City banks to launch financial leasing companies

Eight Chinese city commercial banks plan to launch financial leasing companies to expand their business and increase profits, but analysts warned Monday that there are challenges involved as the sector is still at an immature stage.

The banks, including Bank of Beijing and Bank of Hebei, are drafting plans to set up leasing companies this year, an unnamed source was quoted as saying Monday by China Business News.

"Setting up financial leasing companies by commercial banks is still in the pilot stage, and the regulator has told the banks that intend to enter this area to carry out feasibility studies carefully," so as to avoid financial risks, the source said.

When offering financial leasing services, a leasing company purchases assets chosen by a lessee, who has the option to use the assets and also to acquire them eventually.

"After nearly two decades of development, China's financial leasing industry is still far from mature," Zhang Taowei, an associate professor at the School of Economics and Management of Tsinghua University, told the Global Times.

Unlike large State-owned aircraft leasing companies, whose customers are always big enterprises, small and medium-sized leasing enterprises can suffer losses because they deal with less affluent lessees who sometimes fail to honor their contracts, Zhang noted.

"Diversifying business areas will be the development trend for China Construction Bank in the future," China Construction Bank Chairman Wang Hongzhang was quoted as saying by China Business News.

The newspaper also reported that another incentive for the eight city commercial banks in trying this new area of business is the approach of interest rate liberalization, which is expected to squeeze their profit margins.

But Zhang said it would be better for the city commercial banks to focus on their main banking businesses, rather than expanding too fast into other areas.

Most of the country's financial leasing companies are highly reliant on their parent companies, such as larger commercial banks, "but it should not be the development trend for the sector. The financial leasing companies need to develop independently," said Zhao Xijun, a professor at Renmin University of China.