China Banking and Insurance Regulatory Commission: Raise the minimum registered capital requirements for financial leasing companies.

On September 20th, the China Banking and Insurance Regulatory Commission revised and released the "Regulations on the Management of Financial Leasing Companies," and relevant officials from the Commission answered questions from journalists regarding the regulations. In the revised regulations, it is mentioned that the minimum registered capital requirement for financial leasing companies will be increased to enhance risk resilience. Additionally, three new types of main investors - state-owned capital investment and operating companies, state-owned financial capital investment and operating companies, and overseas manufacturing enterprises - will be added. The market entry standards for main investors, such as total assets, operating income, registered capital, and minimum shareholding requirements, will be appropriately increased to strengthen the shareholder responsibilities of main investors. The officials also mentioned optimizing the provision coverage ratio and interbank borrowing ratio supervision indicators. Following the principles of counter-cyclical regulation, the provision coverage ratio will be reduced from not less than 150% to not less than 100%. This adjustment aims to support financial leasing companies in increasing support for the real economy while ensuring that loss reserves effectively cover expected credit losses. The scope of interbank borrowing ratio regulation will be expanded from interbank borrowing to interbank borrowing in and out business. The revision of the regulations is an important measure to implement the central government's financial policies, strengthen financial regulation, prevent financial risks, enhance financial services, and promote high-quality development of the real economy. The China Banking and Insurance Regulatory Commission will continue to strengthen regulation, implement politically and people-centered financial work, guide financial leasing companies in implementing the regulations, uphold their function of combining financing and equipment leasing, provide specialized financial services, support large-scale equipment upgrades, and help enhance the resilience of the industrial supply chain for high-quality development of the real economy.As specialized business management. The sixth is to improve the rules of business operation. In order to strengthen the weak links in business operation management, specific operation and management rules for transferring and receiving financing leasing assets, joint leasing, fixed income investments, factoring financing, cooperative institution management, and consumer rights protection will be supplemented and improved. Why does "Regulations" increase the minimum shareholding requirement for the main investors of financial leasing companies? The "Regulations" have increased the shareholding requirement for the main investors of financial leasing companies from not less than 30% to not less than 51%. The main considerations are: first, based on regulatory practices in recent years, increasing the shareholding of main investors is beneficial in strengthening shareholder responsibilities, better utilizing shareholder resource advantages, and encouraging shareholders to play a more active supportive role. Second, it helps improve decision-making efficiency, avoiding problems like ineffective corporate governance due to excessive share dispersal. Third, it helps clarify the major shareholders and actual controllers of financial institutions to prevent shareholders from evading regulation, violating rules, or even embezzling financial leasing companies through methods like acting in concert through proxy holdings or concealing relationships. At the same time, to prevent major shareholders from illegally intervening in the operations and management of financial leasing companies, the "Regulations" have specifically increased regulatory requirements in areas such as corporate governance, shareholder obligations, and related party transactions, forming effective constraints and positive interactions within and outside financial leasing companies. What adjustments does the "Regulations" make to the business scope of financial leasing companies? The "Regulations" have optimized and adjusted the business scope of financial leasing companies to focus more on their core responsibilities. On one hand, there is a distinction between basic business and specialized business. Considering that the "fixed income investment business" and "provision of financial leasing-related consultancy services" require higher expertise from financial leasing companies, these two businesses have been moved from basic to specialized business categories. Additionally, overseas business operations are now subject to categorized management. Within the scope of specialized business, financial leasing companies must further refine their qualifications to establish project companies for conducting specialized financing leasing operations, with a distinction between domestic and overseas operations, requiring financial leasing companies engaged in overseas leasing activities to do so through project companies. For leasing assets like aircraft and ships, which have high individual values and require specialized lessors, companies are required to establish subsidiary companies for such activities. For other equipment assets used as leased items in overseas operations, qualified financial leasing companies can establish project companies for such activities domestically or internationally after obtaining relevant qualifications. How does the "Regulations" regulate leasing activities in various aspects? One is to optimize and adjust the range of leased items. In accordance with international industry practices and conventions, the "Regulations" have adjusted the range of leased items from fixed assets to equipment assets, focusing on providing specialized financial services for enterprise equipment upgrades and renovations, guiding financial leasing companies to concentrate more on their core expertise and return to the essence of leasing. In addition, based on recent practical experiences, productive biological assets such as economic forests, fuelwood forests, livestock, and draft animals are now allowed as leased items. Second is to strengthen eligibility supervision of leased items. The "Regulations" require leased items to have clear ownership, specificity, disposability, economic value, and be capable of generating utility profits. Low-value consumables and consumer goods other than small and micro passenger vehicles are not allowed as leased items, and properties already mortgaged, disputed ownership, judicially sealed, or with faulty ownership are also prohibited as leased items. Third is to enhance the management of leased item value assessment. Based on the development of financial leasing activities in recent years and experiences in risk management, once the appropriate leased items are chosen and accurately valued, the probability of default and ultimate loss in financial leasing activities is minimal. Therefore, the "Regulations" emphasize the management of leased item value and require financial leasing companies to establish internal balancing mechanisms, improve their value assessment systems, develop valuation management regulations, specify valuation procedures, factors, and methods to rationally determine the asset value of leased items. Additionally, external assessment agencies are to be managed more closely, with clear criteria for entry and exit, and an overall enhancement of leased item valuation and management capabilities. What are the changes in regulatory indicators in the "Regulations"? One is the addition of leverage ratios and financial leverage multiples indicators. As non-bank financial institutions that do not accept public deposits, financial leasing companies are subject to new regulatory indicators including leverage ratios and financial leverage multiples to avoid blind expansion. The leverage ratio should not be lower than 6%, and the financial leverage multiple should not exceed 10 times. The second is the optimization of provisions coverage and interbank borrowing ratio regulatory indicators. Following a counter-cyclical regulatory approach, the provisions coverage ratio has been adjusted from no less than 150% to no less than 100%, to support financial leasing companies in increasing their support for the real economy while maintaining adequate coverage for expected credit losses. The range of interbank borrowing ratio regulation has been expanded from interbank borrowing to both interbank borrowing and lending. The third is the addition of indicators such as the provision coverage ratio of lease receivables and liquidity ratios to further enhance the regulatory indicator system. The specific calculation methods and values for liquidity ratios and coverage ratios will be determined by the China Banking and Insurance Regulatory Commission in conjunction with industry practices. How was public opinion solicited for the "Regulations"? In January 2023, the "Regulations" were publicly solicited for opinions from the public, with the majority of reasonable suggestions and feedback being adopted. Suggestions that were not accepted mainly focused on reducing regulatory requirements blindly and insufficient understanding of regulatory provisions. Regarding some feedback on interpretations of regulations and transitional arrangements for implementation, the China Banking and Insurance Regulatory Commission will issue additional documents to clarify.