOC increased the bench rate and reserve ratio, which made many leasing companies short of liquidity and unable to fund new business or prevent a slowdown in business. With regard to the second, risk control by SMEs, he stated that this is a challenge as they are not as closely monitored by government as larger companies. If you enter this market, you must have local expertise to investigate and mitigate the risks. For example, many SMEs dont have audited accounts, so you cant purely rely on these accounts to make decisions. This accounting issue is touched on further below in this section, and accounting for leases is covered in detail in the nal section of this survey.
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CHINA ASSET AND AUTO FINANCE SURVEY The risk issue was also pointed out by Diwakar Singhal, who listed three big challenges: The need for a next phase of reforms to give thrust to the leasing sector; Putting in place the right operating models to cash in on the growth. The need for technology solutions, trained manpower and managing risk, through scalable low-cost operating models; Managing risk most lessors are struggling to establish the right credit underwriting model to benet from the low/medium ticket size growth. The challenge arises out of managing high volumes and not being suciently prepared for them. For Haitian Yang, the underdeveloped nature of the market means there is a steep learning curve for Chinese rms. He pointed out that, although China is one of the largest importers as well as producers of equipment, much of which in developed economies would be acquired through leasing, there is a lack of market understanding which needs to be addressed: The leasing market in China is still at a very early stage. It takes time for companies to realize and take advantage of the benets of nancial leasing to expand sales. In addition, he added, we are short of professional nancial leasing experts. Yang made the further point that China is also one of the worlds largest exporters of equipment, but there is a challenge to be overcome here: Chinese equipment and automobile companies suer from trade barriers from some European countries and the US. Paul Errington saw a challenge in the current lack of registration: The problem with mobile equipment and vehicles is their registration and their tracking. Until this is correctly addressed, corruption will lead to lessor losses and potentially reluctance to grow too quickly.
Customer credit referencing

This last point regarding registration recurred when the interviewees were asked to comment on the problem of lenders gaining accurate customer credit references and whether this is being resolved eectively. This is an issue of particular importance to Haitian Yang, who said: It is crucial for lenders to gain accurate customer credit references, which has been a common and long-lasting problem. Cities such as Tianjin and Shanghai have taken certain measures to help nancial leasing companies, including: Setting up a registration system. After signing the contract, the contract shall be registered in a publicly accessible site for review and inspection; Cooperation with banks. Banks can recommend customers with a sound credit history and good credit level; The China Leasing Association can provide a client blacklist for members as a reference; The formation of the Leasing Inspection Council by leasing companies is planned for the near future.
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CHINA ASSET AND AUTO FINANCE SURVEY The problem of lack of properly audited accounts cropped up again, with Paul Errington saying: The main issue here is obtaining accurate company nancial statements, which is a bigger problem than references. Dealing with a lack of credit information is a challenge already mentioned by Jialin Wang. He expanded on this by commenting that for enterprises or publicly listed companies, credit references are less likely to be a concern. However, there are limitations to individual or SME credit information with the newly established credit system. On top of that, non-banking leasing companies in general dont have access to the credit information system, which is only available to banks. As a result, scorecard-based cash ow analysis with supplemental document support is used as an interim solution by many leasing companies. For David Chen, there is a challenge for foreign-invested leasing companies managed under licence from MOFCOM, which includes his own rm SGEF. Another leasing licence is managed by the China Banking Regulatory Commission (CBRC), which covers many local bank-owned leasing companies. However, Chen added that normally, we can work with banks to solve this issue. This point was elaborated on by Jon Fales and Jason Zhou: For MOFCOM licensees, it is dicult to get credit references the process is still very manual. PBOC/CBRC licensees have access to a shared database of credit information that, while relatively new and small in scale, at least provides some useful credit information to bank lessors. It would be helpful if other lessors could provide information and have access to the database, but we do not believe that is likely to happen soon due to the still-strict regulation of banks by the PBOC. One solution to the problem lies with setting up the proper system to deal with it, according to Diwakar Singhal: The bureau scores are available at an individual and corporate level; however, this solves only a part of the underwriting problem. There is a need to establish a robust originations system which focuses on the right technology platform, integrated workows between dealers/point of sale and underwriters/lenders and customized decision tools which are validated swiftly.
Obtaining title to an asset

Following on from credit referencing comes the issue of the uncertainty of lessors being able to obtain title to an asset at the commencement of the lease, with consequent problems of securing the asset in the event of repossession. Opinion diered as to the degree of seriousness. Paul Errington commented: As with other emerging leasing markets such as Australia, checks and balances have to be created and then eectively practiced and policed to ensure that growth can continue, to which he added: Gaining title is not so much the issue as identifying that the equipment exists and knowing where it actually is. Haitian Yang noted that obtaining title was not so much the problem, but the most important thing is how lenders take control of the lease during the period of execution of contract and deal with the lease more eectively after the contract ends.
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CHINA ASSET AND AUTO FINANCE SURVEY He continued: The following matters should be considered: It should be clearly identied whether the leased asset will be kept by the lessee after the contract ends; Insist on nancial leasing of general-purpose equipment; Generally speaking, keep away from the army, schools and religious associations when dealing with nancial leasing; After signing the contract with the manufacturer, if the lessee breaks the contract or there is anything wrong with the product, the manufacturer should be able to repossess the product; The lessee should pay a 10-30% deposit; There should be mandatory insurance of the leased asset. A dierent aspect was put forward by David Chen: It wont be an issue if you focus on new equipment and get vendor support. The way is to establish a formal relationship with vendors, and their dealers if they have them.
Market segment performance

