Why this troubled Chinese property giant is different to the rest

Another big Chinese property developer is teetering on the brink of collapse. This time, however, the outcome for the country’s second-largest developer might be different.

The Chinese authorities allowed China Evergrande to fall into liquidation earlier this year and have done nothing meaningful to avert the same fate for their largest developer, Country Garden, which is also facing a liquidation petition.

Beijing has urged state-controlled banks to come to its rescue.Credit: Bloomberg

China Vanke, however, whose debt was downgraded to junk status by credit ratings agency Moody’s on Monday, is being treated rather differently, with the authorities urging state-controlled banks to come to its rescue.

The South China Morning Post has reported that 12 banks, six of them state-owned and led by the Industrial and Commercial Bank of China, are in discussions with Vanke about providing 80 billion yuan (about $17 billion) of secured loans to provide the liquidity to repay maturing bonds.

According to Moody’s, Vanke has about 34 billion yuan of bonds maturing before the middle of next year. In effect, if the negotiations with the banks are successful, Vanke would swap short-term unsecured debt for longer-term secured borrowings, with the banks having collateral to protect their loans. It would acquire significant breathing space.

Why is Vanke any different to Evergrande, Country Garden or the host of smaller developers that have been left to flounder and fail without Beijing’s intervention?

Earlier this month at the National People’s Congress, China’s Housing and Urban-Rural Development minister, Ni Hong, said troubled developers would be allowed to go bankrupt or be restructured without state intervention.

The fact that Vanke hasn’t yet defaulted on any of its debt, was an investment grade credit (and still is with Fitch and Standard & Poor’s), was still modestly profitable last year and does have sufficient liquidity to meet its near-term financing demands might be a factor. It has evidently been more soundly managed than many of its overly indebted peers.

At its last available balance date, it had about 1.75 trillion yuan of assets and 1.3 trillion yuan of liabilities. While its market capitalisation has fallen dramatically since the “three red lines” restrictions on developers’ leverage was imposed in 2021 – from the equivalent of about $13.3 billion to about $2.7 billion – investors are betting with their Hong Kong dollars that it still has substantial value.

The more significant asset that it has relative to other developers, however, is that it is more than 27 per cent owned by the Shenzhen local government, which is its largest shareholder. It has had a lengthy and successful relationship with the dynamic technology hub, with Shenzhen directly involved in the negotiations to refinance the property group.

That state presence on its register is a major differentiator from the other big billionaire-controlled developers that Beijing has steered clear of.

Another is the timing of Vanke’s liquidity challenges, which are occurring even as the central authorities are finally taking some steps to try to arrest the continuing downturn in the sector that once contributed around 30 per cent of China’s GDP.

With a massive overhang of new housing, much of it uncompleted developments, housing starts at 60 per cent of pre-pandemic levels, prices that have fallen about 10 per cent in each of the past two years and are still falling and weak demand – Moody’s estimated Vanke’s own contracted sales for the first two months of this year were down 40 per cent on the same period last year – the only surprise is that it has taken Vanke this long come under pressure.

Last year Beijing took some modest steps toward trying to stabilise the sector by making it easier and cheaper for purchasers to buy homes by reducing mortgage interest rates and the deposits required, providing some limited liquidity to the better-managed developers to complete projects already under way and asking local governments to provide what assistance they could to assist developers in their regions.

After the national congress, there has been talk of a new model for the housing sector, with Beijing buying some of the myriad properties held by effectively bankrupt developers to offer them as subsidised rental units to low-income households.

That may not be a permanent solution. It could even create more issues in future in a market that already has millions of unoccupied apartments and a shrinking population by adding to the over-capacity. It would also be very costly – hundreds of billions a year – if it is to have a material impact.

It might, however, keep some of the better developers afloat within a diminished market for new private developments while giving the state a far larger role within the sector. It might also help local government finances stretched by the loss of a major source of income, the revenue they once generated from land sales.

In any event, Beijing – which means Xi Jinping – is no longer maintaining a largely hands-off attitude towards the implosion of the property sector, which is a positive development for Vanke, its creditors and its investors.

It may also be a positive for China’s weakened economy.

The savage decline in the property market has caused households and businesses to become risk-averse, which has weighed on consumption, investment and growth.

Coincidental crackdowns on private companies, particularly the big tech companies, haven’t helped and have also, with a significant toughening of China’s opaque espionage laws and their application, scared off foreign investors.

Beijing has been buying properties held by effectively bankrupt developers and offering them as subsidised rental units to low-income households.Credit: Bloomberg

A precondition for increased consumer confidence is the stabilisation of the property sector. More than 80 per cent of Chinese own their own homes and more than 20 per cent of urban households own multiple homes, making property the major repository of household wealth.

Whatever one thinks of the quality of the decisions the authorities are said to be contemplating, at least they have (belatedly) recognised the need to respond to a crisis that, because the three red lines policy was implemented so crudely – the developers weren’t given any meaningful time to adjust and refinance – was largely of their own making.

The savage decline in  the property market has caused households and businesses to become risk-averse, which has weighed on consumption, investment and growth.

If Vanke can secure a new debt facility from the consortium of banks it is negotiating with it will have the time to re-think its own model.

Like most Chinese developers it has been reliant on pre-selling new developments. It is holding more than 400 billion yuan ($86 billion) of customer deposits for uncompleted projects. That’s a model that relies on consumer trust, which has been broken by the industry’s implosion.

It’s also a model built on expectations of continued strong growth in demand. It can’t work in an environment of still-rising supply and still-falling demand and a massive and still-growing glut of excess housing stock.

Unlike Evergrande, Country Garden and many others, however, Vanke might yet – thanks to its state backing, its more conservative operations and the timing of its problems coinciding with an apparent recognition by Xi that something significant has to be done to try to arrest the downward spiral – be given the time and opportunity to restructure and reinvent itself.

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