In late-2016, the Chinese government launched its deleveraging campaign to get serious about debt in the financial system. Since China's real estate sector took approximately 42% of total financing in the economy in 2016, according to the UK-based Royal Institute of Chartered Surveyors, it's a prime target for the deleveraging campaign.
Part of the build-up of debt in the real estate sector has been down to the government because it has boosted economic growth by channeling loans to developers, allowing shadow bank financing to the sector, and periodically removing purchase restrictions to boost sales and investment.
But the situation is different now that China's government is focused on sustainability. Developers must become more competitive, re-evaluate their business models, use resources more efficiently, and meet development targets.
Major changes introduced in the past two years include restrictions on developer bond issues, curbs on financing via wealth management products, strict qualification criteria to enter land auctions, tough oversight over bank lending, and huge fines for bank sector loan officers if they don't comply with new rules.
These policy changes have driven record levels of sector M&A. Smaller developers have been pushed out of the market and highly leveraged firms have liquidated their land assets and projects, resulting in M&A worth USD 108.5 billion in 2017, up 112% y-o-y, according to data compiled by Pricewaterhouse Coopers.