China’s ‘three red lines’ strike delicate balance between curbing real estate debt and local government finances

Beijing has recently tightened borrowing criteria for property developers in a bid to reduce debt levels in the real estate sector

But the regulations threaten land sale revenues that are essential to the financial health of struggling local governments

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Local government proceeds from land sales grew 5.2 per cent in the first half of 2020, compared to a 1 per cent contraction over the same period last year. Photo: Reuters

Published: 5:30pm, 6 Oct 2020Updated: 10:24pm, 6 Oct 2020

As China moves to tackle excessive borrowing in the real estate sector, it is walking a tightrope between providing cash-strapped local governments with revenues from land sales and keeping a lid on rising house prices.

Chinese regulators in August tightened funding conditions for 12 major property developers, setting caps on the amount of debt they could hold in relation to cash on hand, the value of their assets and as a proportion of equity in their businesses – dubbed “the three red lines”.

Last week, mainland financial newspaper the 21st Century Business Herald reported authorities had asked large banks to keep the proportion of property loans below 30 per cent of all new loans, citing unidentified sources.

Property sales growth has surged this year, helping the economy recover from the coronavirus pandemic. But it has also raised the alarm among top Communist Party officials who fret speculation in the real estate sector could increase house prices further.

It does send out a strong signal that Beijing wants to cool down the sector to save the ammo for the future. As such, property investment could peak soon.

Macquarie Group

In July, the Politburo – the party’s top decision-making body – stressed President Xi Jinping’s mantra that houses are “for living in, not for speculation”.

Given attempts to reign in property funding, analysts expect local government land sales to developers to weaken in coming months, something that could hurt regional finances and weigh on the broader economy.

“We don’t think Beijing wants to kill the property sector. After all, the economy is still running below its trend growth,” Macquarie Group said in a report last month.