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Private Sector's Flying Dream
China's emerging private sector is pumping in capital into the aircraft-leasing business, hoping to grab a share of the lucrative domestic market from the dominant foreign players.

Delong International Group, based in northwestern China's Xinjiang Uygur Autonomous Region, has acquired a controlling stake in Shanghai-based New Century Financial Leasing Co through two of its mainland-listed subsidiaries. Delong also controls the Xinjiang Financial Leasing Co.

Engaged in residual value leasing, New Century and Xinjiang Financial Leasing Co have leased eight aircraft to China Northern Airlines and China Northwestern Airlines since 2000 and are in talks on leasing three more, according to Zhao Geping, head of New Century.

Domestic privately-owned firms have acquired controlling stakes another five of the 12 licensed financial leasing companies on the mainland, according to the 21st Century Economic Herald. The five are Zhejiang, Gansu, Sichuan, Shenzhen, and Foreign Trade Financial Leasing Firms, the Guangzhou-based newspaper said.

This has happened since the central bank required since 2000 that financial leasing firms have a minimal registered capital of 500 million yuan (US$60.24 million) for local currency business and an additional minimum US$50 million for foreign currency business.

Fast-swelling private capital has been attracted by the immense opportunities created by the strong air traffic demand in China.

China's overall aviation market is expected to expand by 7.6 percent every year and will need about 1,900 more aircraft worth about US$165 billion by 2022, aircraft maker Boeing said earlier this month.

With its domestic air traffic market expected to grow by 9 percent annually over the next 20 years, China would be the largest commercial aviation market outside the United States during the period, Boeing said.

The country's air cargo market is expected to grow by 10.3 percent every year during that period, it said.

About 90 percent of the 503 aircraft with more than 70 seats by the end of 2000 were leased from overseas, according to Xu Fei, who specializes in aircraft leasing research.

"The entry of private capital into leasing companies would lead to more market-oriented operation of those companies," said Sha Quan, an expert with China Finance Association.

A number of domestic and foreign firms also plan to apply for a license for financial leasing.

The aircraft leasing market, however, has been dominated by foreign players such as GE Capital Aviation Services of General Electric, International Lease Finance Corp of the American International Group and Boeing Capital Corp, Xu said.

The International Finance Corp, the World Bank's private financial arm, is reportedly interested in gaining a share of New Century, which has a share capital of about 530 million yuan (US$63.86 million).

Foreign leasing companies, however, have their drawbacks, since the Chinese Customs said earlier this year it would levy a tax of 10 percent of the lease value in deals between foreign leasing firms and domestic airlines starting from September, said Qu Yankai, vice-chairman of China Leasing Association, which would raise the leasing cost of domestic airlines.

Domestic airlines could benefit from domestic leasing arrangements, with lower risks in foreign exchange rate, Xu said.

However, a hefty tax rate for domestic leasing firms has impeded the development of the firms, he said.

Although residual value leasing is a convenient starting point for domestic players, this type of leasing carries a much lower profit margin, he said.

Domestic companies are hardly competitive, given their much weaker capital strength, experience and risk-control capacity, he said.

They have also to tackle problems such as lack of fund-raising channels, guarantees and credit ratings.

"Residual value leasing is just the starting point, we will explore our way and move into other business," New Century's Zhao said.

(China Daily November 28, 2002)

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