China's aspirations for its aircraft finance sector are as lofty as its potential, as it bids to transform a young and fast-growing domestic industry into a world-beating one.
Providing insights on the best way to achieve this ambitious goal formed the focus of a recent conference titled, "In-depth and Refined Work for High-end and Sustainable Development - A New Era of China's Airfinance Industry."
Staged in Tianjin, one of the country's aviation finance hubs, the event brought together corporate leaders and policymakers to identify the challenges that need to be overcome for China to catch up with the competition and help shape the industry's future.
Although China is the world's second-largest aviation market, it is still relatively new to aviation finance, an asset class estimated to be worth US$500bn by 2024. The industry is dominated by Ireland, which processes nearly 65% of the world's aviation leasing contracts, including for more than 1,100 Chinese-owned aircraft.
China currently holds about a 15% market share of this lucrative market, but to capitalise on the significant long-term potential of the country's aviation industry, industry experts believe there are many areas of policy, especially in matters of taxation, that China should focus on improving.
Tax and regulatory reform
Tax regimes are key to the success of aircraft finance hubs as proven by the examples of Ireland and, more recently, Singapore and Hong Kong. The Civil Aviation Administration of China has acknowledged the need for tax reforms to help the sector grow.
China has made a good start by ceasing to impose value added tax (VAT) on leased aircraft imports with effect from June 2018. This is good news for airlines, lessors and financiers as the import VAT constituted a significant chunk of lease rentals (in the range of 5%-16%) payable by the importer. The move should prove especially positive for Chinese airlines, 60% of whose fleets are imported leases. But more needs to be done.
While China's free trade zones currently have 105 bilateral tax treaties – more than those signed by Hong Kong, Singapore or even Ireland – the terms of the treaties remain relatively unattractive. Ireland, for instance, has many bilateral tax treaties with a low rate of withholding tax, which may be better than equivalent treaties signed by China. Investors prefer the preferential tax rates of other industry hubs to the subsidies provided by China, which also requires tax to be prepaid.
There are also calls for an overhaul of the industry's regulatory mechanism to bring it more in line with global standards. Currently, China views leasing entities as akin to banks and they are overseen by the China Banking and Insurance Regulatory Commission, subjecting them to greater compliance requirements than in other markets, including Hong Kong.
The wider challenge
While taxation was the major issue raised at the conference, there are a number of other areas China will need to address to enhance the local industry in a way that makes it truly competitive with other markets, including financing, foreign exchange controls, talent gaps and the legal framework.
In addition, a major challenge to China's aspirations for its aircraft finance sector comes from external headwinds. Its trade dispute with the United States has pushed up the price of planes and parts. A 25% tariff on Boeing 737 aircraft, helicopters, private planes, and even airplane tires, could prove crippling.
At the same time, high oil prices and a strong US dollar are seen cutting into airline profits, in turn hurting aviation finance companies already operating in a highly competitive industry that is expecting a round of consolidation after years of rapid expansion.
Despite these challenges, the potential of the country's aviation finance sector and the focus of its policymakers is undeniable. Lifted by the right reforms and the country's economic dynamism, the Tianjin event made it clear work is already well underway to put China's aviation finance industry firmly on the path to longer-term success.
TMF Group and a panel of industry experts will provide you with answers to many of the challenges of aircraft leasing in China, including Hong Kong, to help you to seize the opportunities that this huge market has to offer. Learn more and discover how TMF Group's Aircraft Finance Services can help you navigate the issues by attending our webinar "DFTP and Hong Kong – Identify an efficient jurisdiction for aircraft leasing" on 6 November 2018 and listening to the experts.
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