When considering whether large businesses or the small and medium-sized companies are doing best, opinion generally favored large business at present, as stated by Jialin Wang of De Lage Landen: Due to their stronger nancial capabilities and greater suciency of funding sources, large businesses are doing better than the small and medium-sized company segment. This was the viewpoint also of The Alta Groups Jon Fales and Jason Zhou, who said that from volume and quality perspectives, large businesses are performing best. The equipment nancing market in China is still dominated by autos and by mid/large ticket leases to larger companies; the SME market is still underserved. However, the potential of the SME segment was noted by others. Haitian Yang of the Tianjin Leasing Association commented: Overall, large businesses are doing better than the small and medium-sized company segment. But a few SMEs are doing well. And SGEFs David Chen stressed: the SME market is a huge market with protable business. Chris Pearson, CEO of White Clarke Group Asia Pacic agreed that the SME market is seeing a gradual increase, stating that the bulk of equipment being leased in China at the moment is yellow goods, large heavy duty equipment for mines, construction and manufacturing. It is gradually gaining pace in the technology sector and gradually moving into the SME market.
Given a new funding opportunity in a large and expanding economy it would be expected that large corporates tap the market ahead of SMEs. As Paul Errington of Connaught Finance Investments said: This is all about education of the market with regard to those leasing products that are available. Therefore the multinationals that have experience of leasing from their global oces are starting to use this to nance equipment in China. Errington further observed: the banks are also more comfortable with a recognized brand, as from a credit point of view they often account for leasing as an unsecured loan (due to the possibility of not seeing the equipment in the event of default).
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Sector performance
Opinion varied considerably among the interviewees as to which asset nance sectors are performing best in China at present, and which look to be the best prospects for future growth. Of course, the answers reect the areas in which their own operations tend to specialize, but also indicate the depth of potential in the market. Giving the view from an association and chamber of commerce, Haitian Yang provided a straight running order for current performance: At present, the sequence of the best performing sectors is: aircraft, manufacturing equipment, automotive, medical equipment, shipping, real estate, bridge construction, transportation infrastructure, agricultural machinery and luxury products. Others pointed more to specic sectors of interest. Genpacts Diwakar Singhal observed: The auto segment and Chinese original equipment manufacturers (OEM) should grow rapidly in terms of new originations in the small- to midticket size, adding that, looking at future prospects, Chinese OEMs should be focusing on launching their captive nance arms to push international sales and there should be reasonable government focus on this. Jon Fales and Jason Zhou see medical is the best at present and that medical, green and agriculture have excellent long-term growth prospects. On current performance, Jialin Wang agreed, stating: Healthcare sector is doing best in China now, although in his opinion, the food sector and IT could be future prospects with strong potential. A dierent sector was given by David Chen for best performance: Machine tools seem to be stable, protable and with a low cost of revenue, adding that he too thinks that agriculture is a potential prospect. And in terms of prime sectors, Paul Errington listed yellow goods and heavy equipment, with the view that plant and machinery will continue to grow but as they are already the largest producer of leasing turnover, IT has a longer way to go and therefore we see this as the fastest growing sector in the future.
Business sector incentives from government

When asked to consider in which sectors of the industry were leasing companies being encouraged to develop their activities, again the responses were diverse. For Jialin Wang, Government is encouraging leasing companies to develop activities in aircraft, shipping and large power generation plants. The development of leasing nance for SMEs was picked out by David Chen, and Diwakar Singhal made the additional point that most Chinese SMEs are being encouraged to develop leasing arms. This is to drive equipment sales, both in China and international markets.
Haitian Yang provided a summary from his point of view: The business sectors where leasing companies are encouraged to develop their activities are: the energy saving industry, green industry and the municipal construction industry. However, giving a broad perspective, Jon Fales and Jason Zhou commented: There is not much encouragement for asset nancing in any specic sector, though there is encouragement generally from the government in the green and agriculture industries, from which asset nancing companies can benet.
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Renewable energy
One area that has been getting attention is the green sector. The Chinese government has been active in promoting this, and there was agreement among the interviewees that this encouragement will oer opportunities for lessors to invest in green assets. The response from Fales and Zhou was unequivocal: Yes, absolutely. David Chen pointed out that this was being helped by the fact that a national strategy is being evolved to promote green industry. And in the opinion of Jialin Wang, the prospects were also positive: Yes, new opportunities, such as electric vehicle leasing, open new areas of asset nancing. We are witnessing a rapid ramp-up trend and are waiting for the right time to kick into these sectors after research. For Haitian Yang, The answer is denitely yes. The opportunities lie in two areas. First, the green industry is being strongly encouraged to invest by the government. Therefore, nancial leasing companies starting operations in this eld can receive incentives and support in terms of tax exemption, scal subsidies and other government incentives, which will reduce investment costs. Second, as the government provides incentives on using green assets, this is a good opportunity for lessors to expand their business with companies that follow the governments initiative, thereby reducing the lessors investment risk. To this, Paul Errington added: In the last 12 months we have been approached by more energy-sustainable companies than in the last ve years. The demand is growing in the market and foreign green companies are gradually moving into China and Hong Kong. Because of this, there is without a doubt, an opportunity for lessors to invest in solar and wind farms. He continued: In addition to this is the government investment in new cities and the resulting demand for power and hot water. Although China has14 nuclear power stations with another 25 under construction, the main source of power is still fossil fuels (coal, oil and gas), of which coal is 80% of overall consumption and hydro power is 15%. The result of such a heavy reliance on coal is excessive pollution which creates an economic loss of 6% of Chinas GDP per annum. Consequently, the drive towards sustainable energy has a very real foundation.
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Mergers and acquisitions

