China Property Developers Will Have more Access To Escrow Funds

China is drafting nationwide rules to make it easier for property developers to access funds from sales still held in escrow accounts in its latest move to ease a severe cash crunch in the sector. Regulatory curbs on borrowing have driven the sector into crisis, highlighted by China Evergrande Group which was once China's top-selling developer but is now the world's most indebted property firm with liabilities of $300 billion. The new rules would help developers meet debt obligations, pay suppliers and finance operations by letting them use the funds in escrow that are currently controlled by municipal governments with no central oversight. "An abrupt clampdown on escrow accounts by local authorities after Evergrande's crash choked liquidity for some good quality names. A correction by the central government is much needed," said Nan Li, associate professor of finance at Shanghai Jiao Tong University. Chinese developers are allowed to sell residential projects before completing them but are required to put those funds in escrow accounts. The cash held in escrow typically accounts for 50% to 70% of developers' pre-sale funds. Guided by the cabinet-level Financial stability and Development Committee, the sector's main regulator the Ministry of Housing and Urban-Rural Development and other authorities are drafting the new rules. Many local governments curbed withdrawals from the escrow accounts in 2021 amid fears of contagion after news of Evergrande's debt problems, leaving several projects across the country unfinished and worsening cash flow for developers. While some municipalities have eased withdrawal restrictions since late last year due to lack of nationwide rules on this front, local enforcement had already gone too far in several cities. The proposed new rules are aimed at allowing developers to use escrow funds to first complete unfinished buildings and then for other purposes. The rules would also prioritise the repayment of onshore debt of developers with better credit profiles.