China’s enhanced scrutiny of financial leasing likely to drive consolidation and weed out weaker firms, analysts say

China’s enhanced regulatory scrutiny of financial leasing companies could drive out smaller participants and accelerate industry consolidation, according to analysts.

The National Administration of Financial Regulation (NAFR), which oversees the country’s financial industry with a specific remit to look at market risks, said in January that it is soliciting feedback on a draft measure that would revise decade-old rules for financing companies.

A financial leasing company typically acquires concrete assets and sells operating control to another business – the lessee – for a set period of time, during which the leasing company – also known as the lessor – collects rentals and other instalments for the use of that asset to recover acquisition costs, as well as generating additional interest income.

The draft measure, which is open to public consultation until February 5, will raise the total assets and operating income requirements for lessors. It will also increase the minimum shareholding requirement that a major shareholder can take in an asset to at least 51 per cent, up from 30 per cent previously.

In addition, the draft measure will narrow the range of assets that qualify for leasing, and calls for stronger corporate governance and more comprehensive exit mechanisms to prevent financial risks.

“The new measures, if implemented successfully, should enhance the stand-alone credit profiles (SCPs) of the larger financial leasing companies and are positive for the sector’s long-term development,” analysts at Fitch Ratings wrote in a note.