China’s Property Crisis Enters a Dangerous New Phase
Risks grow as authorities are forced into a first mainland rescue and iconic Hong Kong developer New World’s bonds sink into distress.
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It was the moment China’s leaders finally blinked.
After four years of standing by as property developers like China Evergrande Group spiraled into default, Communist Party officials decided in late January that China Vanke Co. — one of the country’s last surviving real-estate giants — was, for now at least, too big to fail. With Vanke’s bond prices collapsing and its warning of a first annual loss of a record $6.2 billion, officials from the developer’s hometown in Shenzhen stepped in to take operational control and shore up funding.
The unprecedented intervention triggered a sigh of relief in markets, but it also underscored a somber reality: The property crisis that hobbled China’s economy and created a near $160 billion pile of distressed debt — the world’s largest — is getting worse.
Signs of trouble are now popping up everywhere. A brief revival in home sales has fizzled despite multiple rounds of stimulus from President Xi Jinping’s government. Chinese bankers have mostly stopped lending to real-estate projects outside major cities such as Shanghai, according to people familiar with the matter. And international creditors are losing patience: More debt restructuring deals are unraveling and at least a dozen developers face petitions to liquidate, including once-storied names like Country Garden Holdings Co.
The pain is also spreading to Hong Kong as Chinese homebuyers and tourists pull back. New World Development Co., a real-estate giant controlled by one of the financial hub’s richest families, is racing to sell assets and mortgage some of its marquee properties as losses mount.
It all points to more risks for a Chinese economy already grappling with tepid consumer spending and Donald Trump's tariffs. Without forceful action from Beijing to revive homebuyer confidence and stabilize the $15 trillion property sector, the deepening crisis threatens to weaken Xi's negotiating hand on trade talks with Trump and further deter foreign investment in China.
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“China’s regulatory rescue efforts are sometimes cautious, like giving a band-aid after a knife wound,” said Huan Li, co-founder of Forest Capital Hong Kong Ltd., a hedge fund with $200 million under management. “They don’t act until the worst moment, but when that comes, it may be too late. With Vanke, the support is positive, and we need to see more of it.”
China Home Prices in Worst Slump on Record
Average home price in 70 surveyed cities in China, year-over-year change
Source: National Bureau of Statistics of China, Bloomberg Intelligence
China’s housing ministry and national financial regulator didn’t respond to Bloomberg’s request for comments.
The crisis started as Xi began pivoting China toward technology-driven economic growth, while reducing the role of the real estate sector. It prompted Beijing to crack down on developers’ sky-high leverage and tackle a housing bubble. The resulting crash in the market led to the destruction of $18 trillion of household wealth, by one analysis. Home prices have plunged about 30% from their 2021 peak, according to economists. The housing sector has seen its contribution to the economy shrink from about 24% to 19%.
China Evergrande’s default in 2021 underscored the depth of the crisis, and nationwide protests by homebuyers broke out the next year as cash-short companies were unable to complete construction of properties.
Beijing’s solution to the crisis was to focus on delivering homes to buyers rather than bailing out companies. It asked local governments and state-backed companies to buy unsold homes, while providing limited funding to finish construction of uncompleted projects. It then sought to stoke demand by slashing mortgage rates and lifting buying restrictions. The goal was to manage the slowdown rather than reflate the market.
Vanke was a leading symbol of that strategy as the nation’s fifth-biggest developer by sales, with sprawling apartment blocks built for the middle class in some of China’s richest cities. Last year, state-backed companies contributed to 70% of nationwide sales, more than double the 32% before the property downturn began, according to Citigroup Inc.’s research based on sales data from China's top 100 builders.
Yet, in the past few months, investors became worried Vanke may struggle to pay its debt. It has $4.9 billion in bonds maturing or facing redemption options in 2025. Executives at other builders, who requested anonymity to discuss sensitive details, said a default would erode confidence in state-controlled developers such as Poly Developments and Holdings Group Co. and China Overseas Land & Investment Ltd.
Lenders may curb new loans to position for an accelerated drop in housing demand and prices, said bankers with knowledge of the details who asked not to be named to discuss business decisions. Raymond Cheng, head of China property research at CGS International Securities Hong Kong, estimated that new home sales volume may take a hit of 10% this year in the worst-case scenario.
“If Vanke collapses, people will start to question the policy direction promoting stabilization and recovery of the real estate market set by Beijing in September,” said Xu Liqiang, fixed-income deputy director at Shanghai Silver Leaf Investment Co. “We may ask who would be next?”
Details on Vanke’s rescue are gradually emerging. An official from Shenzhen Metro Group Co., its largest shareholder, was appointed chair, the first time the state took direct control. Through state media, the local government has said it would “proactively support” the company’s operations. On February 10th, Vanke said Shenzhen Metro would provide a loan of as much as 2.8 billion yuan ($383 million).
On Wednesday, Bloomberg News reported that, according to people familiar with the matter, Chinese authorities are working on a proposal to help Vanke plug a funding gap of about 50 billion yuan this year. Under the plan, regulators would allocate 20 billion yuan of special local government bond quota for the purchase of unsold properties and vacant land from Vanke, said the people, asking not to be identified discussing private information.
