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Chinese developers to focus on debt reduction until 2023 to meet ‘three red lines’ deadline

  • China introduced the ‘three red lines’ deleveraging campaign in August last year to improve the financial health of the real estate sector
  • China Resources Land and Logan Group have successfully met all three criteria, according to Beike Research Institute

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Residential buildings under construction in the new city area of Yumen, Gansu province. Regulators are tightening the screws on property companies to ease the pressure on housing prices. Photo: Bloomberg
Sandy Li
Debt reduction will be a top priority for Chinese developers until 2023 and many of them are actively taking steps to lower their liabilities as they do not want to come under further scrutiny from regulators who are determined to improve the sector’s financial health, say analysts.

With most developers reducing borrowings and trimming debt, market observers also expect mainland Chinese real estate companies to be less aggressive in their expansion plans as their profit margins have been squeezed by a series of cooling measures to curb price growth.

“Deleveraging will certainly be a focus among developers who are worried about being targeted by regulators,” said Alvin Cheung Chi-wan, associate director at Prudential Brokerage. Chinese developers would also like to avoid the fate that has befallen China Evergrande, he added.

Since China introduced the “three red lines” in August last year, mainland developers have taken measures to get their house in order in line with the requirements. These limit borrowings by defining thresholds on liability-to-asset ratio at 70 per cent, net debt-to-equity ratio of 100 per cent, and cash-to-short-term debt multiple of more than one time. Failure to meet these “red lines” cuts off access to new bank loans.

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10-storey residential building in China constructed in a day

10-storey residential building in China constructed in a day

Those who flunked the test, including China Evergrande, have until 2023 to meet these criteria as policymakers seek to control house prices, manage land markets and rein in lending to the sector. Real estate companies that successfully fulfil all three requirements will be tagged “green”.

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