Finance Leases: In the Shadow of Banks

By analyzing a hand-collected transaction-level dataset on the finance leases of China’s public firms for the period 2007-2019, this paper sheds light on China’s leasing market, the second largest in the world. We find that banks use their affiliated leasing firms to provide credit to clients in order to circumvent the government’s targeted credit policy. In contrast to conventional view of regulatory arbitrage, our evidence indicates that, instead of hiding risk and gambling for profit, banks mainly use their affiliated leasing firms to support high-quality clients. The bank affiliated institutions can play strategic role in relationship banking.