HONG KONG: China has done away with borrowing limits on property developers known as its “three red lines” policy, local media said on Thursday, an apparent end to rules that triggered a debt crisis which continues to weigh on the world’s second-largest economy.
In a separate new measure to help relieve financing pressure on the sector, authorities are also allowing banks to grant extensions of up to five years for loans to certain property projects, two sources with knowledge of the matter said.
China Real Estate Business, a media outlet managed by the Ministry of Housing and Urban-Rural Development, reported that the “three red lines” policy has basically ended. A spokesperson for the ministry could not immediately be reached for comment.
In some ways, China‘s abandonment of the red lines – caps on debt-to-cash, debt-to-assets and debt-to-equity ratios imposed in 2020 that developers could not exceed if they wanted fresh loans – is symbolic.
The rules were seemingly relaxed before this year, developer sources said, declining to be named. Analysts also said that funding challenges for a still deeply troubled industry would continue to persist even without the limits.
Red lines caused liquidity crunch
Nevertheless, real estate developers surged on the news with China Overseas Land and Longfor both gaining 6% and the CSI 300 Real Estate Index in mainland China climbing 5% to its highest level in two months.
The idea behind the “three red lines” was to rein in the sector’s appetite for unbridled borrowing, but the policy backfired spectacularly by causing a liquidity crunch from mid-2021, and many developers have since defaulted on their debt.
For example, China Evergrande, once the country’s biggest developer, is now in liquidation, while Country Garden recently completed a restructuring of its offshore debt. China Vanke, another embattled top-ranked developer, recently gained creditor approval to defer some repayments, staving off a potential default.
The downturn in the sector, which used to account for about a quarter of China’s GDP, has hit the economy hard with homebuyer and investor confidence slumping as swathes of apartments went unfinished.
Liu Shui, an analyst at China Index Holdings, a real estate analytical firm, said that the rules no longer served their intended purpose given changes in the industry.
Developers have “abandoned the debt-driven expansion model and no longer prioritize scale above all else, instead focusing on high-quality development,” he said, adding that aggressive companies in the sector have already defaulted.
Analysts at Citi said in a research note that the removal of the policy is unlikely to bring an influx of new funds to the sector because most private developers are still grappling with debt extension or restructuring. State-owned firms still need to comply with other regulatory requirements to take on more borrowing, they added.
“That said, we see this move as a possible signal, indicating that the deleveraging and de-capacity of the property sector have been accomplished, sentiment wise,” it added.
Loan extensions for ‘whitelist’ projects
Certain property projects are eligible for loan extensions from their original lending banks without additional collateral requirements, said the two sources, who declined to be identified as they were not permitted to speak about the matter publicly.
Those projects belong to a so-called “whitelist” launched in January 2024 aimed at ensuring the completion of residential projects. Local governments nominate eligible projects and banks are encouraged to provide financing.
Many of those loans are expiring after two years. The extension will offer breathing room for developers to complete unfinished projects and stabilize their operations, the sources said.
Chinese authorities have over the years taken a raft of measures aimed at supporting the property market, but new home prices extended declines in December, underscoring persistent strains in the sector.
An official Communist Party journal said on January 1 that the country’s property sector remained a pillar of the economy but was “undergoing a profound adjustment”. The article called for “strong policy actions” to stabilise expectations.
