China's Three Red Lines: Gold Bar Giveaways, Presales and Mortgage Boycotts

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Developers in cities like Hangzhou offered one-kilogram gold bars, worth about 18 percent of an apartment's price, in a market with an estimated 60 to 80 million empty homes. The roots go back to a 1994 tax reform that centralized revenue and left local governments living off sales of land-use rights; land values tripled between 2005 and 2009. After 2008, localities borrowed through Local Government Financing Vehicles backed by land. Developers relied on presales, spending buyers' payments on new land rather than the units sold, and on shadow banking wealth management products promising over 10 percent. In 2020 Beijing declared that houses are for living, not for speculation, and imposed three red lines capping debt against cash, equity and assets.

By October 2021, 14 of the 30 largest developers had breached at least one line. Evergrande breached all three, missed over $83 million in offshore bond payments, and later reported about $340 billion in liabilities; regulators found it overstated revenue by $78 billion in 2019 and 2020, auditor PwC was fined $62 million, and a Hong Kong court ordered liquidation in January 2024. Country Garden and Vanke posted losses, and wealth manager Zhongzhi Enterprise Group revealed a shortfall of up to $36.5 billion. Buyers boycotted mortgages on 343 projects by September 2022. Beijing set up a 300 billion yuan facility to turn unsold homes into affordable housing and a whitelist aiming for 4 trillion yuan in project lending, as real estate fell from about 24 to 19 percent of GDP.

• Evergrande poured over $7 billion into electric vehicles and bought Guangzhou FC.
• Authorities ordered 39 buildings demolished on Evergrande's $15.5 billion Ocean Flower Island.
• Evergrande pressured its own employees to buy its wealth management products to meet sales quotas.
• By early 2024, Evergrande's offshore bonds traded at about one percent of face value.
• Local government land revenue fell 27 percent in the first quarter of 2023.