China reportedly drops rules that sparked property crisis, developer shares surge

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By Clare Jim China has done away with borrowing limits on property developers known as its "three red lines" policy, local media said on Thursday, an apparent end to rules that triggered a debt crisis which continues to weigh on the world's second-largest economy.In a separate new measure to help relieve financing pressure on the sector, authorities are also allowing banks to grant extensions of up to five years for loans to certain property projects, two sources with knowledge of the matter said.China Real Estate Business, a media outlet managed by the Ministry of Housing and Urban-Rural Development, reported that the "three red lines" policy has basically ended. A spokesperson for the ministry could not immediately be reached for comment.In some ways, China's abandonment of the red lines - caps on debt-to-cash, debt-to-assets and debt-to-equity ratios imposed in 2020 that developers could not exceed if they wanted fresh loans - is symbolic.The rules were seemingly relaxed before this year, developer sources said, declining to be named. Analysts also said that funding challenges for a still deeply troubled industry would continue to persist even without the limits.RED LINES CAUSED LIQUIDITY CRUNCHNevertheless, real estate developers surged on the news with China Overseas Land HKEX:688 and Longfor HKEX:960 both gaining 6% and the CSI 300 Real Estate Index SSE:000952 in mainland China climbing 5% to its highest level in two months.The idea behind the "three red lines" was to rein in the sector's appetite for unbridled borrowing, but the policy backfired spectacularly by causing a liquidity crunch from mid-2021, and many developers have since defaulted on their debt.For example, China Evergrande, once the country's biggest developer, is now in liquidation, while Country Garden HKEX:2007 recently completed a restructuring of its offshore debt. China Vanke SZSE:000002, another embattled top-ranked developer, recently gained creditor approval to defer some repayments, staving off a potential default.The downturn in the sector, which used to account for about a quarter of China's GDP, has hit the economy hard with homebuyer and investor confidence slumping as swathes of apartments went unfinished.Liu Shui, an analyst at China Index Holdings, a real estate analytical firm, said that the rules no longer served their intended purpose given changes in the industry....

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