Chinese leasing companies to face funding, capital pressure in 2019: report

Chinese leasing companies are likely to be pressured by capital and funding constraints and tighter regulation in 2019, Fitch Ratings said in their latest report.

The company has revised its ratings for the sector’s outlook to negative from stable, as it believes that the industry players’ asset quality will be tested as China’s economy slows, and that independent lessors in particular will come under rating pressure.

In China, the leasing industry has two main types of market players: bank-owned leasing subsidiaries and independent lessors, which lack "parental support" and have higher reliance on "shadow banking" products for funding.

Fitch said that the sector will continue to benefit from the country’s strong fundamental demand for leasing, as well as the government’s call for diversified funding sources for the real economy, especially for small and medium-sized enterprises.

Also, the lease penetration rate in China still remains low by international standards, suggesting strong prospects for long-term growth, the report noted.

However, Fitch predicted that the rapid expansion of recent years will ease back and growth will be slowed across the sector in the next twelve months, due to capital constraints as well as more stringent regulations.

As China carries on it efforts to contain financial sector risks, reduced shadow banking activity will created short-term challenges for lessors — less established independent lessors will find it particularly difficult to access capital markets.

Bank-owned leasing subsidiaries, on the other hand, may start issuing qualified capital instruments, but will be less likely to receive capital to fund growth from parents, which are facing capitalization challenges of their own, the report said.

This April, supervision of independent lessors has been switched to the China Banking and Insurance Regulatory Commission from the Ministry of Commerce.

Fitch regards such regulatory changes to be positive for the leasing sector in the long term, but could add to short-term challenges for independent lessors. The rating agency anticipates the watchdog to release new guidance in 2019, which will enhance both regulatory oversight and transparency.