The "Three Red Lines": An Attempt at Deleveraging the Chinese Real Estate Industry

This work examines housing bubbles in the context of the Chinese real estate industry. Specifically, we investigate the effects of a new regulation, the “Three Red lines”, which the Chinese government has implemented as an attempt at deleveraging major real estate developers in China in spite of an underlying housing bubble. The empirical research takes a deeper dive on the financial statements of these developers to further understand if they have been operating within the rules of compliance and if these new ratios are improving their financial health. Finally, we look at how the new real estate debt ratios are among Chinese property developers compared to current scenarios for North America and European ones where this regulation has not been implemented. The results of these findings show that the policies have no effect on the deleveraging of Chinese real estate companies. On the contrary, the amount of debt in the real estate sector continues to increase with Chinese property developers, where North America and European leverage ratios remain stable.