2020-10-22

China Three Red Lines Get Thicker

In August I posted Attention Speculators: A-Shares Yes, Housing No. A high level political journal made it clear the real estaet sector would be brought to heel, with no repeat speculative bubble being allowed.
The era of financing "strong supervision" has arrived! Can the real estate company's capital chain be able to carry it?

Recently, silver CIRC Chairman, Party Secretary Guo Shuqing, the central bank issued a document in the "Seeking Truth" magazine made it clear that: Housing estate bubble is the biggest "gray rhino" threat to financial security.

In fact, the "strong supervision" on financing of housing companies is becoming a norm. The running grey rhino has been put on the reins of financing.

The 21st Century Business Herald recently reported exclusively that the regulatory authorities have introduced new regulations to control the growth of interest-bearing debt of real estate companies and set "three red lines". Specifically, red line 1: the debt-to-asset ratio after excluding advance receipts is greater than 70%; red line 2: net debt ratio is greater than 100%; red line 3: cash short-term debt ratio is less than 1 time.

According to the situation of the "three red lines", the real estate companies are divided into four levels of "red, orange, yellow, and green" . Taking the scale of interest-bearing liabilities as the objective of financing management operations, the grading is set as the threshold for the growth rate of the scale of interest-bearing liabilities.

If anyone didn't take the warning seriously, they are now.

ZH: China Crackdown On Property Developer Debt Sparks Fears About Systemic Crisis

While property sources had said they expected a rush to get around the rules by moving more debt off balance sheets, in a form that developers were asked to submit every month, the companies are also being asked for details on items outside the usual financing channels like bank loans and bond issuance. They will need to provide debt figures on off-balance sheet projects.

According to Reuters, other debt information requested include details on projects that give a financial entity guaranteed returns and buy-back agreements - essentially a debt disguised as equity, as well as the amount of securitization of receivables in the supply chain. In short, Beijing wants a full accounting of everything going on at local developers.

"The government is monitoring everything now, unless you want to cheat, but they will be able to tell from your monthly figures," said a senior executive at one of the developers in the pilot scheme.

The policy is great at the micro level. At the highest level of macro though, the question is always: how will they increase credit or money supply? Housing was the driver of every economic recovery since 2011 and the government shows no sign of reversing its hard line against doing another 2008 stimulus. A systemic crisis doesn't require a collapse in real estate firms, it only requires slower credit growth. If real estate firms aren't borrowing themselves into a crisis, who makes up for the "lost" borrowing? Housing and real estate would almost certainly be hit in a crisis, but the impact of slowing credit growth could emerge from any sector.

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