How should high-leverage enterprises smoothly deleverage? — An empirical and theoretical study based on China's "three red lines" policy

Within the context of China's deleveraging policies, 26 of the nation's top 100 real estate enterprises (REEs) encountered financial distress in 2021, with industry leaders such as Evergrande and Vanke facing successive liquidity crises. Investigating the economic consequences of deleveraging policies and the optimal deleveraging pathways for high-leverage enterprises is therefore of significant practical relevance. This study, utilizing a sample of 86 A-share listed Chinese REEs, empirically examined the impact of the "Three Red Lines" policy on enterprise operating performance and its underlying transmission mechanisms. Furthermore, it constructed a theoretical model to address how high-leverage enterprises can achieve smooth deleveraging. Our findings indicate that the implementation of the "Three Red Lines" policy is associated with a significant decline in the operating performance of REEs, a conclusion that holds after a series of robustness tests. The mechanism analysis reveals that the policy affects operating performance through enterprises' financing and sales capabilities and liquidity conditions. Heterogeneity analysis shows that state-owned REEs experience a smaller negative impact, owing to soft budget constraints and inherent credit advantages. Conversely, large-scale REEs, whose business models are more dependent on "high leverage, high turnover, and high debt," face a greater risk of a "hard landing." REEs with higher degrees of deleveraging experience a more drastic decline in operating performance. The theoretical model suggests that an enterprise undergoing deleveraging should first identify its safety threshold, adopting the lower of the optimal leverage solution within the safe zone and this threshold as its adjustment principle. The model also confirms the optimality of a gradual deleveraging strategy. By quantifying the economic costs of deleveraging and clarifying a viable path for high-leverage enterprises, this study provides valuable insights for national deleveraging policymaking and corporate strategy selection.