In 2020, the Chinese government acted to tamp down the sector’s exuberance with its so-called “three red lines” policy, designed to limit developers’ financing and control new debt-related risks.
Over the past three decades, a real estate boom has been a major driver of China’s urbanization; nearly 75% of middle-class household wealth is now tied to housing. Consequently, the real estate sector has been one of the fastest-growing industries in China’s economy, led by huge real estate firms such as Evergrande, China’s second-largest housing developer.
Evergrande’s spectacular default in early December prompted international credit-rating firms to rethink their analyses of Chinese real estate developers. In December 2021, such agencies withdrew credit ratings from a total of 18 Chinese property firms—five rated by Moody’s, six by Fitch and seven by S&P. The two main reasons cited were inadequate information and requests from some property developers to avoid potential credit-score downgrading. The ratings crisis will dampen Chinese property firms’ prospects in global capital markets.
In 2020, the Chinese government acted to tamp down the sector’s exuberance with its so-called “three red lines” policy, designed to limit developers’ financing and control new debt-related risks. The three red lines are: a 70% liability-to-asset ratio, 100% net debt-to-equity ratio and minimum cash holdings equal to short-term debt.
The Chinese government is seeking to avoid delicate problems like how to handle the restructuring of an entity like Evergrande. The crash of this “too big to fail” behemoth will affect millions of jobs—Evergrande has nearly 800 unfinished projects across China—and 1.6 million homeowners waiting to move into their new homes.