Looking further at the future development of the market, specically with regard to restructuring in terms of Chinese lessors looking to consolidation and expansion through merger and acquisition (M&A), some activity has been seen but opinion was divided as to whether this would be a preferred method over organic growth. David Chen saw past activity as a possible indicator for the future: There have been cases. China Development Bank acquired Shenzhen Financial Leasing in May 2008, becoming one of the largest nancial leasing companies in China. It may well happen in the future, because there are hundreds of new nancial leasing companies that have emerged in the last 10 years, most of which dont have a clear core business model, the right target clients or stable liquidity. These will be the targets for mergers in future, especially after a tough period. Jialin Wang also sees some restructuring activities, including M&A, among Chinese asset nance companies. And while Haitian Yang agreed there is scope for M&A, he added the proviso that there are few successful cases as it is complicated dealing with many issues between companies. By comparison, it is easier and more eective to register a new company. Taking the view that natural growth is more likely, Jon Fales and Jason Zhou stated: We dont believe we will see signicant activity in Chinese asset nance M&A in the next few years. The focus of most lessors still is on organic growth, rather than growth by acquisition.
Pros and cons for foreign lessors

Moving on to the incentives and potential pitfalls for foreign leasing companies seeking to expand operations into China, the standout feature mentioned was the obvious one of market size and prot potential, summed up by Fales and Zhou as fast growing market, good interest spread. Jialin Wang agreed, pointing out the growth potential: Huge market size, quick market growth and comparably low leasing penetration are all key incentives for foreign leasing companies seeking to expand operations into China. To this, David Chen added: Support for global vendor partners and benets from the high returns in the local market are the best incentives. And Diwakar Singhal remarked: Small- and mid-ticket leasing is going to see substantial growth in the next ve years with good income margins. Foreign leasing companies can build a healthy portfolio with well-diversied risk in China if they move early and prepare for this opportunity.
From the leasing association perspective, Haitian Yang commented: The Chinese government has set up a number of policies, especially to foreign leasing companies in terms of tax exemption, scal subsidies, investment incentives and so on. However, these policies vary for dierent locations in China.
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CHINA ASSET AND AUTO FINANCE SURVEY He provided examples of such incentives from his own area: At present, for foreign leasing companies, the best incentives are from Tianjin, which is increasingly attracting attention nationally and internationally, and is set to become the biggest nancial centre in China. For example, the Tianjin Municipal Government has initiated the policy that solely foreign-funded companies or joint venture enterprises can enjoy the same benecial incentives, such as tax exemption for the rst two years and a 50% reduction for the third year; RMB5 20mis oered to start-up companies with a large amount of registered capital; if constructing new oce buildings locally or renting local oces, the local government provides a 50% subsidy. Yang then added some particular areas that merit careful treatment: In terms of the drawbacks, there are no man-made pitfalls, but the nancial leasing industry needs to be careful in any dealings with the army, religious associations or schools. From a lessors point of view, Jialin Wang stressed local government as a potential diculty, saying that potential pitfalls include variable local government support to foreign investors. Other areas viewed as problematic were the need for local knowledge and expertise. Jon Fales and Jason Zhou noted that obstacles include more competition than expected; also, most foreign lessors are not familiar with Chinese business practices, which makes it much harder to make informed credit decisions. To this, David Chen added: most things in the market will need to be localized, with a structured programme including funding sources, tailor-made nance oers, processes, risk appetite and remarketing support. This was elaborated on by Diwakar Singhal, who highlighted that moving too fast or entering the China market without the right customized operating model and a framework for managing risk and growth could put lessors at serious risk.
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Internal and cross-border expansion prospects

Asked which direction asset nance companies in China are likely to take for future growth whether through internal or overseas expansion the consensus was generally that internal consolidation would be the prime consideration, but that moves into oshore markets were bound to follow. The Alta Groups Jon Fales and Jason Zhou saw little overseas expansion for some time, stating that growth would be almost all in China for at least the next ve years. Weve seen little to no interest from Chinese lessors to expand out of China, and little government encouragement for them to do so. We believe, eventually, that Chinese lessors will follow their Chinese vendor clients into new countries and markets, but, so far, few manufacturers have expanded internationally in any meaningful way. For SGEFs David Chen, the initial scenario is mainly the same: In the short and middle term, most Chinese lessors shall continue to focus on local markets, excepting some captive leasing companies owned by big manufacturers like Sony and Zoomlion which need overseas equipment markets. However, most local players will enter into overseas markets in future for sure, similar to US, European and Japanese players seeking Renminbi and as the companies themselves become more internationalized. Haitian Yang of the Tianjin Leasing Association also saw internal growth as the rst objective, but listed the regions into which he could see companies moving, which include ambitions in the developed markets: Personally, I think rst is in China, second North America, third Western Europe, and then Russia, Brazil, India and South Africa. Jialin Wang of De Lage Landen agreed, stating: The playground for most Chinese lessors will still be within China in the near future. However, captives of some Tier-1 equipment manufacturers are seeking to expand their footprint overseas to markets such as Brazil and even North America as the manufacturers are selling more and more overseas. Genpacts Diwakar Singhal foresees overseas expansion into other emerging regions, simply stating that development for Chinese leasing companies will occur within China, East Asia and LatAm. However, Paul Errington of Connaught Finance Investments saw no need to look further than a logical progression into the neighboring market, pointing out that the Asia-Pacic market for equipment leasing is still emerging, and as such quite untapped by lessors. Why would Chinese lessors want to expand into a leasing market that has a well-developed market with a multitude of competitors operating? Their best market is on their doorstep, especially as most foreign banks struggle to understand the regionalized legislation, cultural dierences and nuances of customers in Asia. Further to these longer-term views, as this survey went to press the announcement that American International Group (AIG) had agreed to sell up to 90% of its aeroplane leasing unit, International Lease Finance Corporation (ILFC), to a group of Chinese investors in a $5bn-plus deal subject to regulatory reviews, is perhaps an indication of the direction and scope of some Chinese nancial institutions, and of their ambition.
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Value of government incentives

