China's Xiamen city to require property developers to place all deposits in escrow

[BEIJING] The southeastern Chinese city of Xiamen has tightened regulatory supervision of funds managed by property developers, requiring them to put all deposits collected from home buyers to be placed in escrow accounts.

Authorities will make sure that the funds placed in the escrow accounts are used first for the purchase of construction materials and equipment and the payment of construction costs and taxes, the Xiamen government said in rules published on its website on Monday.

Chinese developers are allowed to sell residential projects before completing them but are required to put those funds in escrow accounts. The cash held in escrow accounts typically accounts for 50 per cent to 70 per cent of developers' pre-sale funds.

The move by Xiamen to transfer all the funds to escrow accounts - the first such move for a Chinese city - would add financial strains on developers already struggling with liquidity issues. The new rules will take effect on April 1.

China's property market came under severe pressure last year after regulatory borrowing curbs, set in 2020 to tackle mounting debt in the sector, triggered widespread liquidity problems among real estate firms, including China Evergrande Group , threatening projection completions and stirring concern among individuals who have already paid for their homes.

"The real estate market has undergone a major change," said the Xiamen government in a separate statement, and the revision of the rules can "better protect the legitimate rights and interests of both parties to transactions." Many local governments placed curbs on withdrawals by cash-starved developers in 2021.

But China is now drafting nationwide rules to make it easier for developers to access funds from sales held in escrow accounts to help ease the cash crunch in the sector, Reuters reported previously.

"However, a nationwide relaxation looks unlikely as the central government will likely maintain its conservative stance over the escrow accounts, in order to protect the interests of home buyers and prevent misappropriation," said ANZ in a note on Wednesday. REUTERS