HONG KONG/BEIJING, Aug 2 (Reuters) – Some Chinese city governments have implemented stricter measures to limit developers’ access to escrow accounts holding tens of billions of dollars from property sales, according to sources. This raises concerns that cash-strapped companies will face even greater financial pressure. The aim of these measures is to ensure the completion of unfinished projects at the city level, as the housing market experiences a decline in sales and an uncertain future. These restrictions appear to contradict the central Chinese government’s plan to stabilize the sector, which has been impacted by a prolonged liquidity crisis and declining demand. Gary Ng, Asia Pacific senior economist at Natixis, described this situation as a ”Catch-22 dilemma,” as local governments want to ensure project completion, but developers struggle without access to liquidity. These restrictions may result in lower capital usage efficiency for private developers, who have been hit harder by the crisis, and could increase credit risk for smaller developers, according to Ng. Chinese developers are allowed to sell residential projects before completion but are required to deposit the funds in escrow accounts. Local city governments permit developers to withdraw a portion of the funds based on construction progress. However, since the second quarter of this year, some city governments have started limiting developers’ access to these escrow funds due to the worsening outlook for the sector. Senior executives at three Chinese developers have reported difficulties in withdrawing funds, even after completing some projects. They believe this is a common issue, with a significant portion of their cash now trapped in escrow accounts. Previously, before the debt crisis in mid-2021, only around 30% of their funds were trapped, compared to around 60% during the early days of the crisis. The executives speculate that the tighter access is a result of local authorities wanting to ensure sufficient capital for completing home construction in their cities. An executive from a developer that has defaulted on its debt obligations stated that it has become increasingly difficult to withdraw money from escrow accounts in recent months, despite it being easier at the end of last year after government easing measures.
