China: An Aviation: Finance (PRC Firms) Overview

Opportunities and Challenges Coexist: Prospects for China's Aviation Finance Market

According to forecasts by the International Trade Commission of the US Department of Commerce, by 2043, China is projected to become the world's largest aviation services market, rising from its current second-place position.

Driven by international and domestic environmental factors, such as persistently high aircraft prices, aircraft deliveries not yet returning to pre-pandemic levels, and significant geopolitical shifts, transaction activities in China's aviation finance sector have undergone notable changes over the past years. In addition to traditional aircraft financing and leasing transactions, several other transaction types have become particularly active, including: cross-border sale and purchase of aircraft asset portfolios (especially foreign leasing companies selling aircraft on leased to China airlines to domestic regional leasing companies which previously did not conduct aviation finance business), airline’s purchase of new aircraft through third party’s OEM order and the introduction of passenger-to-freighter aircraft conversions. 

Against the backdrop of a complex and dynamic market environment, China has been continuously refining its domestic legal framework to provide a stable, fair, efficient, and transparent business environment for market participants. This aims to attract more capital for domestic development and further stimulate market activity and to offer clearer guidance for market entities in conducting transactions, reduce transaction costs, and enhance certainty. The newly revised Civil Aviation Law of the People's Republic of China (Civil Aviation Law), set to take effect on 1 July 2026, is a product of this context. It lays a legal foundation for aviation finance and reiterates several key principles. 

The sustained activity in China's aviation finance market and the continuous introduction of supporting laws and regulations have created more opportunities and convenience for all parties involved in transactions. Meanwhile, as the commercial needs of domestic entities evolve, the market has also seen the emergence of numerous innovative and complex transaction arrangements. Coupled with ongoing adjustments to relevant regulations and policies, this necessitates that market participants exercise greater caution in identifying and managing risks when participating in China's aviation finance transactions, and pay special attention to the following matters and arrangements during the course of the transaction:

Registration of rights

In line with the "publicity of rights" principle under the Civil Code of the People's Republic of China, the newly revised Civil Aviation Law explicitly stipulates that rights holders of civil aircraft may apply to the Civil Aviation Administration of China (CAAC) to register ownership, mortgage rights, and possession rights. Failure to register such rights may render them unenforceable against third parties acting in good faith. This provision establishes rights registration as the "statutory standard procedure" for rights publicity. As part of China's legal system development, the Chinese government is also continuously optimizing and updating the aircraft rights registration system and procedures to provide efficient registration and publicity services for participants in China's aviation finance market transactions. 

For common transaction arrangements in aircraft financing and leasing, relevant parties (especially lessors and financiers) may need to undertake the following registration tasks during the course of their aviation business operations:

• Rights Registration with the CAAC: Aircraft ownership, mortgage and possession rights registration.
• Rights Registration with the Unified Registration and Publicity System for Movable Property Financing of the People's Bank of China Credit Reference Center:
  • Registration of ownership retention sales in respect of aircraft/spare engines/aviation materials.
  • Registration of finance leasing in respect of aircraft/spare engines/ aviation materials.
  • Mortgage registration in respect of spare engines/aviation materials (mortgage registration in respect of aircraft must be completed with the CAAC).
  • Pledge registration in respect of lease receivables, such as rent payments.
• Additionally, as China is a signatory to the Cape Town Convention, subject to the declarations made by China upon its accession (eg, the Convention does not apply to "internal transactions"), relevant transaction arrangements (such as cross-border leases, cross-border mortgages, etc) should also complete corresponding International Interest registrations. Furthermore, the IDERA issued pursuant to the Cape Town Convention shall also be registered with the CAAC.

Selection of dispute resolutions

At present, the Chinese legal system does not support "self-help remedies". When acceding to the Cape Town Convention, China also made a clear reservation: any remedies that creditors may obtain under any provisions of the convention (regardless of whether the provisions explicitly require such remedies to be applied for through a court) must be approved by the courts of China before they can be implemented. Against this backdrop, to ensure that the remedies available to right holders in the event of a transaction default can be effectively enforced to the greatest extent, parties involved in aviation finance transactions (especially foreign lessors and financiers in cross-border transactions) must carefully consider the choice of dispute resolutions when conducting business in China.

With respect to arbitration, China acceded to the New York Convention at the end of 1986, stipulating that for disputes arising from contractual and non-contractual commercial legal relationships, China will recognize and enforce arbitral awards made in the territory of another contracting state to the convention on the basis of reciprocity and in accordance with its provisions. Additionally, China has entered into bilateral treaties with certain countries and regions regarding the recognition and enforcement of arbitral awards.

With respect to litigation, as of now, China has not yet acceded to any international convention specifically addressing the recognition and enforcement of court judgments. Although bilateral agreements on judicial assistance in civil and commercial matters have been reached by China and some countries and regions, these do not currently include the UK and the USA, which are commonly involved in aviation finance transactions. Nevertheless, based on publicly available information and under the principle of reciprocity, Chinese courts have, on certain occasions, recognised and enforced judgments from courts in the UK and certain states in the USA, and vice versa.

Allocation of transaction taxes

In aircraft financing, sale, or leasing transactions, market-standard provisions regarding tax compensation and liability allocation are already well-established. However, given the ongoing evolution of laws, regulations, policies and tax practices, all parties (particularly when involved in cross-border transactions with multi-layered legal relationships) must remain vigilant and stay informed in real-time. This is essential to promptly adjust relevant provisions in the agreement and ensure no risk exposure remains unaddressed.

For instance, in previous years, the Ministry of Finance and the State Taxation Administration issued new announcement concerning stamp duty levied on taxable documents (such as sale agreements, leasing agreements, etc) executed overseas by foreign parties in cross-border transactions. In light of requirements under this announcement, an increasing number of prudent foreign companies, when engaging in cross-border dealings with Chinese enterprises, now factor into their transaction costs the stamp duty that might previously not have been paid in practice, and add clauses in transaction documents stipulating that such stamp duty shall be borne or paid on their behalf by the Chinese enterprise, thereby avoiding administrative penalties resulting from non-payment or underpayment of taxes.

China's aviation finance sector stands at the intersection of global competition and localised innovation. Only by keenly seizing the opportunities presented by market transformation and prudently establishing a risk management framework can stakeholders navigate the ever-changing landscape with stability and foresight. It is hoped that international and domestic market participants will collectively contribute their wisdom and vision to authoring a new chapter in China's aviation finance.