The three red lines (Chinese: 三條紅線, Simplified: 三条红线, Pinyin: sān tiáo hóng xiàn) are
financial regulatory guidelines in
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
introduced in August 2020 relating to the
ratio
In mathematics, a ratio shows how many times one number contains another. For example, if there are eight oranges and six lemons in a bowl of fruit, then the ratio of oranges to lemons is eight to six (that is, 8:6, which is equivalent to the ...
of
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
to
cash
In economics, cash is money in the physical form of currency, such as banknotes and coins.
In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...
,
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
and
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s. 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.
History
The three red lines were introduced in August 2020. They stated property should adhere to the following rules:
*
Liabilities should not exceed 70 percent of
assets (excluding advance proceeds from projects sold on contract)
*
Net debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The de ...
should not be greater than 100 percent
equity
Equity may refer to:
Finance, accounting and ownership
* Equity (finance), ownership of assets that have liabilities attached to them
** Stock, equity based on original contributions of cash or other value to a business
** Home equity, the dif ...
.
*
Money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
reserves must be at least 100 percent of short term
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
.
In March, the CBRC, the central bank and the Ministry of Housing and Construction and other regulatory agencies jointly issued a document requiring the prevention of irregular flow of loans for business purposes into the real estate sector, and the officials of the Ministry of Housing and Construction even personally went to localities to inspect the real estate situation.
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.
References
Financial regulation in China
2020 in China
2020s economic history
{{Finance-stub