Real estate policy regulation and corporate financial risk: China's Three Red Lines policy

Abstract The Chinese real estate market has been subject to extensive government intervention. Recently, the government implemented the stringent ‘Three Red Lines’ policy to regulate financial risks of real estate development enterprises. However, the effectiveness of these policies and impacts on real estate enterprises remain unclear. This study aims to address these questions by analysing the effects of the policies on the financial risks of enterprises using a sample of listed real estate companies from 2017 to 2023. The research employs a DID model to assess the policy's influence. The findings reveal that the policies have significantly escalated the financial risks of real estate enterprises, operating through both macro and micro‐level transmission mechanisms. Specifically, the policies have curbed market enthusiasm, increased financing costs, reduced investment levels, and impaired operational efficiency, thereby exacerbating risks. Furthermore, the study analyses the differentiated responses of different enterprises to the policies, highlighting a more pronounced impact on non‐state‐owned enterprises, non‐eastern enterprises and diversified real estate enterprises. This research uncovers the ineffectiveness and deviation of the ‘Three Red Lines’ policy, providing crucial insights into understanding the current state of the Chinese real estate market and its policy implications, thus serving as a valuable reference for future policy‐making endeavours.