GE China, a unit of the US conglomerate General Electric, is expected to be the first foreign company to announce the setting up of a subsidiary in China to conduct leasing business.

This would represent a major step forward in the opening of China's financial industry in accordance with the nation's commitments to the World Trade Organization (WTO).

Industry sources said the development of the leasing market could help enhance the efficient use of capital by the many Chinese enterprises that are expanding to meet increasing demand fuelled by rapid economic growth.

Many foreign leasing companies are known to have been attracted by the Chinese market's massive business potential. And now that the green light has been given they are expected to follow GE's lead, the sources said.

"We are still in the registration process, although we've got the licence," said Geoff Li, a GE (China) Co spokesman.

GE is hoping that it can open the new operation by the end of this month, which will be registered in Beijing and handle equipment leasing business all over China, according to Li.

"We used to have some reservations about the Chinese market because of the potential high risks (in running such a business)," said Li. "However, we are now convinced that in the long run the advantages of entering the China market will outweigh the risks."

Operating as a wholly owned subsidiary has the added advantage of quick response to market changes because business decisions can be made quickly, he said.

Meanwhile, other foreign industrial conglomerates, including Cisco and Caterpillar, are also interested in opening their own leasing operations in China, although they may go for other options.

A source at Shanghai Rental Trade Association (SRTA) told China Daily that International Financial Corp (IFC) and the Netherlands-based Rabobank are jointly planning to buy a stake in the Shanghai-based New Century Finance Leasing Co Ltd, one of China's biggest finance lease companies. The transaction is expected to be completed later this month, the source said.

At least two Taiwan finance companies are also interested in entering Shanghai's leasing market.

In another development, Shanghai Golden Coast Enterprise Development Corp Ltd, a major local leasing company, has been discussing possible partnerships with overseas firms, including Fuji, Komatsu and Softbank.

"We still think the risks from doing leasing business in China remains relatively high, because, in our eyes, the market is still very immature," said Lansi Jiang, China chief representative of Sweden-based Volvo's construction equipment unit, which has set up a manufacturing base in Shanghai.

"However, that doesn't mean we won't do it at a later time, as our study and analysis of the market is well under way," she noted.

While Volvo may be procrastinating, many others are ready to take the plunge. "We'd expect the entry of at least three overseas firms into the local leasing market within this year," said Gao Chao, director of the service industry administrative department under the Shanghai Municipal Economic Commission.

Market takes off?

Shanghai currently has about 10 Sino-foreign joint ventures engaged in finance and operating lease businesses. These establishments are competing with hundreds of domestic firms handling a large variety of leasing or rental businesses, as well as a large number of foreign-invested firms that operate leasing businesses as a sideline.

There are about 40 Sino-foreign joint venture leasing companies across the country at present, among which about 35 firms are mainly engaged in finance leasing business, while the remainder are primarily involved in operating lease businesses.

A finance lease usually involves the long-term leasing of equipment or commodities owned by the leasing company, while an operating lease is generally known as the short-term hire of equipment.

"The leasing industry is quite promising and lucrative, especially given the fact that the China market is far from being mature," said Qu Yankai, deputy secretary-general of SRTA and also deputy director of the leasing committee under the China Association of Enterprises with Foreign Investment.

Sino-foreign joint-stock leasing companies set up last year did more than US$1.1 billion of finance leasing business, a year-on-year increase of almost nearly 40 percent, according to Qu.

Experts estimate that equipment purchases in relation to the 2008 Beijing Olympics alone could total 20 billion yuan (US$2.4 billion).

Despite the demand, China's leasing market has remained rather primitive. For example, lease financing only accounts for 3 percent of all equipment acquired by Chinese manufacturing enterprises, compared with more than 30 percent in the United States, said Qu.

As China's market economy gradually matures, more local companies especially those State-owned enterprises (SOEs) that have modernized will come to realize that leasing can help promote efficiency. The fact that they would all become potential customers serves to indicate the size of the leasing market, he added.

Yu Kaiqi, general manager of Shanghai Golden Coast, agreed.

"A wise entrepreneur won't pour all his money into fixed assets investment," he said. "Instead, he would seek to add value in his capital's flow. In that case, leasing would be a viable choice."

"I believe leasing can play an important role in solving some of China's thorniest economic problems... it's something inevitable," Yu added.

Obstacles ahead

However, some key issues have to be tackled first before such benefits can be realized, insiders said.

The biggest problem relates to the outdated laws and regulations covering domestic leasing operations, according to Yu from Shanghai Golden Coast.

Unlike their foreign counterparts, local commercial banks, for example, are still prohibited from conducting finance lease business.

And many domestic leasing companies have also complained that they are hampered in terms of finance leasing because they are not entitled to the preferential tax treatment extended to their foreign competitors, said Yu.

The government is taking positive steps to redress these issues.

Gao from the Shanghai Municipal Economic Commission revealed that Ministry of Commerce officials are conducting a nationwide study before revising the existing leasing-related regulations and are seeking new approaches to both mechanisms and rules, in order to give China's leasing market a lift.

While domestic leasing firms are expected to be able to compete on an equal footing, qualification requirements for those foreign companies wishing to enter the market might be lower than before.

Industry watchers said such bold moves will hopefully be unveiled within the first half of this year.

(China Daily March 16, 2004)