How Foreign Firms Can Engage in Financial Leasing

Special Purpose Vehicles offer a possible solution for companies looking to invest in the industry

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By Zhang Yichi

China’s financial leasing industry has developed rapidly in recent years, especially after the General Office of the State Council issued its Guiding Opinions on Accelerating the Development of the Financial Leasing Industry in August 2015. The central government believes that the financial leasing industry has played an important role in promoting China’s industrial innovation and upgrading, broadening financing facilities for micro, small and medium-sized enterprises and aiding economic restructuring.

In fact, as one of its commitments to the World Trade Organization, China opened up the leasing market to foreign investors in 2005, when the Ministry of Commerce (MOFCOM) promulgated the Measures on Administration of Foreign Investment in Leasing Industry (“FIE Leasing Company Measures,” as amended in 2015). Pursuant to the FIE Leasing Company Measures, wholly foreign owned enterprises are allowed to undertake leasing business in China.

Requirements of foreign investors

Under the FIE Leasing Company Measures and the MOFCOM circular, foreign companies interested in investing in financial leasing companies in China will have to meet certain requirements.

  1. The foreign investor must be a company, enterprise or other type of entity. In other words, a foreign individual is not a qualified investor of financial leasing companies in China.
  2. The foreign investor or its parent company should be in good standing and have substantial business operations.
  3. The total assets of the foreign investor shall not be less than $5 million.
  4. The foreign investor shall not be insolvent according to the audit report of prior fiscal year.
  5. The foreign investor has to be in existence for at least a year. However, if a qualified foreign investor indirectly invests in a financial leasing company in China via a wholly owned subsidiary (or special purpose vehicle, SPV), such SPV may exist less than one year.

The SPV structure provides a good option for foreign investors. Since an SPV existing for less than one year is allowed, the foreign investor may set up an SPV tailored for the acquisition. However, in practice, it is unclear whether the SPV and its parent company shall both have substantial business operations, or rather only the parent company having substantial business operations will be sufficient. Therefore, it is advisable for the SPV to undertake one or two transactions such as consulting before the investment agreement is signed.

Statutory restrictions on financial leasing companies

The FIE Leasing Company Measures and the MOFCOM circular impose various restrictions on foreign invested financial leasing companies.

  1. The property that an FIE leasing company may lease includes chattel, transportation vehicles and intangible assets attached to chattel or transportation vehicles. However, the value of such intangible assets may not exceed half of leased property.
  2. The operation period for an FIE financial leasing company in the form of a limited liability company shall not exceed 30 years in general.
  3. The risk assets of an FIE financial leasing company shall not exceed 10 times of the total amount of its net assets. The risk assets shall mean the result after deducting cash, bank deposits, national bonds and entrusted leased assets from the total assets.
  4. FIE financial leasing companies shall not engage in business activities of taking deposits, granting loans or being entrusted to grant loans. Meanwhile, inter-bank lending and private equity investment are also prohibited without approval from relevant authorities.
  5. FIE financial leasing companies shall not, directly or indirectly, provide financing whatsoever to financing platform companies of PRC local governments to which public welfare projects have been assigned.

Zhang Yichi is a Partner at East & Concord Partners. She contributed this article on behalf of Lexis Nexis, an AmCham China member company.