Shanghai urged to relax offshore finance

PUBLISHED : Monday, 25 November, 2013, 3:52am
UPDATED : Monday, 25 November, 2013, 3:52am

BOC Aviation, the largest aircraft leasing company in Asia, is lobbying the Shanghai government to relax restrictions on offshore financing in the free-trade zone.

The initiative would facilitate the city in becoming an Asian aircraft finance hub, with the yuan establishing itself as a major settling currency for acquisitions.

The plan, if approved, is expected to attract more aircraft financing companies to the 28 kilometres of land set aside for the zone in Shanghai.

"We have spoken to senior officials in Shanghai about how to stimulate offshore financing for aircraft," said Phang Thim Fatt, deputy managing director and chief financial officer at Singapore-based BOC Aviation. "They will try to accommodate as much flexibility as they can after they clear it with relevant authorities."

Conducting offshore financing on the mainland is now subject to a 7 to 15 per cent withholding tax on the interest, a quota and approval from the People's Bank of China.

The withholding tax on offshore financing was waived by the Singapore government in the 1990s as it wanted to promote the city state as an aviation financial hub.

Meanwhile, overseas investors are looking for yuan investment products, banking on the appreciation in the currency.

The overwhelming response to BOC Aviation's first offshore yuan bond has seen it extend the deal size by one-third to 1.5 billion yuan (HK$1.9 billion). The second batch of the note issue has attracted seven times subscription, following a 3.5 times subscription in the first round.

Previously, the dim sum bond issue by China Eastern Airlines attracted nearly four times its subscription. The 2.2 billion yuan three-year notes, priced at a 3.875 per cent coupon rate, drew 8.7 billion yuan of subscription in May. For comparison, onshore yuan borrowing is priced at about 6.4 per cent by the PBOC.

Due to capital controls and the quota set by the PBOC, not many airlines or aircraft leasing companies are involved in yuan finance overseas at present.

An aircraft financing expert said that even if the restrictions on offshore yuan finance were relaxed, not all aircraft leasing companies could benefit.

"Unless the lessor has yuan income, it has to swap the [US] dollars into yuan every six months to pay for the interest and the principle at the end of the term," an aircraft finance official at China Construction Bank said. "It would increase foreign-exchange risks."

The demand for offshore yuan aircraft financing is rising, but it will not take up a big chunk of the market in the near term as the US dollar is still the dominant currency for aircraft financing.

The yuan has emerged as a currency likely to be increasingly used for aircraft acquisitions. The introduction of China's home-grown commercial plane, the C919, which is scheduled to have its flight test next year, has helped speed up the change.