As China moves to tackle excessive borrowing in the real estate sector, it is walking a tightrope between providing cash-strapped local governments with revenues from land sales and keeping a lid on rising house prices.
Chinese regulators in August tightened funding conditions for 12 major property developers, setting caps on the amount of debt they could hold in relation to cash on hand, the value of their assets and as a proportion of equity in their businesses – dubbed “the three red lines”.
Last week, mainland financial newspaper the 21st Century Business Herald reported authorities had asked large banks to keep the proportion of property loans below 30 per cent of all new loans, citing unidentified sources.
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Property sales growth has surged this year, helping the economy recover from the coronavirus pandemic. But it has also raised the alarm among top Communist Party officials who fret speculation in the real estate sector could increase house prices further.
In July, the Politburo – the party’s top decision-making body – stressed President Xi Jinping’s mantra that houses are “for living in, not for speculation”.
Given attempts to reign in property funding, analysts expect local government land sales to developers to weaken in coming months, something that could hurt regional finances and weigh on the broader economy.
“We don’t think Beijing wants to kill the property sector. After all, the economy is still running below its trend growth,” Macquarie Group said in a report last month.
“But it does send out a strong signal that Beijing wants to cool down the sector to save the ammo for the future. As such, property investment could peak soon.”
Zhang Ming, a researcher with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences (CASS), said in August the central government does not want to see a sharp drop in property prices because it could cause risks for commercial banks, private wealth and local governments.
Land sales have been an integral part of China’s government finances at all levels over the past decade, according to research by Kate Jaquet, a portfolio manager at US-based Seafarer Capital Partners.
In China, land is owned by the state and the sale of land and user rights have been rising steadily since 2010, making up 38.6 per cent of China’s central government revenue last year, compared to 35.5 per cent in 2018, and 30.2 per cent in 2017, Seafarer Capital Partners said.
“One plausible explanation as to why Chinese authorities have allowed the listed portion of the sector to lever up so substantially, contrary to their stated commitment to reduce leverage in the financial system, is that this arrangement has been beneficial to the financial standing of the central and local governments,” Jaquet said in the June report.
Despite Beijing’s push for local governments to increase the use of municipal bonds for financing, regional economies still