IMPACT OF "THREE RED LINES" POLICY AND BOND DEFAULT ON CHINESE DEVELOPERS' CAPITAL STRUCTURE

Abstract

This dissertation analyses the potential impact of the “Three Red Lines” policy and industry-wide offshore bond default on capital structure change for Chinese developers. In particular, I intend to discover five hypotheses, namely developers with higher liability-to-asset ratio (excluding advance receipts) will reduce proportionally more debt than those with lower ratio; developers with higher net gearing ratio will reduce proportionally more debt than those with lower ratio; developers with lower cash to short-term debt ratio will reduce proportionally more debt than those with higher ratio; non-state owned enterprises (non-SOEs) will reduce proportionally more debt than state owned enterprises (SOEs); and among developers who have crossed the lines, higher leverage implies greater speed of debt reduction. I randomly selected 42 listed Chinese developers, of which 18 are listed on mainland China’s A-share market while the remaining 24 are listed on Hong Kong stock exchange, and compared the change in their respective capital structures from 2020 to 1H2022. Undergoing repeated multivariate regression analyses and difference-in-difference analyses, many meaningful and statistically significant results are found. Furthermore, it is interesting to observe that SOEs in general are more financially sound, thus they can take on more debt. While the Chinese central government has no intention to bail out troubled developers and encouraged market-based approach to corporate restructuring, relevant authorities have mapped out a considerable number of favorable policies. Despite numerous uncertainties, I believe the Chinese property market could gradually recover and potentially establish a healthier and more sustainable operating model.