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Chinese financial regulatory guidelines
The
three red lines
(Chinese: 三條紅線, Simplified: 三???, Pinyin: s?n tiao hong xian) are
financial regulatory
guidelines in
China
introduced in August 2020 relating to the
ratio
of
debt
to
cash
,
equity
and
assets
.
[1]
It was introduced to help rein in the highly indebted property-development sector in China, seen especially in large real estate concerns such as
Evergrande
, which faced a
liquidity crisis
in Q4 2021.
[2]
History
[
edit
]
In 2017,
Chinese Communist Party
(CCP)
general secretary
Xi Jinping
's
government
started to tighten the real estate market based on the principle that "property is to be lived in, not to be speculated on."
[3]
: 161
These remarks came during the
19th CCP National Congress
.
[4]
: 73
The three red lines were the most stringent regulatory measures based on these remarks.
[4]
: 73
These rules were issued in 2020.
[4]
: 73
They stated property should adhere to the following rules:
[5]
- Liabilities
should not exceed 70 percent of
assets
(excluding advance proceeds from projects sold on contract)
- Net debt
should not be greater than 100 percent
equity
.
- Money
reserves must be at least 100 percent of short term
debt
.
If a real estate firm meets all three requirements, it can increase its debt by a maximum of 15 percent the next year.
[4]
: 73?74
Since December 2021, borrowing to finance acquisitions and mergers would not be included in red line metrics. This was to help facilitate financially healthier firms to buy assets from indebted companies.
[5]
In early 2023, China began softening its approach to the three red lines in an effort increase market confidence.
[4]
: 76
References
[
edit
]