Asset Finance International asked the interviewees for their opinions on the question of the eectiveness of government incentives to invest either for foreign-owned companies into China, or for local companies into overseas markets. Jialin Wang simply commented: Government incentives are eective when lessors meet pre-set criteria. David Chen emphasized certain regional dierences, stating: There are normal government incentives for foreign investors, nothing special for leasing companies. But in some cities like Tianjin, there may be some additional incentive plans for leasing companies. Following on from this, a comprehensive response came, not surprisingly, from Haitian Yang, who said: The various government incentives are very eective. We have increasing numbers of companies from the US, Japan, Korea, Taiwan and elsewhere opening up oces or forming foreign-funded companies in China. We at the Tianjin Leasing Association are willing to answer any questions from overseas nancial leasing companies regarding the process of establishing companies in Tianjin or in China, setting up a representative oce for marketing purposes, and even regarding cultural dierences when doing business. He added that assistance is available in areas such as company registration, legal issues and accountancy, concluding: We are happy to give more detailed explanations of government incentives to companies. The Chinese government and the Tianjin government want foreign nancial leasing companies come to China. A more cautionary note was struck, however, by Jon Fales and Jason Zhou, whose view was that incentives had not had any real eect: There is little investment by Chinese lessors outside of China; within the country, lessors continue to invest in medium- and large-ticket transactions because they are protable. Government encouragement to invest in the SME sector has proven ineective thus far.
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Eects of regulation
The nal matter for consideration was whether legislation and regulation have a benecial or adverse eect on leasing operations. Here, there was universal agreement that the situation is one which requires further development, as put by David Chen, who said: In general, legislation and regulation have a benecial eect on leasing. The market is developing well under local regulations and protected by local law in cases of delinquency. However, the situation needs to continue improving, for instance regarding how to set up software leasing. There is also the need to resolve whether and when to draft and issue a rst leasing law in China, but it is still pending after more than 10 years of discussion. We have some existing regulation; however, a formal leasing law will do much to promote the leasing industry in the long term. To this, Jialin Wang added: So far, legislation/regulation does not incorporate protection for unique leasing practices. A leasing law is still being drafted. In general, the lack of legal support results in an adverse impact on leasing operations. Jon Fales and Jason Zhou were none too impressed with the speed of development, commenting: There have been few signicant changes in legislation in recent years, but adding that the changes that have been made, such as the movement to replace the business tax with VAT, generally have had benecial eects for lessors. The views were summed up by Haitian Yang: At present, the Chinese nancial leasing industry is in the development stage. Most legislation and regulations have a benecial eect on leasing operations. However, a few regulations have had an adverse eect. For instance, in 2011 the PBOC implemented a regulation to control the scope of nancial leasing companies in order to maintain a similar trade volume to the previous year, which restricted the development of nancial leasing companies and caused a great deal of complaint from lessors and nancial leasing associations. However, this policy has been relaxed due to the volume of complaints. The subject of taxation is specically covered in the article Taxation update on leasing in China later in this survey.
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China leasing: First steps towards evolution into a mature market

