China may soon roll out a draft law over the next two months to regulate the financial leasing business and put it under the umbrella of the Ministry of Commerce.

"The ongoing draft will be released before June," said Yu Xiaomei, deputy secretary-general of the Leasing Industry Association of Beijing.

The Finance and Economy Committee of China's top legislator, the National People's Congress, has set up a special team to work on the draft. The team has already sought public opinion and made revisions accordingly, Yu said over the weekend.

When launched, likely some time around 2007, the law will be the first covering the industry, Yu said.

Currently the nation's Contract Law has some provisions about the financial leasing business.

"But that is far from enough to solve the problems arising from sophisticated leasing practices," she said.

In particular, the country's further opening up of its leasing sector to foreign investors creates an urgency for more legislation, said Yu.

Financial leasing is an intersection of financing and leasing. Unlike renting - in which the owner remains the same after the deal is completed, financial leasing eventually leads to a transfer of ownership.

Under new rules, which took effect on March 5, 2005, foreign investors are permitted to set up fully-owned renting or leasing companies in China. Before they had to establish joint venture or co-operatives with Chinese counterparts.

Meanwhile, the new rule has lowered the capital threshold for financial leasing for foreign investors - from a minimum registered capital of US$20 million to US$10 million.

There's no such requirement for domestic leasing companies.

"Despite the opening-up, foreign companies may feel bewildered as they find controversial stipulations in different rules and laws.

"And while basing the legislation on our specific situations, we will also draw experience from foreign countries, where financial leasing has grown into a mature sector over the past decades," said Yu.

Most importantly, China needs to make it clear, in the law, which government department is mainly responsible for regulating the leasing sector, she pointed out.

Currently, the China Banking Regulatory Commission (CBRC) and the Ministry of Commerce are jointly conducting examination and approval rights over the sector. Leasing companies set up by financial institutions are under the administration of CBRC, while the Ministry of Commerce covers those run by non-financial institutions.

"A consensus was reached during our discussions that the Ministry of Commerce, in charge of trade and circulation, should work as the sector's dominant regulator; and that is in line with the common practice in other countries," Yu said.

To date there are 12 financial leasing companies under CBRC's regulation, all of which were approved before 1995.

Numerous leasing companies set up by non-financial institutions, either domestic or Sino-foreign, are under the administration of the Ministry of Commerce.

Yu said the examination and approval mechanism is likely to remain in place for at least a few years.

But she added that as the leasing business grows more mature in China, a registration process may replace examination and approval, "maybe in three to five years."

(China Daily April 11, 2005)