China’s easing of ‘three red lines’ loan rules for property sector won’t have immediate impact on struggling developers, analysts say
- China plans to exclude debt raised by a developer to acquire distressed assets of another home builder when calculating their ‘three red lines’ compliance
- The three red lines that define thresholds on borrowings were outlined by Beijing in August 2020
Beijing’s loan limit for real estate companies, widely known as the “three red lines”, which has pushed many developers to the brink, has been partially relaxed, according to a report by a state-backed media outlet. Shares of property firms rose in Hong Kong.
Analysts, however, said they do not expect an immediate impact on the market.
Chinese policymakers plan to exclude debt raised by a developer to acquire distressed assets of another home builder when calculating their compliance with the three red lines, Cailianshe reported on Thursday.
The three red lines define thresholds on borrowings, which were outlined by the central government in August 2020. They are a liability-to-asset ratio excluding advance receipts of less than 70 per cent, a net debt-to-equity ratio of less than 100 per cent and a cash to short-term debt ratio of one.
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According to the new rule, companies will be allowed to borrow more from banks and increase their debt level by 5 per cent annually for each red line threshold that they meet, subject to a maximum yearly debt increase of 15 per cent. The rule has been backdated to January 1, 2020.
However, senior executives of two mainland developers contacted by the Post said that they have not yet received any such notice regarding the rule change.