China is tackling unbridled borrowing in the real estate development sector anew with caps for debt ratios. But sources at developers say a rush to get around the rules by moving more debt off balance sheets is on, reported Reuters.
Dubbed “the three red lines”, Chinese regulators outlined caps for debt-to-cash, debt-to-assets and debt-to-equity ratios last month at a meeting with 12 major property developers in Beijing. Though not yet officially announced, developers expect the rules to be applied sector-wide as soon as Jan. 1, 2021.
The move has sent shock waves through the industry, sources at four Chinese property developers told Reuters. “Every company is worried…so everyone is using their own methods, and it’s all about off balance sheet: off balance sheet projects and off balance sheet debts,” an executive at a mid-sized developer told Reuters.
Moving debt off books by setting up ventures with other developers to purchase land is already common practice and will intensify, said Reuters sources.