New rules to shutter >50% of China's financial leasing firms

    A shake-up is on the way for China's financial leasing firms. New rules, due to hit by the end of the year, could push marginal and unconventional players out of the market while shoring up sector leaders, according to a report S&P Global Ratings published today, titled "Financial Leasing Firms Are Next In Line As China Reform Gets Granular."
  "We estimate that more than half of China's financial leasing companies could be driven out of the market, though many of these are already dormant," said S&P's credit analyst Xi Cheng.
  The credit rating agency thinks these rule changes are part of the second wave of financial sector reform that is now widening its scope to capture more nonbank financial institutions. It believes the reforms are positive in the long term because they remove regulatory arbitrage and give authorities better oversight over credit dissemination.
  However, the coming changes to the financial-leasing sector could close yet another funding channel for some smaller firms. The contract value of financial leases reached RMB6.6 trillion (US$966 billion) by end-2018. S&P expects the sector's growth rate to moderate as companies reduce grey business areas and put more emphasis on compliance and risk management.
  Upcoming regulations are likely to particularly affect financial-leasing companies that were previously licensed by the Ministry of Commerce. These firms are known as the "Shangzu."
  In April 2018, the China Banking and Insurance Regulatory Commission (CBIRC) took over regulatory aegis for three types of quasi-financial institutions that were previously managed by the Ministry of Commerce: (1) financial leasing firms (Shangzu); (2) financial factoring companies; and (3) and pawn shops. As part of the process, the CBIRC is rewriting regulations for these three segments. In October the CBIRC released tighter rules for factoring companies, which specialize in financing accounts receivables. We anticipate the financial leasing rules could be announced at any time, and likely before the end of the year.
  S&P thinks the second wave is important because it deals with specific nonbank subsectors to ensure overall policy direction and close major loopholes for regulatory arbitrage across the financial system.
  In the case of financial leases, for example, S&P believes many such sector companies may have been set up for policy arbitrage: e.g., to channel funds on behalf of financial institutions to sidestep certain controls or limits.
  The agency estimated that more than 50% of the 11,777 registered financial leasing companies (as of end-2018) could be shuttered, especially the dormant or shell companies.
While many small entities borrow from financial leasing companies, S&P expects the impact on the industry to be manageable. By the agency's estimates, the top-10 financial leasing companies accounted for about a quarter of financial leases outstanding, and the top-50 players controlled about 44% of market share, as of end-2018.
  Having said that, the potential abrupt exit of numerous smaller financiers could hurt fringe borrowers, a weaker segment of the economy, or borrowers that obtain funding through nonbank means.