Hong Kong sets eyes on aerospace financing amid air travel boom

[BEIJING] Hong Kong will roll out measures to make it a bigger player in aviation finance, Chief Executive Leung Chun- ying said in his annual policy speech to lawmakers, suggesting the city is pushing to catch up with more established leasing centers in Singapore and Dublin.

"The government is formulating measures to develop Hong Kong into a center for aerospace financing," Leung said Wednesday. Such a pledge suggests a firmer commitment than a year earlier, when he said the government was "studying the development" of the city's aerospace financing business.

Leung's speech comes amid rising competition in aerospace financing and China set to outpace the U.S. as the world's largest air travel market over the next two decades. China announced Tuesday that it would allow financial leasing firms in Tianjin's free trade zone, the center of Chinese aircraft leasing, "more freedom" to move capital across borders, the official Xinhua News Agency reported.

"Our long and hard labor and relentless advocacy for the aerospace finance center is recognized and endorsed as a way forward to advance Hong Kong's development and leadership as a global financial center," said Dewey Yee, who heads the Hong Kong Economic Development Commission's aerospace-finance focus group.

Plane-leasing companies in China have been involved in more than $16 billion worth of acquisitions since the government's call in mid-2014 for local leasing companies to expand overseas to benefit from rising travel demand. Renting planes to airlines has proven to be a stable business, often more profitable than the airlines themselves.

Still, Hong Kong has much work to do to rival the tax policies that have made Dublin and Singapore into air-financing centers.

"It is important for the government to understand the advantageous tax regimes for the industry in the traditional hubs of Ireland and Singapore so as to ensure that any proposed tax changes are competitive," Clarence Leung, asset finance and leasing director for PwC Hong Kong, said in a statement Wednesday.

"The main obstacle for a Hong Kong-based company leasing out an aircraft is that it is taxed on gross rental income rather than profits," he said. "Lessors in Ireland and Singapore are not only able to claim for tax depreciation, but are also taxed at a more favorable rate." China requires about US$1 trillion worth of aircraft over the next 20 years and has under-ordered by some 750 planes over the next decade, Domhnal Slattery, chief executive officer of lessor Avolon Holdings Ltd., told Bloomberg Television on Monday, a day after China's Bohai Leasing closed its $7.6 billion acquisition of Dublin-based Avolon.

As part of that merger, Hong Kong Aviation Capitalwill be absorbed into the combined Avolon-Bohai entity. That leaves China Aircraft Leasing Group Holdings as the sole air lessor in Hong Kong, a special administrative zone of China.

BLOOMBERG