According to four individuals with knowledge of the topic, China is preparing statewide guidelines to make it easier for property developers to access pre-sale monies kept in escrow accounts, in its latest step to alleviate a severe liquidity bottleneck in the troubled sector.
Years of regulatory restrictions on borrowing through traditional channels have plunged the sector into a deep crisis, which was highlighted last year by the problems at China Evergrande Group, once the country’s top-selling developer and now the world’s most indebted property company with $300 billion in liabilities.
The new rules would allow developers to use funds in escrow that are currently controlled by municipal governments with no central oversight to meet debt obligations, pay suppliers, and finance operations, according to people who spoke on the condition of anonymity due to the sensitivity of the matter.
“Following Evergrande’s fall, local authorities imposed a sudden ban on escrow accounts, squeezing liquidity for certain high-quality names. A corrective action by the central government is desperately needed “Nan Li, associate professor of finance at Shanghai Jiao Tong University, echoed this sentiment.
The new regulations are being drafted by the sector’s major regulator, the Ministry of Housing and Urban-Rural Development, and other agencies, according to three of the sources. They are being guided by the cabinet-level Financial Stability and Development Committee.
Beijing aims to roll out the new rules by as early as end of January in a push to prevent a wider crisis, they added.
The property sector accounts for about a quarter of China’s economy, the world’s second-largest after the United States.
The State Council Information Office and the Ministry of Housing and Urban-Rural Development did not immediately respond to requests for comment.
Chinese developers are allowed to sell residential projects before completing them, but are required to put those funds in escrow accounts. The cash held in escrow typically accounts for 50%-70% of developers’ pre-sale funds, one of the people said, without giving an estimate on the amount held.
Many local governments curbed withdrawals from these accounts in 2021 amid fears of contagion after news of Evergrande’s debt problems, leaving several projects across the country unfinished and worsening cash flow for developers.
While some governments have eased withdrawal restrictions since late last year, one of the sources said due to lack of nationwide rules on this front, local enforcement had already gone too far in several cities.
The proposed new rules are aimed at allowing developers to use escrow funds to first complete unfinished buildings and then for other purposes, three of the sources said.
The rules would also prioritize onshore debt repayment of developers with better credit profiles, the fourth source added.
Nomura estimates that Chinese developers would need to meet onshore and offshore maturities of around 210 billion yuan ($33 billion) each in the first two quarters of 2022, versus 191 billion yuan in the last quarter of 2021.
In recent weeks, Beijing has taken steps to restore stability in the property sector including making it easier for state-backed developers to buy up distressed assets of indebted private firms, a source told Reuters this month.
On Tuesday, a senior official at the People’s Bank of China (PBOC) said the central bank would maintain “continuity, consistency and stability” of property financial policies.
Property sales and financing are gradually returning to normal, and market expectations are improving, Zou Lan, head of financial markets at the PBOC said.