China may ease ‘three red lines’ property rules in major shift

China is planning to relax restrictions on developer borrowing, dialling back the stringent “three red lines” policy that exacerbated one of the biggest real estate meltdowns in the country’s history.
Beijing may allow some property firms to add more leverage by easing borrowing caps, and push back the grace period for meeting debt targets set by the policy, according to people familiar with the matter.
The deadline could be extended by at least six months from the original June 30 date, the people said.
The easing could mark the most dramatic shift in China’s real estate policy, adding to a clutch of measures issued since November to bolster the battered sector that accounts for about a quarter of the nation’s economy. Within the span of weeks, the government has softened its stance for sectors from chips and coal imports to internet platform businesses, underscoring Beijing’s resolve to refocus on economic growth.
“This is a signal from the top regulators in an attempt to help restore market confidence in the real estate sector and create a positive feedback loop between the homebuyers, developers, and the physical market,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC. The offshore yuan surpassed its 200-day moving average for the first time since April after the news.
A gauge of real estate stocks rose nearly 1.5% yesterday. Prices for China dollar high-yield notes, a sector dominated by property firms, have reached levels last seen in January 2022 at an average 75 cents on the dollar, according to a Bloomberg index. These notes continued to rally yesterday, according to credit traders.
The so-called “three red lines” metrics, that emerged in 2020, were the hallmark of a massive property crackdown by Beijing as it sought to reduce developers’ leverage, lower risk in the financial sector and make homes more affordable as part of President Xi Jinping’s common prosperity push.
The measures, which imposed strict debt and cash-flow targets on real estate firms, choked off liquidity for the highest-leveraged developers, contributing to the avalanche of defaults and construction halts that sparked mortgage boycotts and plunging sales across the nation.
With access to credit markets largely closed, developers have defaulted on more than 140 bonds in 2022, according to data compiled by Bloomberg. Overall, developers missed payments on a combined $50bn in domestic and global debt based on issuance amount.
China Evergrande Group, once the country’s biggest developer and a poster child for the property crackdown, was labelled a defaulter in December 2021 after it missed payments on several bonds. Others followed suit, including Kaisa Group Holdings Ltd and Sunac China Holdings Ltd. The defaults crushed what was once the most active and lucrative high-yield bond market in the world.
Fears of further contagion meantime weakened consumer confidence and roiled global investors who had long assumed the government would bail out the real estate titans. The crisis spooked buyers, driving home sales down by the most in at least two decades, while home prices declined for 15 straight months.
After almost two years of housing market pain, Beijing is changing its stance. Under the new proposal, China will ease restrictions on debt growth for developers depending on how many red lines they meet, the people said, asking not to be identified discussing a private matter.