Relevant Document:Announcement
The China Banking and Insurance Regulatory Commission, Ministry of Housing and Urban-Rural Development and People’s Bank of China jointly issued a statement today, Nov. 14, allowing commercial banks to issue letters of guarantee for qualified real estate developers to partially withdraw funds from presale escrow accounts.
Funds withdrawn may not exceed 30% of such in the escrow accounts that are required for completion of project construction, and that funds remaining in the accounts after the withdrawal shall not be less than 70% of such required for project completion.
Real estate companies shall use withdrawn funds for project construction and repaying debt at the project level, and shall not use for such purposes as land purchase, new investment or repayment of shareholder loans.
The companies shall also replenish the escrow accounts as required to ensure fund sufficiency for construction. When funds in the accounts fall short of construction requirements, the bank that has issued the letter of guarantee shall replenish the funds using its own resources and reduce the amount of guarantee with the amount of the shortfall covered. The bank shall then seek recourse from the developer.
The bank should also make proper loss reserves for the shortfall covered and categorize it appropriately in the bank’s financial statements. Credit enhancement measures such as deposit and counter-guarantee from the developers may also be required in order to limit risk.
Banks that have a regulatory supervisory ratings of 4 or below and those that have less than RMB 500 billion ($70.717 billion) total assets shall not issue letters of guarantee for the said purpose. Banks also may not issue letters of guarantee for developers that are affiliated with the bank’s major shareholders, controlling shareholders or other connected parties. Non-financial institutions such as finance companies associated with business enterprises may not participate in such business.
Lastly, local governments may not force commercial banks to issue letters of guarantee.