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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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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.
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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.
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”.
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