SOME Chinese city governments have made it harder for developers to access tens of billions of dollars from property sales held in escrow accounts, people familiar with the matter said, raising risks that the cash-strapped companies will be squeezed even more.

The moves are aimed at ensuring the completion of more unfinished projects at the city level, they said, at a time when home sales are sliding and the future of the whole sector is uncertain.

The tightening appears to run contrary to the plan of the central Chinese government, which has assured help to stabilise a sector that has been hit by both a years-long liquidity crunch and slumping demand.

“That’s like a Catch-22 dilemma,” said Gary Ng, Asia-Pacific senior economist at Natixis, adding that while local governments may want to ensure that all housing projects can be delivered, it is hard for developers to do it without access to liquidity.

The curbs may mean that private developers, who have been hit harder by the crisis in the sector, will have lower capital usage efficiency, and can imply a larger credit risk for some small developers, said Ng.

Chinese developers are allowed to sell residential projects before completion, but are required to put those funds in escrow accounts. Local city governments permit them to withdraw a portion of the funds, depending on the progress of construction.

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As defaults rippled across the property sector, regulators last year relaxed some escrow rules in an effort to ease the liquidity stress for developers, enabling them to finish construction work on apartments.

Some city governments, however, have started curbing developers’ access to the escrow funds from the second quarter of this year as the outlook for the sector worsened, with sales trending down since April on weak demand and the economic outlook darkening.

Senior executives at two Chinese developers said that more than 80 per cent and 90 per cent of their cash, respectively, is now trapped in the escrow accounts, and efforts to withdraw funds for construction purposes have been thwarted by the local authorities.

That compared to around 30 per cent before the sector was hit by the debt crisis in mid-2021, and around 60 per cent in the early days of the crisis, according to analysts.

The two executives, who declined to be named as they were not authorised to speak to the media, said they believe the tighter access was a result of local authorities wanting to ensure there was enough capital for completing home construction in the cities.

“It has become very difficult again in the past few months for us to withdraw money from the escrow accounts,” an executive at one of the developers that has defaulted on its debt obligations said. “At the end of last year it had been easier after the government easing.”

In the first half of this year, funds that developers used for property development reached nearly 7 trillion yuan (S$1.3 trillion), and about a third of that was from down payments and presale funds, according to data from the National Bureau of Statistics.

China’s housing ministry did not respond to Reuters request for comment on the tightening of developers’ access to escrow funds.

Faltering housing demand

The new measures come as property demand is sluggish – China’s property sales between May and June showed the largest monthly drop this year, based on sales by floor area, and investment in property also slumped.

A person who works at a state bank in a city in Hunan province, speaking on the condition of anonymity, said the local housing authority has ordered the bank to implement stricter rules for withdrawal of escrow funds.

Under those rules, the authority has asked the bank to make escrow funds available only to developers who have other sources of funding to cover construction costs, said the person.

Hunan’s housing regulator did not respond to a request for comment.

Another developer said that some banks are also holding up the funds as they now evaluate a firm’s different projects across cities together, so that pre-sale proceeds from one could be used to cover the construction of another development in another city.

In cities such as Hefei and Xiamen, the local governments manage the accounts of a batch of developers together, so sales from one project could be used to cover the construction costs of a different developer, executives at two other developers said.

The Hefei and Xiamen governments did not respond to requests for comment. REUTERS