New Regulations on Leasing Lower Market Access Thresholds

March 4, 2005

The Chinese government recently released the Measures for the Regulation of Foreign Investment in the Leasing Business, effective March 5, 2005 (the “Measures”).  The new Measures replace the current regulations, known as Interim Measures for the Examination, Approval and Regulation of Foreign-Invested Leasing Companies (the “Interim Measures”), that have been in effect since 2001. 

At the time of its World Trade Organization membership on December 11, 2001, China promised to significantly lower the barriers of access to its leasing market within three years of its WTO membership.  By lifting major restrictions that had been in place under the old regime, the Measures represent another step by China toward fulfilling its commitment to further opening up its domestic market.  Highlights of the Measures are as follows:

I.          Wholly-owned Subsidiaries Now Allowed

A foreign company may set up a wholly owned leasing subsidiary (known as a “wholly foreign-owned enterprise” or “WFOE” under Chinese law) as well as either an equity or a contractual joint venture.  In contrast, under the Interim Measures, a foreign investor could only enter the leasing market in China through either an equity or a contractual joint venture, i.e., it had to find a Chinese joint venture partner. 

The corporate form of a foreign-invested leasing entity can be a limited liability company or a company limited by shares as prescribed under the PRC Company Law. 

II.         Types of Leasing Business

The Measures divide the leasing business open to foreign investment into two types: (1) leasing--the business of delivering lease property to the lessee for its use and gains in exchange for a rent by the lessee; and (2) financed leasing--the business of purchasing lease property from a seller, based on the lessee’s seller and lease property preference, for use by the lessee in exchange for a rent by the lessee.  The financed leasing companies are allowed to use different means to conduct their operations.

Under the Measures, lease property refers to: (1) personal property (e.g., production, telecommunications, medical, research, testing and inspection, engineering and office equipment); (2) means of transportation (airplanes, automobiles and boats); and (3) intangibles accompanying the above (e.g., software and technology) with their value not exceeding 50% of the lease property value.

III.        Lowering of Thresholds

The Measures significantly lower the thresholds for entering the leasing market in China.  Under the Interim Measures a foreign investor of a leasing company had to have prior-year assets worth at least US$50 million and a leasing-business track record of at least 3 years, while a foreign investor of a financed leasing company had to have prior-year assets worth at least US$400 million and a financed-leasing track record of at least 5 years.  Under the newly released Measures, the minimum assets requirement for either type of business is reduced to US$5 million. 

Some requirements remain.  For example, a financed leasing company must have a paid-in capital (known as “registered capital” under Chinese law) of at least US$10 million (under the Interim Measures the minimum registered capital requirement was US$20 million).  For non-financed leasing companies, there is no minimum capital requirement except as otherwise provided in the PRC Company Law applicable to all Chinese companies.  The maximum term of operation for both types of business is limited to 30 years, and the requirements on the ratio between total investment and registered capital imposed generally on all foreign-invested enterprises also apply.

IV.        Approval Requirements

The establishment of a foreign-invested, limited liability, leasing company is subject to government approval at the provincial level (may take up to 45 days), while the establishment of a foreign-invested financed leasing company is subject to preliminary approval at the provincial level and final approval by the Ministry of Commerce (may take up to a total of 60 days).  Under the Interim Measures, all foreign-invested leasing companies were subject to approval directly by the Ministry of Commerce.

Sonnenschein’s China practice team can help you with your China investment projects.  For more information, please contact:  Yabo Lin (ylin@sonnenschein.com) at 816.460.2553.

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