Chinese cities impose stricter regulations on property firms’ access to escrow funds

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.