May 19, 2022 6:41 pm

China prepares to improve real estate access to funds

HONG KONG, Jan 19 (Reuters) – China is drawing up a national regulations to facilitate real estate developers access to sales funds that are still held in escrow accounts, a new measure to ease severe cash shortages in the sector, four people with knowledge of the matter said.

The authorities’ restrictions on borrowing have pushed the Chinese real estate sector into crisis, as the case of China shows Evergrande Group, which was once the most successful promoter in China and is now the most indebted in the world, with a liability of 300,000 million dollars.

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 on condition of anonymity, due to the sensitivity of the matter.

“An abrupt restriction of escrow accounts by local authorities after the fall of Evergrande stifled the liquidity of some good quality names. A correction by the central government is badly needed,” said Nan Li, an associate professor of finance at Shanghai Jiao Tong University.

The Chinese developers can sell residential projects before completion, but 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 Financial Stability and Development Committee of the Cabinet, as well as other authorities.

Beijing intends to launch them by the end of January to avoid a broader crisis, the sources said.

The Hang Seng Mainland Properties index of mainland China real estate was up 1.6% in afternoon trading after the Reuters data was released, ending almost 6% higher on Wednesday.

Chinese property developers Shimao Group Holdings , Sunac China Holdings and Country Garden Holdings led the sector’s gains, closing with gains of 11.3%, 7.6% and 8.3%, respectively.

Dollar-denominated bonds issued by developers such as Sunac and Country Garden also rose on the release of 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.

Many local governments stopped cash withdrawals from guarantee funds in 2021 for fear of the contagion effect, after Evergrande’s debt problems became known, leaving several projects throughout the country unfinished and worsening the promoters’ cash flow.

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 enable promoters use the funds in escrow to first finish the unfinished buildings 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 some 210 billion yuan ($33 billion) each in the first two quarters of 2022, up from 191 billion 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 at the People’s Bank of China (PBOC) said the central bank would uphold “continuity, consistency and stability” in real estate financial policies.

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