China's property crunch throws state-backed developer into turmoil
Vanke's bond extension request signals waning government support
SHANGHAI/HONG KONG -- Turbulence surrounding one of China's biggest property developers is underscoring the depth of the country's real estate crisis.
At the center of the storm is China Vanke, still the country's sixth largest developer by contracted sales. The trigger was a filing on Nov. 26. "To ensure the smooth progress of principal and interest payments for this bond issue, a bondholder meeting will be convened to review matters related to the extension of the bond issuance period," the filing read, referring to an onshore bond set to mature on Dec. 15.
The company and bondholders are set to meet virtually on Dec. 10 to review the extension proposal.
As concerns over its ability to pay back debt mounted, the company's publicly traded bonds plunged by more than 50%, with one note trading at around 20 yuan per face value of 100 yuan on Friday. Its Shenzhen-listed shares fell to their lowest level in 11 years. But it has not spilled over into a broader market selloff, with the mainland stock benchmark CSI 300 Index up slightly since the news.
The bond that Vanke has proposed to extend was issued in 2022, with a principal of 2 billion yuan ($282 million) and a 3% interest rate. A series of proposals was announced Friday, centered around extending the repayment deadline by 12 months. Any proposal would need approval from 90% of bondholders.
An extension proposal for another Vanke bond, due Dec. 28 with a principal of 3.7 billion yuan and a 3% coupon, was filed on Friday.
An agreement to extend the deadlines is unlikely to solve the company's funding issues anytime soon. Credit ratings agency S&P, which downgraded the company on Nov. 28, said the company faces 11.4 billion yuan in maturing bonds over the next six months. It also forecast that Vanke's operating cash flow will be negative and that "its accessible cash buffer will likely be thin."
"We may lower the ratings on China Vanke ... if we view the potential debt maturity extension as a distressed restructuring," S&P said. Moody's, another credit rating agency, said on Nov. 28 that it considers Vanke's proposal a "distressed exchange."
Vanke reported a net loss of 28 billion yuan for the first nine months of the year, widening from 17.9 billion yuan in the previous year. Interest-bearing liabilities stood at 362.93 billion yuan as of September.
China's property crisis has already led to defaults of major Chinese developers like Evergrande and Country Garden. But Vanke's request shocked the market because its biggest shareholder is Shenzhen Metro Group, a state-owned subway operator, indicating strong government support.
"Vanke's request is highly significant because it is the first time a major state-backed developer has sought to delay repayment on an onshore bond," said Zichun Huang, China economist for Capital Economics. The move "suggests that government ties wouldn't always guarantee onshore repayment."
Shenzhen Metro owns a 27% stake in Vanke and it kicked off the year by asserting greater control over the developer. It replaced Vanke's former chairman with its own chairman Xin Jie in January, and also installed several of its executives. It also provided billions of yuan in loans for Vanke to help it pay back debt and supported its business, like a joint trial of a robot delivery operation this summer.
But the tide has turned. Vanke's diminishing stock price has dragged Shenzhen Metro to a 8.48 billion yuan net loss for the January-September period, driven by a 7.38 billion yuan investment loss. Xin resigned in October and was replaced by Huang Liping, Shenzhen Metro's deputy party secretary.
While Shenzhen Metro has provided Vanke with liquidity support in the form of shareholder loans, it has also asked the distressed developer to back these loans with collateral. Last month, Vanke pledged all its shares in a Hong Kong-listed property management company to Shenzhen Metro in a sign that the state-owned firm has turned more demanding.
"The new management installed by Shenzhen Metro has failed to turn around Vanke this year," said Duncan Wrigley, China economist at Pantheon Macroeconomics. "The central government probably wants a debt restructuring to shift the burden away from the local government alone so that creditors take on part of it."
Edward Chan, a property analyst at S&P Global Ratings, cautioned that Shenzhen Metro's support for Vanke has been limited since the beginning. "There is a lack of evidence of actual control by Shenzhen Metro. It has never owned over 50% of the company, and in terms of board representation, they also never represented more than half of the board."
The backdrop is the persistent decline in property prices and the growing financial burden on local governments.
Home prices across 70 cities in China have been in decline since early 2022, according to government statistics. Vanke properties are no exception: Apartment units of a Vanke property in the southern port city of Xiamen were on sale for about 13,000 yuan per square meter, down by about 40% from its peak in early 2023, according to Beike, a property app.
Policymakers have stepped up support for the property sector, vowing to "stop the decline" last September. The government has since loosened homebuying rules, cut interest rates on mortgages and allowed local governments to issue debt to buy up inventory. But none of them have made a dent in falling property prices.
Some analysts warn that a pessimistic outlook is prompting more homeowners to put their properties in the market, widening the imbalance between supply and demand and further pressuring prices. In tier 3 cities, the inventory of homes has ballooned to the equivalent of 40 months of sales, according to research firm Gavekal.
"The biggest reason for the decline in prices is that inventory is piling up due to weak investor demand," said Hiroya Yamauchi, China and Asia market specialist at Amova Asset Management. "It is taking time to digest, and a turnaround may only come in 2027 or later."
While authorities vowed to rein in inventory levels, they are also urging local governments to provide funding to help distressed developers to finish building houses. China's housing inventories ended flat this year compared with the end of 2024, said S&P's Chan.
"That means despite all the decline in investments in the property sector, the inventory hasn't really been coming down, so that will put further pressure on home prices," he said.
It has also left local governments, which had generated significant revenue by selling development rights to property developers, strapped for cash. The Ministry of Finance in October approved an additional 500 billion yuan in bond issuances by local governments, which they can use to pay suppliers and invest in infrastructure projects. Local government bond issuances hit a record 10 trillion yuan for the first 11 months of the year.
Stock market investors have brushed off concerns about a spillover effect. An index of mainland-listed property stocks is up 4% so far this year, although it has underperformed a 16.5% gain in the CSI 300. Shares of banks, which are at risk from rising bad loans if developers go bust, have also been stable.
Beijing has so far defied calls to intervene more aggressively. Proposals for the upcoming five-year plan are centered on economic growth driven by industrial upgrading, tech self-sufficiency and expanding domestic demand. One of the few recommendations for the housing market is to "optimize the supply of affordable housing" as part of its goal to improve people's livelihoods.
S&P Global predicts year-on-year property sales to fall another 6-7% next year. "That's essentially due to weak homebuyer confidence. It is reflected in the falling sales volume. We think home prices will likely continue to fall next year as well," said S&P's Chan.
Serena Zhou, senior China economist at Mizuho Securities, said Beijing may announce more supportive measures after leaders convene later this month for the annual Central Economic Work Conference, which usually sets the economic agenda for the next year. "If not, things will probably get worse before they get better next year," Zhou said.
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