Approaching Leasing Joint Ventures

In general, a foreign-invested leasing company must be approved by MOFTEC (now the Ministry of Commerce) and cannot be a wholly foreign-owned enterprise.

To set up a financial leasing joint venture (FLJV), the investors should possess relatively strong economic strength and financing capacity. The Chinese investor must have had total assets of not less than Rmb400 million and the foreign investor must have at least five years experience in the financial leasing industry with total assets of not less than US$400 million in the year immediately before the application for the establishment of the FLJV. Additionally, registered capital shall not be less than US$20 million; the contribution of the Chinese investor shall not be less than 20% of the registered capital; the term of business operation shall not be longer than 30 years; and appropriate management personnel and the senior management personnel must have corresponding professional qualifications with at least three years' experience in the financial leasing business.

In a leasing business that is other than lease financing (OLJV), the requirements are considerably less restrictive. The Chinese investor must have had total assets of not less than Rmb100 million and the foreign investor must have at least three years' experience in the financial leasing industry with total assets of not less than US$50 million in the year immediately before the application (compared to US$400 million for an FLJV). Additionally, the OLJV's registered capital shall not be less than US$5 million (compared to US$200 million for an FLJV); and the term of business operation shall not exceed 20 years. The Chinese parties' contribution shall, as in an FLJV, be not less than 20% of registered capital, and the same requirements are given for the qualifications of management as in an FLJV.

Business Scope

Upon approval, an FLJV may engage in: various types of financial leasing business in Chinese and foreign currency, including direct leasing, sub-leasing, lease-back, leverage leasing, mandate leasing, joint leasing and other types of leasing. The equipment for lease can be sourced domestically or from abroad, including advanced or applicable production equipment, communication facilities, medical apparatus and instruments, scientific research equipment, inspection and testing equipment, engineering machinery, transport faculties (including aircrafts, vehicles, vessels), and other mechanical equipment and their affiliated technology. They can also: purchase domestically or from overseas, equipment technologies necessary for the leasing business, according to the lessee's choice; sell off and dispose of the residual value of depreciated lease goods and products; provide leasing transaction consultation and securities; and conduct other business approved by the approval authority.

It is worth mentioning that engaging in a financial leasing business does not make an FLJV a financial institution. An FLJV may, however, apply to the People's Bank of China (PBOC) to become a financial leasing company pursuant to the Administration of Lease Financing Companies Procedures, promulgated by the PBOC on June 30 2000. Upon the approval of establishment by the PBOC, the Leasing JV may obtain a financial institution legal person permit and enjoy the rights to conduct other financial business approved by the PBOC.

An OLJV, upon approval, can engage in the following business activities: leasing general purpose equipment including production equipment, communication facilities, medical apparatus and instruments, scientific research equipment, inspection and testing equipment, engineering machinery, transport faculties; selling off and disposing of the residual value of depreciated lease goods and products; and other business approved by the approval authority.

Conclusion: The Legal Vacuum

Although the Tentative Procedures set forth a series of provisions on the administrative procedures in connection with the establishment of a foreign-invested leasing company, they still leave unaddressed the problems involved in the course of the business operation of such foreign-invested leasing companies. For instance, will the Chinese legal system favour repossession of leased equipment when the lessee breaches the contract? In theory, the lessor keeps the title to the leased equipment and the owner's legal rights include the right of possession or repossession of the leased equipment. But in practice, a lessor always finds it difficult to repossess the leased equipment without resorting to court proceedings. The Chinese legal framework, which advocates court or arbitration settlement as the method for dispute resolution, does not provide a leasing company with the right to voluntarily repossess the leased assets, though it recognizes that the title to the leased assets belongs to the lessor, the leasing company. This aggravates the problem of enforcement, and especially regional enforcement, of judgments or arbitration awards.

By Edmond Tang & Grace Li,

Zhong Lun Law Firm

Shanghai