Diwakar Singhal assesses the building blocks needed for a successful leasing operation in China
In 2010, the Peoples Republic of China became the second largest economy in the world, exceeding US$5.7trillion for that year and overtaking Japan ($5.4tn). (Source: IMF.) It is now poised to overhaul the US and take its position as the biggest global economy, an event that will inevitably happen in another decade or so. In 2001, China became a member of the World Trade Organization (WTO); this also marked the rise of the Chinese leasing sector, with nancial leasing evolving as an accepted method of nancing equipment. Leasing volumes saw a huge jump from 2006 to 2010, when new lease origination grew from RMB8bn to RMB700bn primarily in large equipment such as aircraft, shipping and heavy machinery. Currently, lease nancing is primarily dominated by low margin, high ticket deals and driven by domestic banks, which hold close to 60% of leasing assets. This landscape is now about to experience rapid change. Given the current European slowdown, and with the US economy still recovering, China is poised to play a dominant role as an economic powerhouse in the next decade. The next phase of Chinese growth is expected to be driven by robust domestic demand and this should in turn be the catalyst for phenomenal growth in SME nancing in general and leasing in particular. Medium- and small-ticket leasing options to meet the nancing needs of SME and end-customers should see exponential growth. Leasing penetration (the proportion of investment via leasing in the total equipment market) will grow multifold in a very short time. This penetration, which is currently between 3% and 5% in China, is expected to catch up with that of developed economies, which stands at around 20-30% (and roughly 45-50% in the US). Factors driving medium-and small-ticket leasing volumes Relaxing restrictions: In 2005, the market was opened up by the Ministry of Commerce (MOFCOM) to leasing operations wholly owned by foreign operators. The intention was to boost the leasing sector and the desired eect of these reforms is now being seen. A number of key international players have started operations in China; some of these have now been established in the market for several years and are in the position to focus on launching vendor programs and/or creating low ticket, high volume asset books with diverse risk spreads and better margins. Captives: China is the manufacturing hub of the world. Chinese OEMs now see the advantage of launching nancial/operating leasing options through their captive nancing arms to drive product sales in both international and domestic markets. Some key OEMs already have captive nance arms, which play a predominant role in pushing their international presence. This trend is here to stay and would create further traction in SME leasing. Auto sector: In 2005, foreign-invested car companies were allowed to oer car leasing in China. Volvo Financial Services Company was the rst to be licensed, and now there are around 17 auto nance companies in China, including giants like Daimler Financial Services and BMW Financial. China is the biggest auto market in the world and currently car leasing has a market share of only 10% oering a huge potential for growth in auto rental, leasing and eet services. 32
Diwakar Singhal
CHINA ASSET AND AUTO FINANCE SURVEY The new way: With continued economic growth in China and increased demand for o balance sheet nancing, entrepreneurs are beginning to accept the concept of value derived from usage, rather than ownership. In addition, leasing is an ideal platform for the development of structured nance and oers the right nancing tool to match funding requirements with investment periods (minimizing liquidity risk). Building blocks for successful lessors in China The operational framework: Both domestic and foreign nancers in China need to invest in building skills, capabilities and creating the right end-to-end operating models. The developing leasing market in China is unique, although with some structural decits like limited availability credit bureau scores (one of the sources for credit bureau scores is the Peoples Bank of China). Lessors need to strike a ne balance between aggressively pursuing growth versus credit quality. This can be achieved through a combination of an eective process framework (both originations and servicing), market analytics and selecting the right technology platform. Low-cost and scalable powerful partnerships: As the low ticket, automated business-ow leasing market rapidly develops in China, the ability to move fast and with a variable and quickly-scalable model is of prime importance. The key for lessors is to focus on core variables such as: cost of funds; building a risk framework; product innovation/customization; and building sales channels and vendor programs. Lessors should partner with established service providers, which oer hosted technology platforms to manage routine processes like booking, collections and customer service etc. Genpacts BPaaS (Business Process as a Service) solution, which is a combination of leasing expertise, technology partnerships and trained people, is an ideal example of establishing such powerful partnerships. Paperless and customized originations: Credit information on individuals and enterprises is now available through the Credit Reference Center. Established by the PBOC, this is a positive step in the growth of low- and medium-ticket leasing business. However, there is a real need for setting up origination systems which enable lessors to quickly make decisions on deals with minimum impact on credit quality. An originations system which is seamless integrated with vendors/OEMs and the credit hubs through workows is needed, as is the creation of auto-decision underwriting models which can handle low-ticket large-volume deals with consistency in credit policy applications. Such steps would greatly help nancers progress in building up a healthy asset book. Best in Class servicing: Volumes of assets under management can be built up fairly quickly in China. An operating system which is built to handle volume growth from a collections and customer service perspective is necessary. The implementation of global industry practices and best practices in each of the servicing functions at the early set-up stage would help lessors seamlessly build protable books and happy customers.
Diwakar Singhal is senior vice president and business leader of consultancy Genpact
33
Taxation update on leasing in China

