China Tightens Use of Property Proceeds as Fed Sees Risks

(Bloomberg) -- A growing number of cities in China have tightened supervision over the use of presold property proceeds, a move likely to deepen the cash crunch at many of the country’s real estate developers that have relied on the inflows as a key source of funding.

Major cities including Beijing, Tianjin and Shijiazhuang as well as smaller municipalities like Suzhou and Nantong in the eastern province of Jiangsu, and Luohe in central Henan province have issued rules tightening oversight of the proceeds, according to a China Business News report and government statements.

The measures are designed to ensure the timely completion and delivery of property projects as the number of suspended projects rises amid a severe downturn in the nation’s real estate market, the report cited Yan Yuejin, research director at Shanghai-based E-house China Research and Development Institute, as saying.

However, the policies are set to worsen the cash shortage for some developers and make it more challenging for them to repay debts, because the companies would have less access to those proceeds at project levels, the report cited unidentified industry sources as saying. Official data show presale proceeds generally account for almost half of developers’ cash inflows.

“The new regulations have directly affected the sales rhythm of real estate enterprises and further slowed their capital turnover, and that might intensify pressure on their working capital,” said Chen Wenjing, associate research director at China Index Academy.

China’s property industry has been suffering from a nationwide government crackdown on speculation and leverage following years of debt-fueled expansion. A widening crisis at China Evergrande Group, which is saddled with more than $300 billion in liabilities, is now spreading to other developers. 

Fed Concern

Foreign central banks are signaling concern. The U.S. Federal Reserve said in a report Monday that the fragility in China’s real estate sector could spread to the U.S. if it deteriorated dramatically. The Hong Kong Monetary Authority told banks recently that it would require them to disclose more details about their exposure to the industry, the Hong Kong Economic Journal reported Tuesday.

Underscoring the risk of contagion, China’s higher-quality dollar bonds are suffering their worst selloff in about seven months. 

For the Chinese government, a top priority is to ensure social stability. In order to safeguard the interests of homebuyers, authorities want to make sure developers use presale proceeds to complete the projects rather than for starting new ones or for other purposes, according to the China Business News report. At Evergrande, 1.6 million homebuyers are waiting for their properties to be finished.

The housing authority in Shijiazhuang, near Beijing, stipulates that from Nov. 9, developers will be banned from starting presales of any of their projects in the city until after entire structure is completed, according to an official statement. Previously developers there were allowed to kick off presales when construction reaches one third of the total number of floors designed for the project.

A district government in the city of Nantong said in a statement that it has set minimum amounts of presale proceeds that developers must deposit into government-supervised bank accounts for certain housing projects. Builders can only access the proceeds after the thresholds are met, according to the statement dated Nov. 8.

In Beijing, developers that wish to open supervisory accounts for presale proceeds can only choose from banks selected by local authorities, according to a revised regulation released by the capital city’s housing department last week.

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With assistance from Bloomberg