The Chinese Financial Leasing Market

The concept of financial leasing was already introduced to China in the 1980s but did not gain economic significance until recent years. By providing an alternative source of financing apart from classical loan transactions especially for small and medium companies leasing will be of growing importance. As leasing can also be made available to private consumers it is also instrumental to the growth and development of the domestic Chinese market which is one of the main goals of the government for the next years in order to reduce the country's dependence on exports. A financial leasing transaction itself is always bound to a movable asset which one contract party, the legal owner and so called lessor, leaves to a second party, the lessee, for usage against the payment of a fee. The character of financial leasing is more similar to a financing than a renting transaction, as what it might look at first glance.Currently the Chinese market for financial leasing is estimated to have a volume of around 22 bln. US$ (2008). This represents a percentage of only 2% of the investment volume of that year that theoretically would have been eligible for lease financing. This suggests a huge potential for growth both by increasing penetration and by growing investments themselves. Especially some important subsectors like the market for cars or airplanes exhibit immense growth potential. This is supported by a strong political will to improve the domestic Chinese market which translates into an active strategy of support mapped out in the forthcoming 12th five year plan. Other trends like the shift from simple manual manufacturing to high tech productions, the aging Chinese population and the likely decrease of available workforce as well as the tendency to ever shorter technological innovation cycles drive the need for investments in advanced infrastructure and machinery in thereby indirectly support the positive outlook for the financial leasing industry.The legal and regulatory environment or the leasing industry has improved constantly in the past years. Since 2005 wholly foreign owned financial leasing companies are allowed which lead to increasing FDI in this sector and an important inflow of funds and relevant related know-how. The accounting rules for leasing in China are in large parts in line with the International Financial Reporting Standards and financial leasing transactions are covered by a section of the Contract Law of China. A special law for leasing is in preparation but has not been enacted yet. The current timing is unclear but once in place it will further spur the development of the financial leasing market.The Five Forces Analysis reveals the Chinese financial leasing market to be with no significant threat of substitute products and only little influenced by bargaining power of suppliers. Buyers on the other hand have more power, especially if they have good credit worthiness. Although the current competition is not too fierce overall, a multitude of market entries will be observed in the coming years, despite the relatively high market entry barriers.An empirical study especially conducted for this thesis compared the use of leasing among German and Chinese listed companies. The assumption was that German companies have a much higher acceptance of leasing as a means of financing than Chinese companies. This could be verified by the results of the study.