A total of 668 passenger aircraft currently flying in China are under operating leases, accounting for 36% of the total in-service passenger fleet of 1,827. Although aircraft leasing has always been popular in China, the leasing market has historically been dominated by Western leasing companies. China's financiers have only been active in the market for the past five years, after the China Banking Regulatory Commission (CBRC) relaxed its regulations on aircraft leasing.
Today, both Western and Chinese lessors are gaining more exposure in China as the airlines' attitudes towards aircraft leasing change. Over the past decade, the number of leased aircraft has grown significantly in China, with a compound annual growth rate of 17%, compared with 13% for the total commercial fleet.
China Southern added two Boeing 777 freighters to its fleet using a Chinese tax-free zone lease
In addition, Chinese lessors have attained significant market share in the last decade, having grown from zero aircraft 10 years ago to over 220 aircraft on lease to Chinese airlines today. They are now responsible for more than 32% of the total current leased fleet in China.
The rapid growth in leasing within China began in January 2007, when the CBRC issued new management rules for financial leasing companies, lowering the minimum required registered capital for firms from CNY500 million ($79.9 million) to CNY100 million. This permits local and overseas commercial banks to set up financial leasing companies, provided they comply with a set of requirements. These include a capital-adequacy ratio of at least 8%, total assets of at least CNY8 billion and the condition that firm has to be profitable for two consecutive years.
The development of leasing was further aided by Chinese lessors' ability to set up onshore special purpose companies (SPC) within Chinese jurisdictions. Cities such as Beijing, Shanghai and Tianjin offer preferential policies to lessors for their local incorporation, including special tax rebates and simplified foreign currency settlement procedures. These allow Chinese lessors to be more competitive compared with other foreign lessors in China. Although foreign investors can set up an SPC in China, they will have more restrictions imposed on them (such as higher capital requirements) and more complicated application procedures, compared with local lessors.
To get a better idea of how SPCs in these special economic zones in China can help with the aircraft leasing business within the country, it is important to recognise certain taxes that are relevant to aircraft leasing in China.
Under the onshore SPC structure within the designated areas, Chinese airlines can avoid these taxes. The 10% withholding tax can be avoided because the lease rental is being paid within the country. In December 2009, ICBC Leasing arranged a Chinese tax-free zone lease for two Boeing 777 freighters meant for China Southern Airlines and since then, there have been a number of Chinese lessors structuring their deals through onshore SPCs.
Chinese lessors still predominately focus on domestic leasing. The growth in international leasing has been slower than expected, with only CDB Leasing, ICBC Leasing and Hong Kong Aviation Capital acting as significant international lessors. For the past five years, industry observers have been confidently predicting that Chinese lessors would become more of a force internationally. However, the increased restrictions placed on Chinese financial institutions in recent years, particularly in relation to US dollar financing, have slowed the growth significantly.
China's leasing companies have so far acquired their aircraft through a combination of purchases from other leasing companies as well as sale and leaseback transactions with airlines. For example, according to the Ascend Online Fleets database, ICBC Leasing purchased 27 aircraft from its current fleet from lessors, with its remainder from airlines, while CDB Leasing purchased over 35 aircraft from its current fleet from lessors. All of the main Western lessors have been active in selling aircraft to Chinese lessors, with GECAS, SMBC Aviation Capital and AerCap being the most active sellers.
Chinese lessors are now at the stage where they are either making or considering speculative orders from the manufacturers. Most of their current orderbooks are made up of C919 orders, which will be delivered from 2016 onwards. However, ICBC Leasing has orders for Airbus A320 aircraft and CDB Leasing has orders for Embraer 190s. The ICBC Leasing order is meant to serve both domestic and international airline customers.All the latest news, video and images from Zhuhai 2012