Khoon Ming Ho, Lachlan Wolfers and Simon Liu take a look at recent taxation changes aecting the leasing industry in China
Just as the Chinese economy continues its rapid development, the asset leasing industry in China is also undergoing signicant change. At one end of the spectrum, Chinese airlines have placed unprecedented orders for new aircraft, and at the other end, the market for leasing new motor vehicles, farming equipment and other industrial equipment continues to mature. This article looks at some of the key taxation reforms which have taken place in China, and how they aect the leasing industry. The analysis below focuses in the rst section on direct taxes, such as Chinas Corporate Income Tax (CIT), and in the second section on indirect taxes, such as Chinas Value Added Tax (VAT) reforms. Direct taxes The CIT regime that came into force on January 1, 2008 generally favors lessors in China over those having no local leasing vehicles. This is principally attributable to the relatively high withholding tax rates, which allow limited deductions if any, for payments to foreign lessors. Facing competition from domestic lessors, some foreign lessors are now weighing up the option of setting up leasing vehicles in China to compete on a level playing eld with their domestic rivals. Foreign lessors The lessor of an inbound operating lease is liable to pay withholding tax on the gross amount of rentals. The statutory withholding tax rate is 10%. However, if the lessor qualies as a resident of certain jurisdictions, for instance, the US or Ireland, and is able to demonstrate to the Chinese tax authorities that it is the benecial owner of the rentals, the withholding may be subject to reduced eective rates (e.g. 7% for US residents and 6% for Irish residents). No deduction is allowed in computing the withholding tax payable. Where a lease is characterized as a nance lease, the foreign lessor is liable for withholding tax on the interest element of the lease rentals, computed as the gross amount of rentals less the equipment cost. Under the CIT law eective from 2008, foreign lessors are no longer allowed to further deduct from their interest income a deemed interest expense at the home-country export credit rate. Conventionally, foreign lessors have passed on the withholding tax to Chinese airlines under tax gross-up clauses in their lease agreements. But there are signs that times are changing, as some Chinese lessees are requesting foreign lessors set up leasing vehicles in China to mitigate exposures to the passed-on withholding tax. Lessors in China The lessor of an operating lease in China is liable for CIT at 25% on its taxable income. Lease rentals are recognized over the period of the lease. The lessor claims tax depreciation of the equipment on lease using the straight-line method, subject to the minimum depreciation period as follows:
34
CHINA ASSET AND AUTO FINANCE SURVEY Aircraft, trains, ships, machinery, and other production equipment 10 years; Tools, utilities, and furniture pertinent to productions and operations 5 years; Transportation devices other than aircraft, trains and ships 4 years; Electronic devices 3 years. Under a nance lease, the lessor in China must recognize its lease income on an accruals basis. Eectively, the lease rentals, after deduction of equipment costs, interest expenses, and other relevant business expenses, are allocated over the term of the lease and are subject to CIT at 25%. The lessor under a nance lease eectively gives up the right to depreciate the leased equipment over to the lessee. Indirect taxes China has had, for many years, a dual system of indirect taxes. That is, Business Tax (BT) applicable to the services industry, and VAT applicable to the sale and importation of goods. Asset leasing has stood at the intersection of those two tax regimes. Now that is changing. With eect from January 1, 2012, the Chinese Government has embarked upon an ambitious reform agenda which is expected to ultimately result in VAT replacing BT entirely for the services industry. Those reforms commenced with a VAT pilot programme in Shanghai for the modern services and transportation sectors, before being extended to several other cities and provinces. During the rst half of 2013, the initial pilot programme is expected to be applied nationwide, and then attention will turn to transitioning other service industries still paying BT, such as nancial and insurance services, real estate and construction, post and telecommunications and entertainment services. The asset leasing industry was included as part of the initial pilot programme, so that leases granted by lessors with oces in Shanghai, Beijing and Guangdong province (amongst others), as well as leases granted by foreign lessors to lessees in those same provinces, are now subject to VAT. Set out below is a summary of the way that the VAT reforms aect the asset leasing industry: 1 Leases of any tangible movable property, including both nance and operating leases, are subject to VAT at the rate of 17%. Where the lessor is in China, the VAT is collected from the lessor. However, where the lessor is outside China, the VAT is paid on a withholding basis by the lessee to the tax authorities. Lessees who are registered as general VAT taxpayers will ordinarily be eligible to claim input VAT credits, so the VAT should not be a real cost. Where the lessee is an end-consumer or otherwise unable to claim VAT credits, the cost impact is generally greater than under the previous BT regime. 2 The impact of the 17% VAT rate is tempered by a number of special rules, such as: Only leases entered into from the date of commencement of the VAT pilot programme in that city or province are subject to VAT. Existing leases remain subject to BT until terminated. This necessitates leasing companies determining, on a case-by-case basis, whether the particular lease is subject to VAT, or remains within the BT regime. Leasing companies also need to apportion their input VAT credits between those relating to new leases (where VAT applies), and those relating to old leases (where BT still applies);
35
CHINA ASSET AND AUTO FINANCE SURVEY Lessors of nance leases are potentially eligible for a VAT refund where their eective tax burden exceeds 3%. There are diering interpretations being made of the way of measuring the eective tax burden between leasing companies, and by dierent tax authorities, so advice in this area is often needed; Under the previous BT regime, nance lessors were eligible to deduct certain costs (such as the purchase price and interest expenses) against their revenue in calculating their BT liability. This policy eectively continues under VAT, notwithstanding that such expenses may currently be outside the VAT regime. This can give rise to dicult systems issues in recognizing and allocating costs. On a more cautious note, the VAT pilot programme rules contain a somewhat obscure provision which arguably denies a VAT credit for lease payments made by lessees of motor vehicles, even where the motor vehicle is to be used entirely for business purposes. The policy basis for this would seem to be designed to produce the same VAT outcome for the leasing of motor vehicles as for the outright purchase (where a VAT credit is similarly denied). A popular option under the previous BT regime was the use of sale and leaseback transactions, the objective of which was to place the VAT credit entitlement on the purchase of the asset in the hands of the lessee, with the subsequent sale by the lessee back to the lessor eectively being ignored for VAT purposes. This approach may still produce favorable tax outcomes under the new VAT pilot programme, although the basis for the concession in Announcement [2010] 13 pre-dates it. The VAT reforms have produced a number of challenges for the asset leasing industry in China. Key areas of uncertainty where advice is often needed include: Understanding the nancial impact of these changes; Whether it is preferable to terminate old leases and enter into new leases which fall within the VAT regime; Whether cross-border leases entered into prior to 2009 (which can, in certain circumstances, remain outside the scope of BT), also remain outside the scope of VAT if they are novated from 2012 onwards; The extent to which refunds can be claimed where the eective tax burden under nance leases exceeds 3%; Whether sale and leaseback transactions produce the same benecial outcomes under the new VAT regime as they did previously; Whether withholding taxes are payable on lease amounts calculated inclusive or exclusive of VAT, recognizing that this has signicant nancial ramications for the aircraft leasing industry in particular; Whether VAT is payable to Customs on the importation of leased assets into China and again under the VAT pilot programme. As the saying goes, the only constant is change, and that saying is most apt to describe both the leasing industry and the direct and indirect taxation regimes applicable in China.
Khoon Ming Ho is partner in charge, Lachlan Wolfers, partner, and Simon Liu, senior manager, KPMG China
36
Accounting for leases in China

