{"id":1085793,"date":"2023-01-06T10:11:59","date_gmt":"2023-01-06T15:11:59","guid":{"rendered":"https:\/\/bugaluu.com\/news\/in-huge-policy-reversal-china-will-ease-three-red-lines-rule-to-kickstart-worlds-biggest-asset-bubble\/1085793\/"},"modified":"2023-01-06T10:11:59","modified_gmt":"2023-01-06T15:11:59","slug":"in-huge-policy-reversal-china-will-ease-three-red-lines-rule-to-kickstart-worlds-biggest-asset-bubble","status":"publish","type":"post","link":"https:\/\/bugaluu.com\/news\/in-huge-policy-reversal-china-will-ease-three-red-lines-rule-to-kickstart-worlds-biggest-asset-bubble\/1085793\/","title":{"rendered":"In Huge Policy Reversal, China Will Ease “Three Red Lines” Rule To Kickstart World’s Biggest Asset Bubble"},"content":{"rendered":"
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In Huge Policy Reversal, China Will Ease “Three Red Lines” Rule To Kickstart World’s Biggest Asset Bubble<\/span><\/p>\n

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Back in 2020, around the time Xi Jinping decided to burst the Chinese housing bubble, which as a reminder was estimated by Goldman at the time as the world’s single largest asset class (and bubble) at over $62 trillion, larger than both the US equity and bond markets…<\/strong><\/p>\n<\/p>\n

… China unveiled the so-called “three red lines” <\/em>policy, which sought to reduce developers\u2019 leverage, lower risk in the financial sector and make homes more affordable as part of President\u00a0Xi Jinping\u2019s common prosperity push and practically meant that only companies that have very little debt (which basically meant nobody) were allowed to grow their debt at a max of 15%, and since most Chinese developers were in the 2 or 3 red lines category, it prohibited them from growing debt (a full breakdown of the three criteria is shown below),<\/p>\n

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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.<\/p>\n

The outcome result was the biggest shock for China’s property sector, which quickly took down giant housing developer Evergrande and numerous of its undercapitalized peers, impoverished countless real estate billionaires (some say this was Xi’s plan all along), sent home prices sliding and hammered household consumption across China’s middle class, whose biggest asset – their home – was no longer appreciating at double digits every year and in fact was contracting for the first time in a decade.<\/p>\n

So fast forward to today when just weeks after China’s shocked the world with the speed and magnitude of its “covid-zero” reversal, Beijing – in its pursuit of a powerful, and generously credit funded, economic rebound appears set to unleash the full power of the country’s real estate bubble because as Bloomberg reported overnight, “China is planning to relax restrictions on developer borrowing, dialing back the stringent \u201cthree red lines\u201d policy that exacerbated one of the biggest real estate meltdowns in the country\u2019s history.”<\/strong><\/p>\n

According to BBG sources, Beijing would 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. The deadline could be extended by at least six months from the original June 30 date.<\/p>\n

Such easing could mark “the most dramatic shift in China\u2019s real estate policy, adding to a clutch of\u00a0measures\u00a0issued since November to bolster the battered sector that accounts for about a quarter of the nation\u2019s economy.”<\/strong> Indeed, within the span of just a few weeks, the government has softened its stance for sectors from\u00a0chips\u00a0and\u00a0coal imports\u00a0to\u00a0internet platform\u00a0businesses, underscoring Beijing\u2019s resolve to refocus on economic growth.<\/p>\n

\u201cThis 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,\u201d <\/strong>said\u00a0Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.<\/p>\n

The news helped push China’s property index higher by 1.5% and nearly 100% above its late October low when Chinese assets saw a widespread global liquidation amid covid zero fears and Xi’s escalating crackdown on asset markets. 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.<\/p>\n

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The offshore yuan\u00a0surpassed\u00a0its 200-day moving average for the first time since April after the news.<\/p>\n

What does this policy reversal mean for China’s property markets, and economy in general? Well, consider that with access to credit markets largely closed since 2020, developers had defaulted on more than 140 bonds in 2022, according to data compiled by Bloomberg. Overall, developers missed payments on a combined $50 billion in domestic and global debt based on issuance amount.<\/p>\n

All of that is about to go into reverse.<\/p>\n

In the meantime, however, China Evergrande Group, once the country\u2019s biggest developer and a poster child for the property crackdown, was labeled a defaulter in December 2021 after it missed payments on several bonds. Others followed suit, including\u00a0Kaisa Group Holdings Ltd.\u00a0and\u00a0Sunac China Holdings. The defaults crushed what was once the most active and lucrative high-yield\u00a0bond market\u00a0in the world.<\/p>\n

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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\u00a0prices declined\u00a0for 15 straight months.<\/strong><\/p>\n

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But now, very suddenly and unexpectedly, 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. According to Bloomberg sources, companies that meet all three thresholds will no longer have borrowing caps and can use letter of guarantees from banks to pay land purchase deposits.<\/p>\n

To be sure there had been vocal opposition to China’s credit crackdown: as recently as last month, the head of a leading Chinese think tank had signaled Beijing needed to rethink what he called the mistaken \u201cthree red lines.\u201d<\/p>\n

\u201cUsing such harsh policies toward the sector\u00a0was a total mistake,\u201d said Yao Yang, dean of the National School of Development at Peking University, in an interview. \u201cWe had companies whose business was more or less healthy, but because of the \u201cthree red lines,\u201d their business became a problem.\u201d<\/p>\n

As Bloomberg also notes, the policy reversal comes on the heels of a slew of directives aimed at reviving the housing sector, which accounts for as much as 70% of\u00a0household assets\u00a0in some parts of the country. <\/strong>The recent measures include:<\/p>\n