Air Transport World

Morning after in China. (financing and aviation industry)(Leasing & Finance)

BEIJING - A new realism has set in among China's aviation officials and those who do business with them, as they start to deal with the problems of growth in the industry. This was the subtext of a recent conference here, sponsored by the Institute for International Research.

The aviation industry has grown by leaps and bounds since the "open door" policy began in the late 1970s. Chinese airlines operate some 400 aircraft and in order to keep pace with growth in the sector that is comfortably into double digits, estimates are that an additional 250 planes will be needed by the year 2000. Finding them will not be difficult. There are numerous whitetails and unfilled delivery positions a-plenty. The difficult part is paying for them.

Historically, the Bank of China has been critical to the placement of aircraft in China by agreeing to act as a guarantor in most of the financings. According to its own statistics, BOC had guaranteed around $11.5 billion for 15 domestic airlines to support purchase or lease of 230 aircraft at the end of 1994. CAAC is planning to import about 20 aircraft estimated at more than $1 billion in the next two years, and BOC will guarantee most of them. Moreover, given the primitive state of China's private finance and business and contract law, few Western-built aircraft would have been placed with mainland airlines absent the sovereign BOC guarantee.

The problem is that BOC, which also is trying to make the transition from a state-owned specialized bank to a state-owned commercial institution, admits that it is effectively overexposed with regard to airline guarantees, and is trying to backpedal.

While this has been understood generally in aviation and banking circles for some time, BOC used the October conference to make the first public admission that this was the case and that changes would have to take place. "In our balance sheets, the guarantee exposure to the airline industry accounts for the highest percentage and 8 out of the 10 biggest guarantees are airline companies," said Wang Yi, deputy general manager of the Second Credit Dept. …

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