A Study About The Financial Leasing Industry’s Deviation From Its Fundamental Purpose In China From The Perspective Of Lessees

Since 2007,the regulatory standards for China’s financial leasing industry have been relaxed driven by China’s accession to the WTO.Then China’s financial leasing industry has shown strong growth,with the number of leasing companies increasing,the leasing investment volume expanding and the international status of China’s leasing industry improving.From 2007 to 2016,the number of leasing companies in China increased from 109 to 7136,the leasing investment volume increased from 46 billion yuan to 1794.3 billion yuan,and the world ranking of China’s leasing investment volume improved from the 27^th position to the 2^nd position.Although China’s financial leasing industry has exhibited a“pleasing”performance in terms of transaction volume and growth rate in the past decade,there is also a problem that should not be ignored behind the rapid growth:most of China’s financial leasing transactions are sale-and-leaseback purely providing financing for lessees,which deviates from the essential characteristics of the financial leasing.From the historical origin of financial leasing transactions and the experiences of several mature leasing markets,such as the Europe and the United States,the essential feature of financial leasing transactions should be the financial intermediary between the enterprises using equipment and the equipment manufacturers,providing financial support for the lessees to obtain new equipment.In contrast,China’s sale-and-leaseback transactions,the dominating leasing transactions,have separated from the equipment manufacturers,which no longer act as a financial intermediary between the enterprises using equipment and the equipment manufacturers but change to a pure financing instrument similar to loans instead.Therefore,China’s financial leasing industry has deviated from its fundamental purpose during its rapid growth in the past decade.Such phenomenon is worthy of attention not only because it is concerned with the Chinese society’s accurate perception of the concept of financial leasing,but also because of a deeper meaning,which implies that the resource-allocating function of financial leasing is determined by its essential characteristics.Especially in China,the entry to the financial industry is strict and the financial resources are scarce.Therefore,the phenomenon of the financial leasing industry’s deviation from its fundamental purpose will be related to the use of funds of nearly two trillion yuan and related to the resource-allocating function of financial leasing.Therefore,it is necessary to clarify the reasons and consequences of the financial leasing industry’s deviation from its fundamental purpose in China,and then objectively evaluate such phenomenon.However,in reality,the reasons and consequences of the phenomenon are very complex and there are more than one research angles.For the sake of data availability and research feasibility,this paper chooses to explore the reasons and consequences of the phenomenon from the perspective of the lessees.From the point of the lessees,their financing motivation of borrowing money through sale-and-leaseback provides the market demand for the leasing companies to conduct sale-and-leaseback transactions,which has caused the phenomenon to a certain extent.Moreover,the consequences of lessees’borrowing money through sale-and-leaseback should also be an important dimension in evaluating the outcome of the phenomenon.Therefore,the purpose of this paper is to explore the motivations and consequences for lessees to borrow through sale-and-leaseback.Based on the long-term track and observation of China’s financial leasing industry,this paper selects three research angels,which are avoiding the financing restriction of‘De-capacity’policy,alleviating the mismatch of investment and financing and the debt governance effect.Furthermore,this paper uses a combination of theoretical analysis and empirical studies.In theory,this paper analyzes the logical mechanism of the motivations and consequences for lessees to borrow through sale-and-leaseback combined with the framework of the game theory,the matching principle of investment and financing,and the debt governance effect.In the empirical analysis,this paper uses the manually collected data of Chinese listed companies’sales-and-leaseback transaction information from 2007 to 2016,and conducts empirical studies by several models such as Difference-in-Difference（DID）.Finally,the conclusions are as follows.First,enterprises with overcapacity are an important member of lessees borrowing through sale-and-leaseback,accounting for about 30%of the total lessees.The motivation for overcapacity enterprises to borrow through sale-and-leaseback is to avoid the financing restrictions of the‘De-capacity’policy,which weakens the effect of the policy.In addition,the mechanism of the‘De-capacity’policy to prompt the overcapacity enterprises to borrow through sale-and-leaseback is that the policy limits the mainstream financing channels including loans and bonds.Moreover,strengthening the supervision of leasing companies can curb the overcapacity enterprises’arbitrage behavior to a certain degree.Second,another motivation for enterprises to borrow through sale-and-leaseback is to alleviate the mismatch of investment and financing,and such behavior is proved to be effective.In addition,compared with private enterprises,state-owned enterprises have a stronger motivation to borrow through sale-and-leaseback,and sale-and-leaseback has taken a better effect in alleviating the mismatch of investment and financing for state-owned enterprises.Third,from the perspective of the debt governance effect,the consequence of the enterprises’borrowing through sale-and-leaseback is that sale-and-leaseback produces a negative governance effect on lessees,especially a worse effect for state-owned enterprises.The negative governance effect of sale-and-leaseback for state-owned enterprises is related to the‘soft budget constrain’problem caused by government intervention,thus difficult to be solved in the short term.However,the establishment of a registration system for leasing assets with legal validity can improve the governance effect of sale-and-leaseback for private enterprises.The conclusions of this paper provide a reasonable explanation for the financial leasing industry’s deviation from its fundamental purpose in China from the perspective of lessees.In order to avoid the financing restrictions of the‘De-capacity’policy or alleviate the mismatch of investment and financing,the borrowing demand of lots of Chinese enterprises has not been satisfied by mainstream financing channels such as bank loans,which provides opportunities for leasing companies to conduct sale-and-leaseback transactions.The consequences of the financial leasing industry’s deviation from its fundamental purpose should be treated critically.On the one hand,sale-and-leaseback has played a positive role in supplementing and improving China’s long-term financing system,alleviating enterprises’mismatch of investment and financing.On the other hand,sale-and-leaseback has not become an effective debt governance tool and has also hindered the governments from removing the overcapacity effectively.From the point of China’s financial leasing industry,the phenomenon of the deviation from the fundamental purpose is harmful to the healthy development of the financial leasing industry.Although in the short term,most leasing companies rely on sale-and-leaseback transactions to rapidly expand their business scale,such sale-and-leaseback transactions have extremely limited sustainability and are difficult to become a competitive business model.The conclusions of this paper enrich the researches of financial leasing and sale-and-leaseback,especially providing new explanations for Chinese enterprises’leasing incentives.In addition,the conclusions are helpful to the healthy development of the financial leasing industry,and can shed some light on the establishment of the multi-level financial market in China.