China may ease ‘three red lines’ property rules in big shift

CHINA is planning to relax restrictions on developer borrowing, dialling back the stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history.

Beijing may allow some property firms to add more leverage by easing borrowing caps and push back the grace period for meeting debt targets set by the policy, according to people familiar with the matter. The deadline could be extended by at least six months from the original Jun 30 date, the people said.

The easing could mark the most dramatic shift in China’s real estate policy, adding to a clutch of measures issued since November to bolster the battered sector that accounts for about a quarter of the nation’s economy.

“This is a signal from the top regulators in an attempt to help restore market confidence in the real estate sector and create a positive feedback loop between the homebuyers, developers, and the physical market,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore.

The offshore yuan extended gains following the news, with the currency gaining as much as 0.4 per cent to 6.8615 per dollar. The Australian dollar and Korea won also extended advance amid risk-on sentiment.

A gauge of real estate stocks surged more than 3 per cent as of 11.21 am in Hong Kong. Prices for China dollar high-yield notes, a sector dominated by property firms, have reached levels last seen in January 2022 at an average 75 US cents on the dollar, according to a Bloomberg index. These notes rose at least another 1 US cent Friday (Jan 6), according to credit traders.

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The so-called “three red lines” metrics, that emerged in 2020, were the hallmark of a massive property crackdown by Beijing as it sought to reduce developers’ leverage, lower risk in the financial sector and make homes more affordable as part of President Xi Jinping’s common prosperity push.

The measures, which imposed strict debt and cash-flow targets on real estate firms, choked off liquidity for the highest-leveraged developers, contributing to the avalanche of defaults and construction halts that sparked mortgage boycotts and plunged sales across the nation.

With access to credit markets largely closed, developers have defaulted on more than 140 bonds in 2022, according to data compiled by Bloomberg. Overall, developers missed payments on a combined US$50 billion in domestic and global debt based on issuance amount.

China Evergrande Group, once the country’s biggest developer and a poster child for the property crackdown, was labelled a defaulter in December 2021 after it missed payments on several bonds. Others followed suit, including Kaisa Group Holdings and Sunac China Holdings. The defaults crushed what was once the most active and lucrative high-yield bond market in the world.

Fears of further contagion meantime weakened consumer confidence and roiled global investors who had long assumed the government would bail out the real estate titans. The crisis spooked buyers, driving home sales down by the most in at least two decades, while home prices declined for 15 straight months.

After almost two years of housing market pain, Beijing is changing its stance. Under the new proposal, China will ease restrictions on debt growth for developers depending on how many red lines they meet, the people said, asking not to be identified discussing a private matter.

Companies that meet all three thresholds will no longer have borrowing caps and can use letter of guarantees from banks to pay land purchase deposits, the people added.

The plans are still in deliberation and could be changed, the people added. The central bank didn’t immediately respond to queries for comment.

More than 30 companies were able to meet all three lines as of June last year, including China Vanke and Longfor Group Holdings, based on Bloomberg calculations.

As recently as last month, the head of a leading Chinese think tank had signalled Beijing needed to rethink what he called the mistaken “three red lines”.

“Using such harsh policies towards the sector was a total mistake,” said Yao Yang, dean of the National School of Development at Peking University, in an interview. “We had companies whose business was more or less healthy, but because of the “three red lines”, their business became a problem.”

The policy reversal comes on the heels of a slew of directives aimed at reviving the housing sector, which accounts for as much as 70 per cent of household assets in some parts of the country.

The recent measures include:

• Lower mortgage rates for first-home buyers if newly constructed house prices drop for three consecutive months
• A nationwide cap on real estate commissions to boost demand
• Allowing private equity funds to raise money for residential property developments
• Pledging 200 billion yuan (S$39.3 billion) in special loans to ensure stalled housing projects are delivered
• A 16-point plan unveiled in November that ranged from addressing the liquidity crisis to loosening down-payment requirements for homebuyers

Officials have signalled further support. In an interview with Xinhua News Agency, China’s housing minister Ni Hong pledged further efforts to take a “sound approach” to address the risk of “capital chain breaks” among developers, and steer the industry onto a “high-quality development path” in 2023.

While Ni reiterated Xi’s famous catchphrase that “housing is for living in, not for speculation”, he added that “forestalling and defusing risks in the sector is the bottom line”, according to the Xinhua report published on Friday.

The moves have sparked a sharp rally in property stocks and bonds, boosting confidence in the sector as some of the stronger firms like Country Garden Holdings regain access to credit and equity markets to pay debt and resume construction.

Still, the sweeping measures have yet to arrest the slump in China’s housing sector, which has also been slowed by Covid lockdowns and more recently, a surge in virus cases. New home sales dropped 31 per cent in December from a year earlier. Citigroup analysts including Griffin Chan expect sales to fall another 25 per cent in 2023, as recovery will be constrained by reduced supply, and buyers’ expectations will take time to turn around. BLOOMBERG