Good Prospect of Chinese Construction Machinery Financial Leasing Industry

www.shcri.com -- In recent years, since enterprises have gradually improved their awareness levels of the financial leasing, the functions of the financial leasing market have been perfect and Chinese construction machinery financial leasing industry has entered a new stage of rapid development. Especially in the background of the financial crisis, Chinese government has adopted the policy to positively expand demands of the domestic market, which brings opportunities to the rapid development of the construction machinery financial leasing industry. But on the other hand, compared with mature financial leasing markets in developed countries, Chinese construction machinery financial leasing industry is still in the primary stage of development. Therefore, the market penetration rate is very low, which is only about 8%. According to the statics of China Research and Intelligence, in 2008, the market scale of Chinese construction machinery financial leasing market is only about 3 billion USD. The statistics reveals that Caterpillar’s the largest construction machinery producer in the world whose sales amount accounts for over 60% of the  global sales amount and over 80% of its sales amount in developed areas is dealt in the financial leasing.

The penetration rate of Chinese domestic construction machinery financial leasing is estimated to increase year by year. It is estimated that in 2010, it will be 12% and in 2015, it will reach 25%. The market scale will reach 20 billion USD. Thus, Chinese construction machinery financial leasing has a large development space.

For those construction machinery enterprises with large scales and sufficient cash flows, setting up their own financial leasing companies means significantly. Especially in the background of the financial crisis, bank mortgage amounts can not satisfy the sales demands of quite a few construction machinery enterprises. As a new sales model, to some degree, the financial leasing makes up for this demand. Just because of this, the sales model of the financial leasing has gained the attention of manufacturers and becomes the new choice for many large construction machinery enterprises home and abroad which hope to defend the market beat and the policy impact.

When economy is prosperous, bank credit policy is loose, and the financial leasing can fully play its function of corporate finance to promote the flourish development of economy. When economy is in depression, the financial leasing not only plays a role of a cardiotonic but also plays its role of promotion. It pushes forward investment and consumption, stimulates the economic development and pours fresh blood into the economic development. The financial leasing is an effective way to simulate investment and overcome the reduction in investment. To some degree, it can avoid being influenced by the fluctuation of national monetary policies. It plays a positive role in the stable development of enterprises and the sustained and stable growth of state economy. Moreover, the financial leasing has the function of accelerating depreciation. After a contract expires, part of leasing equipment will be absolutely overhauled in the second-hand market, which objectively promotes the development of remanufacturing and supports the cyclic development of the construction machinery industry.

For its objects, the financial leasing has a unique advantage in promoting the development of medium and small enterprises. In China, the standard of commercial bank loans in recent years is comparatively high, which not only avoides bank risks but also blocks the development demands of medium and small clients. The combination of the financial leasing provides medium or small enterprises with medium and long term loans. In the process of the financial leasing, the ownership of equipment belongs to a lessor, but the use right and the usufruct belong to a leaseholder. The current Chinese accounting system stipulates that leasing assets can be incorporated into a leasee company’s fixed assets to extract depreciation. For quite a number of medium and small construction enterprises, this feature can solve the problem of being classified as enterprises with insufficient quality for the lack of sufficient equipment (fixed assets). And successful bids of projects will not be affected. Moreover, a variety of business released by financial leasing companies can forcefully support medium and small companies to enter the market competition. For example, sale leaseback can help construction enterprises purchase the equipment tenders required in the process of bidding. That is to sell a company’s equipment at scrap value (which doesn’t take part in the construction tender) to financial leasing companies. Besides, it raises funds to buy the equipment required in the tender and rent the equipment which has been sold to the financial companies. The business has been comparatively mature overseas. Enterprises change physicochemical capital into money capital through sale leaseback. The business doesn’t affect enterprises to go on using property and keep the capital fluidity.

For construction machinery enterprises, the financial leasing has 4 functions as financing, promotion, investment and assets management. Among them, financing and promotion are the most important. Especially in the current stage of the national macro-control and the credit crunch, on one hand, the financial leasing can provide parent companies with financial services by adopting rental instead of selling. It not only avoids the over-reliance on bank credit, but also avoids the unsmooth intermediate links caused by too many stocks, which helps accelerate the flow of enterprise capital. On the other hand, the financial leasing can enlarge the market of parent companies’ products and strengthen the market competitiveness. Meanwhile, as the parent company of a financial leasing company, a manufacture enterprise can occupy partial profits of bank interests.

The overall prospect of Chinese construction machinery financial leasing industry is good. But according to the statistics of China Research and Intelligence in July of 2009, the operational status of every enterprise in Chinese construction machinery financial leasing industry is not the same. Some enterprises like Caterpillar, the international giant in the construction machinery industry, take many preferential measures in Chinese construction machinery financial leasing industry in 2009: before 2009, their financial leasing business required 5% of deposit; after entering 2009, the margin-free policy is carried out; the commission charge is canceled; 1-year construction machinery insurance is offered to their clients in the financial leasing business. Therefore, their business develops prosperously.

However, in some companies, the procedures for the financial leasing business are complex and the total leasing costs are higher than bank mortgages after the total. Thus their financial leasing business in Chinese construction machinery financial leasing industry has declined or even been canceled. The bank mortgage business replaces the market space left by the financial leasing business.

Source: China Research and Intelligence

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