The policy Beijing introduced in 2020 to cap developers' leverage is backfiring. Officials are considering blurring or moving the “three red lines”. They might have to erase them, warns ywchen1
Frustrated by the ineffectiveness of efforts to curb speculation by hiking mortgage down payments and similar measures, regulators led by banking chief Guo Shuqing stiffened policy in 2020. They introduced formal caps on three key ratios: debt-to-cash, debt-to-assets, and debt-to-equity. Those on the wrong side of those lines found themselves almost entirely locked out of credit markets.
With developers and worried investors dumping apartments onto the market to raise cash, and the rest of the economy cooling, home prices started falling. Sales volumeslast year. Constricted cash flows made it even harder for developers to pay down debts. Indeed, the average net-debt-to-equity ratio at China’s top 80 real estate companies rose to 152% by the second quarter of 2022, nearly double what it was in mid-2020, per analysts from state-owned Chinese Academy of Social Sciences.
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