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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A pedestrian wearing a protective mask walks past the People’s Bank of China building in Beijing on March 17. China suffered an even deeper slump than analysts feared at the start of the year as the coronavirus shuttered factories, shops and restaurants across the nation, underscoring the fallout now facing the global economy. Photo: Bloomberg

Published: 1:30am, 2 Sep 2020Updated: 3:30am, 2 Sep 2020

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.

That said, while property tightening sounds familiar, the approach has been different this time – Beijing is focusing on targeted measures. In the past, the central government preferred blanket tightening – for instance, raising the interest rates of mortgage loans, or having banks comply with a limit for property financing.

A man works on a crane at a construction site in front of Lujiazui financial district in Shanghai on July 16. China’s property developers will be classified according to their level of debt, with those that are highly leveraged subject to tighter controls on borrowing. Photo: Reuters