China slaps new curbs on developers to tame runaway home prices by hitting them where they hurt most: bank loans
- Beijing’s new rules limiting property bank loans are likely to hit Chinese developers hard and weigh on the momentum of a major economic growth engine this year, say analysts
- The new policies may let some air out of the speculative bubbles that have defied the central bank’s cooling measures since 2017
“Investment in infrastructure and property led the economic recovery [in China] last year,” said Qu Hongbin, chief China economist at HSBC. “Those two engines may slow in 2021 as government bond issuance shrinks and financing rules for property developers tighten. But investment in manufacturing should rebound on the back of stronger demand, rising capacity utilisation and more digitalisation.”
Based on the types and asset scales of the banks, the CMS sets caps for the proportion of outstanding property loans to total loans in five different bank tiers. Well capitalised Tier 1 banks can lend the most, while the small, underfunded Tier 5 lenders that operate in villages or local-area limits are permitted to extend the most modest loans.
The performance of the country’s banks, mostly state-owned and managed, will essentially be evaluated on criteria that replaced the former indicators of profitability, growth, asset quality and solvency, according to the Ministry of Finance. Their key performance indicators are now to serve the national development goals and the real economy, achieve high-quality development, control and prevent risks, and improving operational efficiency.
The “three red lines”, meanwhile, require developers to cap their liability-to-asset ratio, excluding advanced proceeds, at 70 per cent and their net debt-to-equity ratio at 100 per cent. Their cash to short-term debt ratio must be at least one. Developers that fail to meet the three specific financial requirements will be restricted or even completely prohibited from borrowing.
Some moved quickly to fulfil the financial criteria of the new rules and increase their chances of enjoying access to bank credit.
Some economists and analysts expect the new CMS rules to slow property investment in China this year, making life difficult for smaller developers and leading to faster consolidation in the market.
“The unprecedented ceilings on bank loans constrict the largest source of credit for developers. At the same time, limits on mortgage loans could subdue home-buying demand,” said S&P Global Ratings credit analyst Aeon Liang in a report on Wednesday.
The growth of China’s property investment market had already steadily slowed month by month in 2020, rising just 0.5 percentage point between January and November, the lowest pace since the nation was still entangled in lockdowns at the peak of the pandemic. Land purchases and new housing starts also dropped year over year in the newest reading, official data shows.
“The CMS rules will lead to financial institutions such as banks preferring larger developers to make sure its lending is legal and efficient when the loan proportion can be maintained,” said Zhang Bo, chief analyst at 58 Anjuke Real Estate Research Institute, a Shanghai-based firm.