**MARKET BRIEF: CHINA REAL ESTATE SECTOR POLICY SHIFT** **January 30, 2026** **Executive Summary: End of the "Three Red Lines" Era** In a significant policy pivot reported on January 29, 2026, Chinese regulators have effectively dismantled the controversial "three red lines" deleveraging framework. Local media confirm that property developers are no longer required to report monthly compliance data, signalling the official end of the stringent borrowing caps introduced in 2020. This deregulation marks a decisive shift from the austerity measures that triggered a liquidity crunch and precipitated one of the most severe debt crises in the sector's history. The move appears aimed at stabilizing a market that continues to weigh heavily on the broader Chinese economy. **Immediate Market Reaction: Developer Stocks Surge** Equity markets responded explosively to the news. Investors, interpreting the policy relaxation as a potential lifeline for surviving developers, drove major property stocks significantly higher in Thursday's trading session: * **Logan Group** soared by as much as **40%**. * **China Aoyuan** jumped over **34%**. * **Sunac China Holdings** rallied approximately **29%**. * **Country Garden Holdings** climbed **16%**. Broader sector indices also reflected this renewed optimism. The **CSI 300 Real Estate Index** advanced **5%**, reaching a two-month high, while the **Hang Seng Mainland Properties Index** gained **4.8%**. This rally stands in stark contrast to the broader market, which remained largely flat. **Context: The Legacy of the "Three Red Lines"** Implemented in August 2020, the "three red lines" policy was designed to curb reckless borrowing by imposing strict limits on three financial ratios: 1. Liability-to-asset ratio (excluding advance receipts) of less than **70%**. 2. Net gearing ratio of less than **100%**. 3. Cash-to-short-term debt ratio of more than **1x**. While intended to reduce systemic risk, the abrupt cutoff in financing backfired, leading to a massive liquidity squeeze. Since mid-2021, the sector has seen approximately **$130 billion** in offshore debt defaults. Industry giants like **China Evergrande** have entered liquidation, while others, such as **Vanke**, have narrowly avoided default as recently as January 2026 through last-minute bond extensions and state-backed support. **Current Market Fundamentals & 2026 Outlook** Despite the positive sentiment in equity markets, physical market fundamentals remain challenged. The removal of reporting requirements acknowledges a new reality: the era of debt-fuelled expansion is over, and aggressive deleveraging has already forced the market's most leveraged players into restructuring or insolvency. * **Price Trends:** New home prices across **70 major cities** extended declines in December 2025, underscoring persistent weak demand. * **Sales Volume:** Analysts forecast a further contraction in 2026, with primary property sales volumes expected to drop by approximately **6%**. * **Inventory:** High inventory levels in lower-tier cities continue to suppress pricing power. **Market Analysis** Industry experts suggest that while the policy shift is symbolic, it may not immediately solve the sector's funding challenges. Financial institutions remain risk-averse, and consumer confidence is still recovering from years of unfinished projects and falling asset values. The focus has now shifted from regulatory compliance to survival and "high-quality development," with state-owned enterprises increasingly dominating the landscape as private developers retreat. This policy relaxation serves as a critical signal that Beijing is prioritizing market stabilization over deleveraging for the remainder of 2026.