China is drafting a national regulation to make it easier for real estate developers to access sales funds still held in escrow accounts, a new measure to ease a severe cash shortage in the sector, four people with knowledge of the matter said. matter.
The authorities’ restrictions on indebtedness have pushed the Chinese real estate sector into crisis, as shown by the case of China Evergrande Group, once the most successful developer in China and now the most indebted in the world, with a liability of $300 billion.
The new rules would help developers meet their debt obligations, pay suppliers and finance operations, allowing them to use escrow funds currently controlled by municipal governments without central oversight, the people said, speaking on condition of anonymity, because of the sensitivity of the matter.
“An abrupt restriction of escrow accounts by local authorities after the fall of Evergrande stifled liquidity for some good-quality names. A correction by the central government is badly needed“, He said Nan Li, associate professor of finance at the Universidad Jiao Tong from Shanghai.
Chinese developers can sell residential projects before they are finished, but they are required to deposit those funds in escrow accounts. The cash deposited in these funds typically represents between 50% and 70% of the promoters’ pre-sale funds, one of the people said, without giving an estimate of the amount deposited.
The Chinese Ministry of Housing and Urban-Rural Development, the main regulator in the sector, is preparing the new rules under the direction of the Cabinet’s Financial Stability and Development Committee, as well as other authorities.
Beijing intends to launch them by the end of January to avoid a wider crisis, the sources said.
The index Hang Seng Mainland Properties Mainland China’s real estate sector rose 1.6% in afternoon trading after the Reuters data was released, ending almost 6% higher on Wednesday.
Chinese real estate developers Shimao Group Holdings, Sunac China Holdings Y Country Garden Holdings led the gains in the sector, closing with increases of 11.3%, 7.6% and 8.3%, respectively.
Dollar-denominated bonds issued by promoters such as Sunac Y Country Garden also rose after knowing the information.
The real estate sector accounts for about a quarter of China’s economy, second in the world after the United States.
The State Council Information Office and the Chinese Ministry of Housing and Urban-Rural Development did not immediately respond to requests for comment.
liquidity crisis
Many local governments stopped cash withdrawals from guarantee funds in 2021 for fear of the contagion effect, after learning of Evergrande’s debt problems, leaving several projects across the country unfinished and worsening the cash flow of developers.
Although some city councils have eased withdrawal restrictions since late last year, one of the sources said that due to a lack of nationwide rules on this front, local enforcement had already gone too far in several cities.
The proposed new rules are intended to allow developers to use escrow funds to finish unfinished buildings first and then for other purposes, three of the sources said.
The rules would also give priority to the repayment of onshore debt from developers with better credit profiles, the fourth source said.
Nomura estimates that Chinese developers would face debt maturities both in mainland China and abroad of about 210 billion yuan ($33 billion) each in the first two quarters of 2022, up from 191 billion. million yuan in the last quarter of 2021.
In recent weeks, Beijing has taken steps to restore stability to its real estate sector, including making it easier for state-owned developers to buy distressed assets from indebted private companies, a source told Reuters this month.
On Tuesday, a senior official from the People’s Bank of China (PBOC, for its acronym in English) indicated that the central bank would maintain the “continuity, coherence and stability” of real estate financial policies.
Real estate sales and financing in China are gradually returning to normal, and market expectations are improving, it said. Zou Lan, head of financial markets PBOC.
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