Chinese regulators developed its Three Red Lines policy to try and curb out-of-control borrowing by Chinese land developers. Recently, Chinese property developers have been making headlines for missing loan payments which are now starting to negatively impact the Chinese economy.
The Three Red Lines Breakdown
The Three Red Lines regulations propose a range of allowable annual debt growth for Chinese property developers.
- Liability-to-asset ratios that exclude advance receipts of less than 70%.
- Net gearing ratio of less than 100%.
- Cash-to-short-term debt ratio of more than 1x.
Under the Three Red Lines regulations, if a property developer fails to meet one, two, or three of its loan payments, Chinese regulators will now step in and place limits on the pace at which a company can grow its debt.
What is Evergrande?
Evergrande is the second-largest property developer in China that has a $310 billion debt that it is struggling to service. So far, this October, Evergrande has missed three loan payments. When a Chinese land developer hits one, two, or three of the Three Red Lines, then its borrowing capacity is greatly diminished. Evergrande in October 2021 hit all three of the Three Red Lines.
Borrowing Money in China
Given that Evergrande has been defaulting on its loan payments this month, the cost of borrowing money has now skyrocketed for this struggling property developer. Today, banks issuing loans to Evergrande are charging interest rates as high as 16% to 17%.
The Reserve Bank of Australia Analysis
The Reserve Bank of Australia believes that the Chinese economy could collapse. This belief is based on the other large property developers in China that are too starting to default on their loan payments. These missed payments are happening en masse, amidst a backdrop of a cooling Chinese property market. To cause further worry, the bonds issued against much of this debt have also begun to plummet. In some cases, bonds issued by the Chinese property developers have lost up to 80% of their value since July 2021.
Elaine Allan, BA, MBA
Technology & Business Blogger
Vancouver, BC, Canada