Russell Brown and Sharon Su detail the dierent accounting treatments of leases
In Article 21 of China Accounting Standards (CSA) 2006, the classication, accounting and presentation in nancial statements for leases have been specied in detail. In general, a lease with which the risks and rewards of the assets have been transferred in substance would be classied as a nance lease, otherwise would be classied as an operating lease. The details of Article 21 of CSA are illustrated as below. Classication of leases A lessee and a lessor shall classify a lease as a nance lease or an operating lease on the lease beginning date. The nance lease shall refer to a lease that has transferred in substance all the risks and rewards related to the ownership of an asset. The ownership of it may or may not eventually be transferred. Where a lease satises one or more of the following criteria, it shall be recognized as a nance lease: (1) The ownership of the leased asset is transferred to the lessee when the term of lease expires; (2) The lessee has the option to buy the leased asset at a price which is expected to be far lower than the fair value of the leased asset at the date when the option becomes exercisable. Thus, on the lease beginning date, it can be reasonably determined that the option will be exercised; (3) Even if the ownership of the asset is not transferred, the lease term covers the major part of the use life of the leased asset; (4) In the case of the lessee, the present value of the minimum lease payments on the lease beginning date amounts to substantially all of the fair value of the leased asset on the lease beginning date; in the case of the lessor, the present value of the minimum lease receipts on the lease beginning date amounts to substantially all of the fair value of the leased asset on the lease beginning date; and (5) The leased assets are of a specialized nature that only the lessee can use them without making major modications.
The term operating lease shall refer to a lease other than a nance lease.
37
CHINA ASSET AND AUTO FINANCE SURVEY Accounting treatments of lessees in nance leases (1) On the lease beginning date, a lessee shall record the lower one of the fair value of the leased asset and the present value of the minimum lease payments on the lease beginning date as the entering value in an account, recognize the amount of the minimum lease payments as the entering value in an account of long-term account payable, and treat the balance between the recorded amount of the leased asset and the long-term account payable as unrecognized nancing charges. The initial direct costs such as commissions, attorney's fees and traveling expenses, stamp duties directly attributable to the leased item incurred during the process of lease negotiating and signing the leasing agreement shall be recorded in the asset value of the current period. The lease beginning date shall refer to the date on which the lessee begins to have the right to use the leased asset. (2) When a lessee calculates the present value of the minimum lease payments, if it can obtain the lessor's interest rate implicit in the lease, it shall adopt the interest rate implicit in the lease as the discount rate. Otherwise, it shall adopt the interest rate provided in the lease agreement as the discount rate. In case the lessee cannot obtain the lessor's interest rate implicit in the lease and no interest rate is provided in the lease agreement, the lessee shall adopt the borrowing interest rate of the bank for the same period as the discount rate. (3) The expression interest rate implicit in the lease" shall refer to the discount rate that, on the lease beginning date, makes the aggregate present value of the minimum lease payments and the unguaranteed residual values equal to the sum of the fair value of the leased asset and the initial direct costs of the lessor. (4) The term "guaranteed residue value" shall refer to, in the case of a lessee, the residual value of the asset which is guaranteed by the lessee or by a third party related to the lessee; and in the case of a lessor, the guaranteed residual value from the standpoint of the lessee plus the residual value of the asset which is guaranteed by a third party independent from both the lessor and the lessee. The term "residual value of the asset" shall refer to the fair value of the leased asset when the term of lease expires as estimated on the lease beginning date. The term "unguaranteed residue value" shall refer to the residual value of the leased asset minus the guaranteed residual value of the lessor. (5) The unrecognized nancing charge shall be amortized to each period during the lease term. The lessee shall adopt the eective interest rate method to calculate and recognize the nancing charge in the current period. (6) In calculating the depreciation of a leased asset, the lessee should adopt a depreciation policy for leased assets consistent with that for depreciable assets which are owned by the lessee. If it is reasonable to be certain that the lessee will obtain the ownership of the leased asset when the lease term expires, the leased asset shall be fully depreciated over its useful life. If it is not reasonable to be certain that the lessee will obtain the ownership of the leased asset at the expiry of the lease term, the leased asset shall be fully depreciated over the shorter one of the lease term or its useful life. (7) Contingent rents shall be recognized as an expense in the period in which they are actually incurred.
38
CHINA ASSET AND AUTO FINANCE SURVEY Accounting treatments of lessors in nance leases (1) On the beginning date of the lease term, a lessor shall recognize the sum of the minimum lease receipts on the lease beginning date and the initial direct costs as the entering value in an account of the nance lease values receivable, and record the unguaranteed residual value at the same time. The balance between the sums of the minimum lease receipts, the initial direct costs and the unguaranteed residual value, and the sum of their present values shall be recognized as unrealized nancing income. (2) The unrealized nancing income shall be allocated to each period during the lease term. The lessor shall calculate the nancing income at the current period by adopting the eective interest rate method. (3) The lessor shall, at least at the end of each year, re-examine the unguaranteed residual values. No adjustment may be made if the unguaranteed residual value increases. Where there is evidence showing a reduction in the unguaranteed residual value, the interest rate implicit in the lease shall be recalculated and the associated reduction of the net investment in the lease shall be recognized as a loss for the current period. The nancing incomes for subsequent periods shall be recognized on the basis of the revised net investment in the lease and the recalculated implicit interest rate. The net investment in the lease shall be the dierence between the sum of the minimum lease receipts and the unguaranteed residual value in a nance lease and unrealized nancing incomes. Where the unguaranteed residual value for which a loss has been recognized previously is subsequently recovered, the reversal of the loss shall be limited to the amount of the loss recognized, and the interest rate implicit in the lease shall be recalculated. The nancing incomes for subsequent periods shall be determined based on the revised net investment in the lease and the recalculated implicit interest rate. (4) Contingent rents shall be recorded into the prots and losses of the period in which they actually arise. Accounting treatments of lessees in operating leases (1) The rents from operating leases shall be recorded by the lessee in the relevant asset costs or the prots and losses of the current period by using the straight-line method over each period of the lease term, unless there are other more reasonable methods. (2) The initial direct costs incurred by a lessee shall be recognized as the prots and losses of the current period. (3) The contingent rents shall be recorded into the prots and losses of the current period in which they actually arise.
39
CHINA ASSET AND AUTO FINANCE SURVEY Accounting treatments of lessors in operating leases (1) A lessor shall include the assets subject to operating leases in relevant items of its balance sheets in light of the nature of the asset. (2) The rents from operating leases shall be recorded in the prots and losses of the current period by using the straight-line method over each period of the lease term, unless there are other more reasonable methods. (3) The initial direct costs incurred to a lessor shall be recorded into the prots and losses of the current period. (4) As for the xed assets subject to operating leases, the lessor shall calculate the depreciation of it by adopting depreciation policy for similar assets. As for other leased assets, systematic and reasonable methods shall be adopted for its amortization. (5) The contingent rents shall be recorded in the prots and losses of the period in which they actually arise. Sale and leaseback transactions (1) A lessor and a lessee shall recognize a sale and leaseback transaction as a nancing lease or an operating lease according to Chapter II of the present Standard. (2) Where a sale and leaseback transaction is determined as a nancing lease, any balance between the sales proceeds and the carrying amount of the asset shall be deferred and amortized as an adjustment to depreciation in light of the depreciation pattern of the leased asset. (3) Where a sale and leaseback transaction is determined as an operating lease, any balance between the sales proceeds and the carrying amount of the asset shall be deferred and amortized as an adjustment to the lease payments in light of the proportion of the lease payments during the lease term. However, in case any evidence shows that the sale and leaseback transaction is based on the fair value, the balance between the sales proceeds and the carrying amount of the asset shall be recorded in the prots and losses of the current period. Presentation (1) A lessee shall, in its balance sheet, present the balances between the longterm accounts payable minus the unrecognized nancing charges related to the nancing leases, long-term liabilities and long-term liabilities due within one year respectively.
(2) A lessee shall, in its notes, disclose the following information related to the nancing leases: (a) The originally recorded carrying amounts at the beginning and the end of the period of each class of leased xed assets, and the accumulated depreciation amount; (b) The minimum lease payment for each of the next three accounting years subsequent to the balance sheet date and the aggregate minimum lease payment thereafter; and 40
CHINA ASSET AND AUTO FINANCE SURVEY (c) The unamortized balance of unrecognized nancing charges and the method used to allocate the unrecognized nancing charges. (3) A lessor shall, in its balance sheet, present the balances between the nance lease accounts receivable minus the unrealized nance incomes as long term liabilities. (4) A lessor shall, in its notes disclose the following information related to the nancing leases: (a) The minimum lease receipt for each of the next three accounting years subsequent to the balance sheet date and the aggregate minimum lease receipt thereafter; and (b) The unamortized balance of unrealized nancing income and the method used to allocate the unrealized nancing income. (5) As for an important operating lease, the lessee shall, in its notes, disclose the following information: (a) The minimum lease payment for the irrevocable operating lease for each of the next three accounting years subsequent to the balance sheet date; and (b) Aggregate minimum lease payment thereafter for the irrevocable operating lease. (6) A lessor shall disclose the carrying amount of each class of leased assets in the operating leases. (7) A lessee and a lessor shall disclose each sale and leaseback transaction as well as the signicant items in the contract on the sale and leaseback transaction. In summary, at the commencement of the lease term, a lessee shall recognize a nance lease asset in its balance sheet, while a lessor shall recognize the nance lease as a sale of asset together with a nancing transaction. On the contrary, in an operating lease the lease asset remains in the balance sheet of the lessor.
The authors are Russell Brown, managing partner, and Sharon Su of LehmanBrown International Accountants www.lehmanbrown.com Email: beijing@lehmanbrown.com
41
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ASSET FINANCE INTERNATIONAL IN ASSOCIATION WITH WHITE CLARKE GROUP

