Two thirds of China's top developers breach state's 'red line' on debt

Developers are facing rising financial stress as stricter rules around borrowing and a deleveraging campaign weigh on the sector.

China’s indebted developers are struggling to meet Beijing’s tighter financing rules. 

Two-thirds of the top 30 Chinese property firms by sales ranked by the China Real Estate Info Corp. have breached at least one of the metrics known as the “three red lines,” Bloomberg-compiled data showed as of Oct. 29. 

Developers are facing rising financial stress as stricter rules around borrowing and a deleveraging campaign by authorities weigh on the sector. A liquidity crisis at China Evergrande Group has roiled markets, with the nation’s real estate sector making up almost half of the world’s distressed dollar-denominated debt. Speculative-grade yields briefly topped 20% in October -- the highest in a decade.

The three lines are as follows, according to a state-media report on a government website: 

The property firms’ liabilities shouldn’t be more than 70% of assets

Net debt shouldn’t exceed equity

And cash should be at least equal to short-term borrowings

A search of public statements by the government didn’t turn up any concerning any breaches of the red lines.

Other firms with the largest amount of outstanding debt and liabilities like China Evergrande Group and China Railway Construction Corporation Ltd. have also violated two red lines. 

There were no immediate replies to questions sent to those and the other companies mentioned in the graphics below.

 

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