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What China’s Three Red Lines Mean for Property Firms （Intermediate)
Real Estate Finance must learn case: Three Red Lines
1. How will it work?
2. Why draw the lines?
3. What’s the implication for developers?
4. Will it crash the economy?
With eight of the 10 most indebted property developers based in China, policymakers have drafted what state-run media are calling “three red lines” -- metrics regarding the debt that developers will have to meet if they want to borrow more. The new approach promises to be a game-changer for a sector that accounts for about 29% of economic output.
The People’s Bank of China and the Ministry of Housing announced in 2020 that they’d drafted new financing rules for real estate companies. Developers wanting to refinance are being assessed against three thresholds:
a 70% ceiling on liabilities to assets, excluding advance proceeds from projects sold on contract,
a 100% cap on net debt to equity,
a cash to short-term borrowing ratio of at least one.
Developers will be categorized based on how many limits they breach and their debt growth will be capped accordingly. If a firm passes all three, it can increase its debt by a maximum of 15% in the next year. As the regulator hasn’t announced its official calculations, some definitions aren’t clear.
The key point and your take-away from this case study 'What China’s Three Red Lines Mean for Property Firms （Intermediate) '. Your learning combines both language skills and market knowledge.
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