CHINA ASSET AND AUTO FINANCE SURVEY

White Clarke Group

CHINA ASSET AND AUTO FINANCE SURVEY

CHINA ASSET AND AUTO FINANCE SURVEY

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China: Macroeconomic indicators

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China: Real GDP Projected Change

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185 Source: World Bank, Doing Business 2013 database 8

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How China ranks on topics in the Doing Business index

Enforcing contracts (19)

Getting electricity (114)

Trading across borders (68)

Registering property (44)

Paying taxes (122)

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Global Competitiveness Index

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Innovation Business sophistication

Technological readiness Financial market development Labor market eciency

Source: Global Competitiveness Report 2011-2012, World Economic Forum, Switzerland

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Most problematic factors for doing business

Corruption Perceptions Index, 2012

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The leasing industry in China

China leasing industry business volume, 2006-10

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China Leasing Development, 2010-11

China Leasing Development, end Sept 2012

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Number of lessors licensed under dierent authorities

NBFI Lessors approved by CBRC (at end 2012)

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Auto nance companies in China

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010-66279137 (Mr Ke Kasheng)

SAT Beijing Leasing Association

Shanghai Leasing Trade Association

Tianjin Leasing Trade Association

Financial Leasing Committee of CBA

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The industry view of the leasing market

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Challenges for the leasing market

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Customer credit referencing

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