Widespread interest within the financing and leasing sector has been sparked by revisions to the Measures on the Administration of Financial Leasing Companies, announced on 15 September 2023 by the National Administration of Financial Regulation (NAFR) under its 2023 Regulations and Legislation Work Plan.
Given that financing lease companies and financial leasing companies engage in similar leasing activities, with responsibility for formulating relevant business operations and regulatory rules falling under the unified purview of the NAFR, relatively uniform business rules and regulatory constraints should also be applied in principle.
In recent years, the overall regulatory environment for the leasing industry has become more stringent, and the frequency of policy introductions has notably increased.
This trend is exemplified by the Notice on Strengthening Compliance Supervision of Financing Leasing Business Conducted by Financial Leasing Companies (document 12), issued by the former China Banking and Insurance Regulatory Commission (CBIRC), emphasising the need to strictly address issues such as deviations from the core principles of leasing, conducting quasi-credit operations under the guise of leasing, fictitious leasing assets, overvaluation of leased assets, and accumulation of implicit debt by local governments.
Against this backdrop of enhanced regulatory scrutiny, aligning with the policy trend of returning to the essence of leasing has become a pivotal direction for transformation of the financing and leasing industry.
Governmental implicit debt
The 14th Five-Year Plan explicitly calls for establishment of a financial risk prevention and resolution system and the prudent management of local government implicit debt.
In line with this directive, the former CBIRC issued the Guidelines for Further Strengthening the Prevention and Resolution of Risks Related to Local Government Implicit Debt for Banking and Insurance Institutions (document 15). It underscores the necessity for all financial institutions to conduct thorough due diligence, and prohibits using any form to add local government implicit debt.
Notably, document 15 specifies that, “no requirement shall be made or accepted for the mortgage or pledge of state-owned assets of government agencies, public institutions or social organisations to fundraise for relative units or individuals; and mortgage or pledge of assets shall not be carried out through sale-leaseback or sales with buyback transactions.”
This directive poses significant compliance risks for financing leasing companies engaging in sale-leaseback transactions with government platform-type enterprises.
Interpreting regulatory documents
In light of the above-mentioned policy context, financial regulatory authorities have issued a series of guidelines to regulate the eligibility of leased assets and limit the proportion of certain business types to guide the financing leasing industry towards a return to its fundamental leasing principle.
Document 12 strengthens regulation of buildings as leased assets. To address issues of financing leasing practices straying from the essence of leasing, document 12 explicitly prohibits the use of roads, municipal pipelines, water pipelines, bridges, dams, waterways, tunnels, non-equipment projects under construction, structures with suspected new local government implicit debt, or those that may affect the normal supply of public services after disposal as leased assets. It further calls for a three-year programme to reduce the proportion of building leasing business.
Simultaneously, document 12 specifies that leased assets must meet the compliance requirements of complete, transferable and disposable ownership with non-public interest nature and economic value.
Document 149 restricts non-equipment sale-leaseback operations. Following document 12, the former CBIRC issued the Notice on Further Enhancing the Supervision of Financial Leasing Companies (document 149), which prohibits non-equipment sale-leaseback transactions and emphasises that all leased assets in sale-leaseback transactions should generally be equipment.
In response to practical issues in the assessment of leased assets, document 149 also stresses the prohibition of excessive reliance on assessment intermediaries to determine the value of leased assets. Apart from assessment reports, additional corroborating evidence such as original purchase contracts and invoices must be provided to establish the value of leased assets.
Potential risks in reducing the proportion of sale-leaseback business. Besides the above-mentioned official regulatory documents, information circulated on the internet says that regulatory authorities are considering a direct cap on financial leasing companies – limiting the proportion of new sale-leaseback business to no more than 50% – and have sought comment on the content of the relevant provisions.
While official adoption of such a proposal remains uncertain, in conjunction with the requirement of endeavouring to increase the proportion of direct leasing business in document 149, the requirements related to limiting the proportion of direct leasing and sale-leaseback businesses will likely remain a pivotal measure for regulatory authorities guiding transformation of the financing leasing industry.
Under increasingly stringent regulatory requirements, the need for transformation in the traditional financing leasing business segment has become more pressing. The strategic idea of financial-industrial integration to support development of the real economy has become an inevitable trend in the financing leasing industry.
According to the above-mentioned regulations, increasing the proportion of direct leasing business has become a crucial compliance requirement. The restrictions on non-equipment leasing assets primarily pertain to sale-leaseback transactions, leaving some room for tolerance at the regulatory level for the direct leasing business.
Additionally, several regional regulatory policies encourage financing leasing companies to expand their operations in high-end manufacturing and green industries such as aviation, aerospace, integrated circuits, artificial intelligence, energy conservation and environmental protection.
In current practice, new energy and new infrastructure segments – such as photovoltaics, energy storage and internet data centres (IDC) – have also become hotspots for financing leasing companies.
However, it is essential to note that when venturing into these emerging business areas, financing leasing companies must still prioritise compliance checks related to the eligibility and valuation of leased assets, and the fulfilment of their guarantee functions.
Jonson Zhang is a senior partner at AllBright Law Offices
AllBright Law Offices
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