The Three Red Lines policy, introduced by the Chinese government in 2020, aims to curb excessive debt in the real estate sector and prevent a housing bubble. It sets strict limits on developers' financial health, monitored by the People's Bank of China and other regulators.
The three thresholds are:
Liability-to-asset ratio ≤ 70% (or ≤ 65% for state-owned enterprises) – Measures debt relative to total assets.
Net debt-to-equity ratio ≤ 100% – Caps net debt against equity.
Cash-to-short-term debt ratio ≥ 100% – Ensures sufficient liquidity for short-term obligations.
Developers exceeding any line face funding restrictions; breaching all three blocks new loans. This slowed credit growth, contributing to challenges for firms like Evergrande, though the policy has been partially relaxed since 2023 to stabilize the market. For details, see EAC International Consulting's analysis from 2021.
The Three Red Lines policy, introduced by the Chinese government in 2020, aims to curb excessive debt in the real estate sector and prevent a housing bubble. It sets strict limits on developers' financial health, monitored by the People's Bank of China and other regulators.
The three thresholds are:
Developers exceeding any line face funding restrictions; breaching all three blocks new loans. This slowed credit growth, contributing to challenges for firms like Evergrande, though the policy has been partially relaxed since 2023 to stabilize the market. For details, see EAC International Consulting's analysis from 2021.