Momentum in China’s property market remains strong so far in 2021, driven by healthy demand for housing. Although we expect this demand strength to be partially offset by the government’s recent credit tightening, the property market should remain relatively stable this year.
Government tightening aims to curb credit exposure to the real estate sector
China’s resilient growth in 2020 provided an opportunity for the government to address debt levels in the property sector. In August 2020, the People’s Bank of China (PBOC) introduced new measures to closely monitor and control the total debt level of major property developers. Under this policy, commonly referred to as the “Three Red Lines,” companies are scored as green, orange, yellow or red based on their cash-to-short-term debt ratio, net gearing ratio and liability-to-asset ratio. In December 2020, the central bank announced a cap on bank exposure to the real estate sector.
This focus on real estate reflects the central government’s determination to address growing systemic risks and to avoid a further increase in wealth inequality created by rising property prices. Housing affordability is a particular concern because prices remain at 15-20 times the average household income in major cities.
However, real estate
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