China’s top financial regulators have issued a directive to guide the provision of letters of guarantee to high-quality property enterprises in exchange for pre-sale supervised funds.
On 14 November the People’s Bank of China (PBOC), the China Banking and Insurance Regulatory Commission (CBIRC) and the Ministry of Housing and Urban-Rural Development (MOHURD) jointly issued the “Notice on Work in Relation to Commercial Banks Issuing Letters of Guarantee in Exchange for Pre-sale Supervised Funds” (关于商业银行出具保函置换预售监管资金有关工作的通知).
The Notice stipulates that when funds allocated to pre-sale supervised accounts reach the quotas set by MOHURD, property enterprises are permitted allowed to apply with commercial banks for letters of guarantee in exchange for funds within the quota.
Conversely, the Notice calls for commercial banks to provide letters of guarantee to high-quality property enterprises in exchange for pre-sale supervisory funds, after “fully assessing credit risk, financial conditions and reputational risk” and “in accordance with the principles of marketisation and the rule of law.”
Commercial banks must “select high-quality property enterprises with stable operations and excellent financial conditions” for letters of guarantee.
Under the requirements of the Notice, letters of guarantee can only be swapped for funds within the regulatory quota for pre-sale funds, and cannot exceed 30% of the funds required to ensure completion and delivery of projects.
Following the swapping, the remaining supervisory funds cannot be less than 70% of the funds required for completion and delivery of projects. The full sum of the letter of guarantee quota is included with the unified quota allocated to the property enterprise and any group to which it belongs.
Any pre-sale supervisory funds obtained with letters of guarantee must be used for development projects and the repayment of maturing project debts, and cannot be used for land purchases, new investments, or to pay shareholder debts.