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What caused China’s real estate crisis?


The Chinese government response, beginning in late 2020, was to ease the real estate bubble by targeting developers with restrictions on borrowing, captured in the slogan “three red lines.” The “red lines” set limits on firms’ liability-to-asset ratio, net-debt-to-equity ratio and cash-to-short-term borrowing ratio. Companies like Evergrande that fail on all three of these measures have been barred from receiving additional bank loans. For Evergrande, this policy intervention triggered the current liquidity crisis and potential default.

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