Leasing is a growing trend in the international airline and maritime sectors, and plays a large role in other industries where acquiring equipment is capital intensive.
It is therefore unsurprising that leasing is taking off in China against the backdrop of the country's huge economic growth and the maturation of its industrial services.
Dongjiang Free Trade Port (DFTP) has emerged as China's leading hub in this burgeoning sector, and is now becoming a major player in international leasing. This is thanks to its innovations, policies and support structure that have seen it attract 2,467 leasing companies with total registered capital of 321.5 billion RMB. Total leasing assets account for 700 billion RMB.
Leasing in China was relatively undeveloped until as recently as a decade ago. In 2007, the country had just 109 leasing companies in total. By June 2017, that number had grown to 8,218. The overall industry scope has increased by a factor of 200 - higher than that of any other country.
The DFTP winning formula
DFTP has become the leasing leader in China thanks to its development of creative business model solutions combined with unparalleled services. These allow the leasing companies to take full advantage of favorable tax and regulatory policies to develop successful, sustainable businesses. It will also enable them to face challenges as the industry matures.
"We are very proud of our work in policy advocacy, and how it has been adopted as best practice in the industry," said Ms. Shen Lei, Chair of DFTP. "We see DFTP as a showcase for China's larger reform and innovation, and we hope that our efforts will be viewed as such on the global stage."
DFTP has developed coverage of eight categories in the leasing industry: aircraft leasing; international ship leasing; marine engineering and equipment -- each of the three categories claiming over four-fifths of the nation's total in terms of cross-border leasing; rail transportation; medical instruments; energy sector; the automobile industry; and high-end equipment.
Each of these categories has attracted leading leasing operators, lessors, intermediaries, manufacturers, banks and financial institutions such as Air China, China Eastern, China Southern Airlines, ICBC, China Construction Bank, Deloitte, PwC, Boeing, Airbus, Rolls-Royce and Cessna, to name but a few.
A major driver for the booming sector is China's civil transportation industry, which has ranked second in the world for the past nine years and keeps developing rapidly. The International Air Transport Association (IATA) predicts that China will surpass the US to become the world's largest aviation market around 2024.
Meanwhile, more than two-thirds of aircraft are employed through leasing. It all adds up to vast potential for China's air finance industry. It is projected that, between 2017 and 2036, China will need an estimated 7,240 new airplanes valued at $1.1 trillion.
"China has just passed through the easy stage of asset acquisition," said Beth D. Notari, Managing Director of Portfolio Marketing, Boeing Capital Corporation (BCC). "Chinese lessors are now entering the complicated stage of aging assets, acquisitions, modifications and other asset management issues. A lot of financial value can be lost over time if the asset is not managed well."
Notari added that Boeing has looked into offering professional training programs, in an increasingly structured way, to support partners in China.
Two international lessors - Ireland's Avolon Aerospace Leasing Limited and Hong Kong International Aviation Leasing, both announced in July 2017 that they would be moving into DFTP. Both were previously acquired by China's Bohai Leasing, which, with a fleet size of over 900 aircrafts, is the world's third-largest aviation leasing company already having a large presence in DFTP.
Other international leaders in the field who have established presences in DFTP include ALC, AerCap, BOCA, Dragon, Standard Chartered's Pembroke, Milestone, Waypoint, SES and Goshawk.
Promoting the leasing industry with pilot policies
A backdrop to DFTP's ongoing success in leasing is the favorable policies it endows upon tenants.
DFTP-based leasing companies are entitled to a raft of tax reductions, tax refunds and tax installment payment policies. DFTP is also the only zone in China where lessors can collect lease payments from clients in foreign currency.
In the meantime, DFTP also offers a combination of favorable customs supervision framework in the Bond Port and financial innovation policies, which substantially eases the burden on leasing companies when it comes to cross-border operation.
As a result of the advocacy of DFTP officials, policies promulgated by DFTP have been recognized as best practices, and some have been adopted to cover the entirety of the Tianjin Free Trade Zone.
The new pilot Cross-border RMB Two-way Capital Pooling program is a prime example of how innovative policies can have a significant beneficial impact on tenants. ICBC Leasing Co. is one of a number of leasing companies to have benefitted from this program. ICBC Leasing has thus far deployed 5 billion RMB from abroad, significantly increasing its liquidity and enabling it to access cross-border opportunities.
Business model innovations
What really sets DFTP apart from other free trade zones in China, however, is its innovations in terms of the leasing business model.
These have included helping domestic leasing companies go global; the reselling of asset-backed securities; maintaining the bonded status of leased export goods and facilitating cross-border re-selling and joint-leasing deals, among dozens of others.
Garry Burke, Global Head of Structured Finance at Standard Chartered, recalled: "We are the first foreign bank to establish a leasing business in DFTP. DFTP has built up a big lead in this area with resulting economies of scale. We find the team quite responsive and we believe this region will continue to be one of the leaders in the Chinese aviation leasing market."
DFTP has also blazed a trail in terms of first-of-their-kind services for China, which have included leasing support for intellectual property; helicopter and tug boat leasing and establishing an SPV to facilitate the securitization of a domestic asset in a foreign currency.
The region has as well worked to help leasing companies expand financing and refinancing mechanism, including OPI, issuing bonds, MNT, PPN, Factoring and ABS.
Affirming the core of services
DFTP also fosters the healthy development of the industry by providing professional and lifecycle post-investment services for the sector.
Among such services is a consultant team of related government officials composed of experts in corporate registration, foreign currency, taxes, customs, marine affairs, banking, financing and investment. This consortium of service platforms is on hand to assist corporate tenants whenever needed, and helps them tackle detailed business operation problems.
There is also a variety of think tanks such as the China Financial Leasing (CFL) 30 Forum and its affiliated research institution; theme-focused task forces; the CFL Business Index; domestic and foreign consultancies offering advisory services in aircraft transaction, evaluation and asset management; and leasing brokerage houses and lessor-care service providers.
Regular events such as conferences and seminars help provide up-to-date information, intelligence and networking opportunities. DFTP has been involved in hosting several high-profile forums such as the China Air Finance Development Summit, the China Maritime Finance Summit and the Global Leasing Industry Competitiveness Forum. It has also set up the Free Trade Zone Court, and a Collegial Panel for Leasing Affairs.
Kevin Ng, Aviation Analyst, Flight Ascent Consultancy, said: "Property rights protection is a key topic as China becomes more involved in global transactions. Traditionally, Chinese legal system has been relatively unique, which can create challenges when transferring assets or rights across borders."
The latest initiative is a support fund for further boosting the aviation leasing industry. On September 28, 2017, Ms. Shen Lei, Chair of DFTP, announced that all tax revenue from newly-delivered aircraft covering 2017 to 2019 will be put into the fund.
Soaring into the future
DFTP is working to further enhance its "soft environment" in areas such as financing, judiciary, and professional services so that it can better integrate into the international leasing ecosystem, according to Shen Lei.
It is also putting effort into better servicing Chinese leasing enterprises as they embark on the One-Belt-One-Road initiative and go global by advocating new favorable tax, currency and custom policies, she said.
Attracting more international leaders in terms of lessors, operators, intermediaries and professional service providers is also a core plank of DFTP's development plans.
As well as directly stimulating the leasing sector, DFTP sees its efforts as being of great benefit to the wider economy, positively impacting programs to promote domestic products and expertise, and make modern technology more easily available to the agricultural, healthcare, education and energy sectors.
"Indeed, by helping to better integrate the leasing industry and the new-generation manufacturing and service economy, we hope to see leasing become a holistic solution provider," noted Ms. Shen.