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Why China is asking banks to sacrifice profits and tightening property sector controls
- With limited policy room and a deeply leveraged economy, China’s central bank is pushing forward with new policy thinking, implementing targeted measures in specific sectors
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Hao Zhou currently serves as a senior economist (emerging markets) with Commerzbank.
On August 20, a meeting between Chinese regulators and property developers was held in Beijing. While there is little concrete information in the statement later issued by the Ministry of Housing and Urban-Rural Development and the People’s Bank of China, the meeting still attracted much attention as it was reported that the Chinese authorities has set “three red lines”.
Specifically, the measures aim to control the scale of property developers’ debt. The red lines are: a 70 per cent upper limit for a developer’s debt-to-asset ratio after excluding advance receipts; a 100 per cent upper limit for the net debt-to-equity ratio, and; a one-to-one down limit ratio for cash against short-term debts.
Media reports also said property developers would be classified according to the key debt indicators. Those at the red and yellow level would be subject to tighter access to funding.
Obviously, this is in line with Beijing’s overall trend towards tightening control over the property sector. However, compared with the past rounds of tightening, which targeted banks and local governments, the new warning system appears to be more specific – property developers with high debt and leverage are likely to be badly punished.
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