Focus topics

Real estate sector crosses red lines

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  • In 2020, the People’s Bank of China (PBoC) and the Ministry of Housing & Urban-Rural Development (MOHURD) jointly imposed three “red lines” on all domestic real estate companies, requiring them to achieve:
    • 1) <70 percent debt-asset ratio,
    • 2) net debt ratio < 1.0, and
    • 3) cash to short-term debts ratio > 1.0.
  • Developers that fail to achieve these targets have restricted access to bank financing​
  • The three “red lines” aim to push a deleveraging process in the real estate sector, which has accumulated dangerous levels of risks through excessive debt and aggressive business expansions without sufficient consideration of financial health.​
  • However, looking back at the end of 2022, the policies failed to bring about the intended consequences. Among the top 5 Chinese real estate developers in terms of revenue, only two barely succeeded to lower their debt-asset ratio to below 70 percent. Two others, Evergrande and Sunac China, had to enter debt restructuring processes due to bond defaults.​
  • More generally, the real estate sector is currently encountering an existential crisis, caused by weakening market demand amid the covid-driven economic downturn combined with the sector’s financial fragility. At the same time, the crisis is in fact worsened by the government’s excessive pressure to deleverage.​
  • Real estate sales in China in 2022 decreased by 23 percent year-on-year (year-to-date data until November 2022). The government now tries to adjust its excessive policies, relaxing bank financing for real estate developers and thereby, in essence, removing the “red lines”. However, the damage to the real estate sector and the overall Chinese economy are already done.​
  • This provides an illustrative example of the enormous difficulty to implement economic reforms even when aiming at the right objectives. Even China’s economic policy planners are not always able to react to the market dynamics in time and steer sectoral development towards the desired outcomes.​

Sinolytics is a European research-based consultancy entirely focused on China. It advises European companies on their strategic orientation and concrete business activities in the People’s Republic.


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