The View | As the Evergrande saga unravels, China’s property market can expect a further slowdown

China’s housing sector has been cooling, and a further slowdown of real estate activity and investment is on the cards in the coming quarters.

The Evergrande saga has shone a spotlight on the Chinese real estate sector. While Evergrande’s liabilities are likely to be restructured to limit broader financial and economic disruption, risks have emerged and hurt confidence at a time when the sector was already slowing.

After an impressive rebound following the first wave of Covid-19, housing sales in mainland China slackened in July and August this year as mortgage practices tightened.

Real estate investment growth and housing starts have also weakened sharply amid strict regulations on property developers’ financing. Reflecting weaker demand, growth in house prices has slowed broadly across cities in recent months.

Even before fears that Evergrande would default on its debt rattled markets, Chinese property developers were moving to improve their balance sheets and reduce leverage to satisfy strict regulations by mid-2023.

The “three red lines” – capping developer’s debt-to-asset ratio at 70 per cent, net debt-to-equity at 100 per cent, and short-term borrowing at no more than cash reserves – were implemented last year when the government resumed its efforts to curb corporate leverage, which had been suspended due to the pandemic. Developers will face different limits on their debt growth depending on how many of these red lines they fail to meet.