Shipping Finance in the Spotlight: China’s Ship Leasing Market

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Today, I will be covering the Chinese ship leasing market. In recent months, I have developed a keen interest in shipping finance and attended several conferences to better understand how the shipping industry is financed, as well as the legal and regulatory frameworks that apply to such financing agreements.

One approach to shipping finance is ship leasing, which has become a particularly popular financing option in China. This naturally caught my interest, so I will be exploring some key questions about China's ship leasing market and its potential for international growth.

What is ship leasing, and why is it important for the shipping industry?

Ship leasing is a financial arrangement, in which the legal owner of a vessel (the lessor), will give an operator such as a shipping company (the lessee), full possession and control of the ship for a certain period of time, receiving regular payments in return.

Within that, there are several types of ship leasing agreements such as operating and financing leases. The former typically refer to more short-term agreements, whereas the latter "usually last for the economic life of an asset," and are likely to include option to buy clauses.

Ship leasing has become particularly significant for the shipping industry in recent years, because it is a relatively flexible and accessible way to finance shipping operations, especially when compared to more traditional methods of financing.

What is China's role in ship leasing?

Over the past decade, Western banks have partly withdrawn from the shipping market, creating an opportunity for non-Western- specifically Chinese and Japanese - actors to step in and fill the gap left by their Western counterparts. Chinese and Japanese lessors offered attractive, alternative "sale and leaseback structures (SLBs) for vessels and/or fleets."

That is not to suggest that ship leasing is a new phenomenon, as it has been around for many decades. However, since 2017, the Chinese shipping market has seen a significant increase in shipowners acting as leasing institutions, with five of the ten largest shipowners following this trend. CSSC Hong Kong Shipping Co Ltd is one of the top 10 Chinese shipowners and an expert in ship leasing. As of December 2023, its total assets alone were HK$43.8 billion (approximately USD 5.6 billion), highlighting the size of the Chinese market.

How international is China's presence in the international ship leasing market?

It is important to note that, despite the magnitude of the Chinese ship leasing market, its international presence remains relatively limited. In fact, despite having over 80 leasing houses, only around 30 are "providing financing in US Dollars." This demonstrates that global transactions are generally limited.

This could be attributed to the complex legal and regulatory frameworks governing ship leasing. On the one hand, China has strict regulations overseeing its domestic ship leasing market. These include financial, maritime, and foreign investment regulations. For example, all transactions must adhere to foreign exchange controls, typically set forth by the State Administration of Foreign Exchange (SAFE), which is the official Chinese agency for foreign exchange and international trade. This requires approvals for foreign currency conversions, and thus partly explains the small portion of leasing houses offering transactions in USD. Such issues shed light to why Chinese firms are limited in their international ship leasing transactions.

Additionally, non-Chinese lessees also face restrictions in securing financing for their shipping operations in the form of leasing. For example, "the Greek authorities noted that there are no ship-leasing companies in operation in Greece and there is no legal basis for acquiring an ocean-going vessel based on a financial lease agreement." Financial leasing is also prohibited for vessels under Article 1(3) of the Law 1665/1986. This creates legal barriers for lessees operating in such legal jurisdictions, as they may struggle with contract enforcement, tax treatment, and vessel regulation issues. This lack of legal clarity therefore makes it more difficult for potential lessees to enter into partnerships with Chinese leasing houses, even those which offer transactions in USD.

So, whilst the Chinese leasing market has massive potential for growth both domestically and internationally, these legal and regulatory barriers must be addressed for it to fully realise this potential.