Jonathan L. Fales has worked for more than 26 years in the information technology and equipment leasing fields and has worked extensively in Asia since the 1990s. A member of the American Equipment Leasing Association board of directors and executive committee, he is co-author of an ELA white paper, Knocking Down (Great) Walls: Identifying Factors for Success in the Chinese Equipment Leasing Market. Fales" suggestions have been frequently solicited since China’s top legislature initiated the drafting of the Leasing Law in March 2004. On the eve of the release of the second draft of the new law, expected to be adopted later this year, Fales spoke with Beijing Review reporter Li Li, focusing on the enormous potential in China’s nascent leasing market and how the law would make a difference.
　　Beijing Review: How is the market development for foreign leasing companies?
　　Jonathan L. Fales: Foreign companies could only have joint ventures in leasing in China until 2004, when the government allowed leasing companies to have Wholly Foreign-Owned Enterprise (WFOE) licenses. Before that, there were only a handful of foreign companies running leasing in China but since 2004 around 15 foreign companies have gotten WFOE licenses and many more are waiting to come in.
　　
　　What about the situation for local players?
　　
　　In a November 2004 trip to Beijing and Shanghai, I had a chance to talk with two dozen Chinese leasing companies. Some of them were owned by banks and some were independent. As far as I understand, independent leasing companies are a little bit more successful than banks’ subsidiaries, but they get a challenge. A bank-run leasing company can put bank funds into a lease, while an independent company needs to borrow from a bank, which means their leasing rate has to be higher. In contrast, in the United States and Europe, this problem doesn’t exist since independent leasing companies can issue commercial paper, whose price could be lower than a bank loan if structured properly.
　　
　　How will the new legislation improve the market?
　　
　　First, it will combine legislation from the China Banking Regulatory Commission and the Ministry of Commerce in one source, so there won’t be any question what the law is. Before, the two organizations both had separate regulations on the leasing industry, which yielded confusion.
　　Second, the legislation provides for asset registration, which enables the lessors to retrieve their assets if their clients go bankrupt.
　　Third, the legislation helps a little bit with taxing scheme reform toward nurturing a benevolent environment for operating leases. For the time being, operating leases are still taxed more harshly as a service rather than a financial product as it is. More needs to be done in this aspect.
　　The work group on the leasing law has done a marvelous job. They have talked with companies and professional associations from all over the world for suggestions.
　　What is the largest barrier expected to remain for lessors after the new law is released?
　　The availability of company credit information. The financial statements of companies in China are not as reliable as in some other countries.
　　How do you view cultural factors affecting the development path of the leasing industry in China?
　　First, leasing is a totally new concept in China. All the Western companies that want to come in realize it is important to educate the customers and tell them why leasing is good for them. Second, in Asia generally, ownership is considered good. If you have to borrow money or lease equipment, you lose a little face because you are not financially strong enough to buy it. But those views come from an older generation of business people. That’s changing among the younger generation of entrepreneurs.
　　Do you have advice for foreign investors with interest in the Chinese leasing market?
　　In November 2004, the American Equipment Leasing Association put together a trip to China for leasing companies thinking about getting into the local market. While meeting with the Chinese minister of commerce in charge of leasing, a company executive from New York City complained to the minister over the defects and retarded progress of the market environment concerning leasing.
　　The minister said that China had been a business-oriented country for 3,000 years and is now emerging from a government-driven economy back to a market-based economy, but it takes time. “My advice to you is: No.1, be patient; No.2, remember this is China and not the West and it will never be the West. What you do in New York you may never be able to do here. But you will be able to do leasing and you will be able to make money. The last thing I advise you to do is come here, set up a company and begin to learn.” That is probably the best advice on our trip.
　　What is your forecast for the leasing market in China?
　　I believe there is a lot of potential to the market. In the United States, of all the equipment that could be leased, 30 percent is leased. But in China, the market penetration rate is less than 0.5 percent of capital formation. Eventually it is going to be a huge leasing market.
　　One brand-new business opportunity in leasing I can see right now is for Chinese companies that are manufacturers and sell their products in the West to offer their buyers leasing service, for example, China’s PC giant Lenovo.
　　Through an operating lease deal between a Chinese equipment exporter and a foreign buyer, the rising pressure of the trade surplus for China could be eased since payment will be delivered in several years rather than in one year.
　　Significant factors that should be useful to lessors considering entering the Chinese market include:
　　The key driver for market entry, for most non-Chinese lessors studied, has been the need to support their existing customers.
　　There is no single, successful business model. Leasing companies analyzed in this study include wholly foreign-owned enterprises, joint ventures, offshore and Chinese-owned onshore lessors, each of which is successful in its own way. Partnerships with Chinese lessors can shorten the time to market and help lessors get assimilated into China more quickly, but it can be difficult to find a suitable partner--financial strength, control issues, cultural differences and a lengthy approval often are obstacles.
　　Identifying and managing the risks of doing business in China is the critical factor to success, but the task should not be overwhelming. There is no question that the credit and legal environment in China is extremely challenging, the regulatory process is burdensome, and the tax system discourages operating leases. There also is no question that the environment is gradually improving, and that there are dozens of lessors already on the ground and doing business successfully.
　　The lack of trained local personnel should be factored into the business plans. Lessors entering the market should have a carefully vetted hiring plan, and be prepared to provide in-depth training to their local hires.
　　Leasing is still a new concept for many business people in China. This issue can be overcome with sufficient marketing and training, but lessors should not underestimate the effort involved.
　　The used equipment market is largely underdeveloped, but could be a huge opportunity for certain assets.
　　

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