China braces for another record year of bond defaults as cash-starved developers breach central bank’s red lines for borrowings

China’s corporate defaults may set a record this year when a trio of the central bank’s debt limits kick in this month, as they crimp the ability by borrowers to use loans to repay their outstanding debt.

One in five of China’s biggest real estate developers including China Evergrande Group will be barred from borrowing any more money from banks according to the three red lines on debt drawn by the People’s Bank of China, the state-owned Economic Information Daily said.

The red lines are different limits on borrowings: liability-to-asset ratio excluding advanced receipts at 70 per cent, net debt-to-equity ratio at 100 per cent; and cash to short-term debt ratio at one time, outlined in Beijing last August during a financial symposium.

“If a developer crosses all three red lines, its total debt level would not be allowed to increase any more,” said S&P Global Ratings’ director Esther Liu, adding that only 6.3 per cent of all rated Chinese developers can comply with the limits. “This means the developer cannot borrow more from banks or other financial institutions if its existing debts have not been paid, or if its overall leverage has not improved.”

The government, presiding over the only major global economy that actually grew in 2020, is zealously keeping its iron grip on the country’s debt to avoid causing systemic risk to banks. Regulators are also anxious to avoid runaway debt from setting off the kind of global financial crisis that followed the US subprime loans defaults in 2008. The real estate and construction industry contribute to about 29 per cent of China’s economic output.