The aid followed a slew of sector-wide stimulus and announcements from September. A meeting of the Communist Party’s decision-making body that month pledged to ensure the housing market will “stop declining,” the strongest vow yet to stabilize the beleaguered sector. A series of interest rate cuts by the People’s Bank of China pushed mortgage rates for first-time buyers to a record low of 3.1% in the final quarter last year. Downpayment requirements were cut.
With room to run a higher fiscal deficit, Beijing’s firepower isn’t in doubt.
The problem is home demand isn’t picking up fast enough, with Chinese consumers’ preference to save putting the nation on track for its longest deflationary cycle since the 1960s.
A nationwide sales rebound that came after the September stimulus has fizzled out. Home sales fell 3.2% in January from a year earlier, after they had been little changed in the prior month, according to preliminary data from China Real Estate Information Corp. Vanke’s sales in the fourth quarter did jump 20% from the prior three months, but Bloomberg Intelligence estimates show that’s not enough to help the developer meet its 100 billion yuan debt-reduction target.
“What the government has done is encouraging for a start, but the measures aren’t sufficient and aren’t happening fast enough,” said Zhu Ning, a faculty fellow at Yale University and the author of China’s Guaranteed Bubble, which examines the country’s banking, financial and property industry woes. “What I really worry about on the housing market is that the expectations have been pessimistic.”
Lucy Wang, a junior analyst at a Beijing-based mutual fund, said her family sold their apartment last year as the housing slump continued. While they’re considering buying again to help secure a school spot for their child, the economic uncertainty is daunting.
“We are in an economic cycle where different industries are going through adjustments and salaries are falling,” Wang said. “We may have to think twice because it would be hard to take on so much leverage anymore.”
The depressed housing demand is derailing the progress of defaulters which were seemingly recovering. Sunac China Holdings Ltd., whose successful debt restructuring in 2023 was hailed as a role model by creditors, recently said it “can’t rule out” a second overseas restructuring as market conditions are worse than expected. It plans to oppose another wind-up petition vigorously.
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The list goes on. Fellow defaulter China Fortune Land Development Co. is mulling scrapping a creditor-approved debt plan for a court-led solution, a rare approach for developers in China, people familiar with the details said in January. The developer declined to comment at the time on the Bloomberg report. Liquidation petitions are piling up again at Hong Kong’s court, with targets including Shimao Group Holdings Ltd., once one of the nation’s biggest builders, in recent weeks.
Reflecting the concerns, a key gauge of major Chinese property stocks has dropped around 9% this year. Many developers’ dollar bonds are sinking into more deeply distressed levels, with JPMorgan Chase & Co.’s analysts predicting that the sector will be the biggest source of defaults in Asia in 2025.
Builders are caught in a catch-22. Poor sales make banks reluctant to lend. That then impedes the companies’ ability to finish construction and sell homes. Beijing’s promise of funding last year, as well as shortlisting an undisclosed number of property projects to back in a so-called White List, was meant to put a bottom to the downward spiral.
Some of that cash is getting deployed, with loans that fall under the support program reaching 5.6 trillion yuan as of Jan. 22.
Yet, lending for projects outside of key cities, such as Shanghai and Hangzhou, have more or less been suspended, according to bankers involved in the business who declined to be identified discussing confidential matters. Getting on the White List is no guarantee to secure loans, with banks scrutinizing the viability of projects as they weigh the risks for them, the executives said.
Less than 10% of loan applications were approved for one of the largest Chinese developers on the White List, an executive said, declining to be identified discussing confidential matters. For all the support, Chinese builders received 6.1% less funds from banks last year, a fourth consecutive annual drop, official data show.
“Properties in second and third-tier cities are not selling well,” said Yang Junxuan, a fund manager at Shanghai Junniu Private Fund Management Co. “We’re worried that developers’ liquidity may break one day.”
The impact of a weak Chinese economy is also rippling across into Hong Kong. New World borrowed heavily to fund mega retail and commercial projects such as 11 Skies and Victoria Dockside to capitalize on spending by tourists and companies from China. It also acquired land across the border.
But, with retail spending plunging and Chinese companies rushing to sell office towers in Hong Kong, the average prices of commercial buildings, shopping malls and other properties have fallen more than 40% from their highs in 2018.
“The deceleration of China’s economic growth is inevitable, especially at this moment when so many headwinds are emerging and the worsening of real estate will accelerate that,” said Gary Ng, senior economist at Natixis SA.
The broader fear now is that China’s property crisis continues to spiral downward, handicapping Beijing’s goal of reviving domestic consumption. That would put its growth plans at risk at a time when US tariffs are threatening to hurt its exports. According to economists surveyed by Bloomberg, the median forecast for the nation’s real economic growth this year is 4.5%.
Economists and investors have been calling out for a more comprehensive support package, with Chinese lawmakers meeting for an annual session in March when authorities typically unveil key policy targets from a yearly economic growth rate to the fiscal deficit level.
“Property loosening measures by themselves are unlikely to boost the sector,” said Sheldon Chan, a portfolio manager for Asia credit at T. Rowe Price Group Inc. “Instead, a broad coordinated package of stimulus would be most effective to stimulate confidence and consumption.”
(Adds detail on new funding proposal in paragraph 17.)
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