China Warns Struggling Property Developers, but Steps In to Help State-Backed Vanke

An aerial view of the Evergrande Changqing community, in Wuhan, China, on Sept. 26, 2021. Getty Images

Just over a week ago, China’s housing minister sent a stern message to struggling real estate companies. Warning that they should not expect to be bailed out, he said failing developers “must go bankrupt.”

Shortly after, it became clear that Beijing’s tough love stance doesn’t apply to all housing developers, with reports that the State Council had stepped in to help struggling state-backed property giant Vanke.

Analysts have warned that the collapse of Vanke, whose stock was downgraded to junk status on March 11, will trigger a major crisis, and China’s central authorities must take immediate action to slow down the crisis.

On March 9, Minister of Housing and Urban-Rural Development Ni Hong told the press that “Real-estate companies that are seriously insolvent and have lost their operating capabilities must go bankrupt and be restructured in accordance with the principles of the rule of law and marketization.”

Mr. Ni stressed that China will hold onto the principle that “housing is for living in, not for speculation” when formulating a new development model for the real estate sector, in the hopes of keeping speculators from inflating the market.

Meanwhile, the State Council appealed to banks and creditors to help Vanke, as the developer risked defaulting on its debts.

Vanke on the Brink of Bust

Vanke is one of the three largest real estate companies in China, together with Evergrande and Country Garden. The developer is state-backed, with 33.4 percent ownership by Shenzhen Metro, a company held by Shenzhen’s state asset regulator.

Vanke started to reduce its leverage in the past few years and proclaimed itself to be the safest real estate company financially.

In late February, however, it was reported that Vanke was negotiating with lenders to extend its debt. When the debt extension negotiation was rejected, the market reacted almost immediately.

On March 4, Vanke’s shares fell sharply, closing down 7.1 percent in Hong Kong, a record low, and 4.7 percent in Shenzhen, their biggest slump since December 2022.

According to a financial analyst who writes for Chinese financial information platform xueqiu.com under the pen name “Bamang Swordsman,” based on Vanke’s cash flow for the past three quarters, the company has available cash ranging between 30 billion yuan (about $4.17 billion) to 85 billion yuan (about $11.8 billion). Without external support, it will last for two years at most, the analyst said.

On March 11, Moody’s canceled Vanke’s “Baa3” issuer rating and assigned a “Ba1” corporate family rating, while also downgrading its senior unsecured debt rating from “Ba1” to “Ba2.”

Baa3 is the lowest investment grade, while Ba1 and below are non-investment grades, commonly known as junk grades.

A Double Standard for State Enterprises

On March 11, Bloomberg reported, citing anonymous insiders, that Vanke was facing resistance from China’s two state-owned banks on a new HK$4.5 billion (about $575 million) offshore loan, blocking Vanke’s access to financing.

The developer’s plight drew the attention of authorities to the point that the State Council intervened, according to a March 11 report from Reuters. The report said China’s cabinet is coordinating the support effort for Vanke, asking banks to step up financing support for the developer and urging creditors to extend the maturity of the firm’s debts.

Mike Sun, a North American investment consultant and China expert, told The Epoch Times that there is a reason behind the housing minister’s double standard. For state-owned enterprises, the consequences of bankruptcy are too great, he said.

“Although the Ministry of Housing and Urban-Rural Development claimed that the insolvent real estate companies should go bankrupt and close down, the main target of this statement is private enterprises. For a real estate giant and state-owned enterprise like Vanke, it must be rescued. If Vanke collapses, the resulting crisis will be bigger than that of Evergrande,” Mr. Sun said.

Stabilizing the property market is an urgent task for authorities, he noted, but absorbing the excess housing will be a long process.

“The reality facing China is a prolonged downturn in the property market, which has a serious impact on economic development. The real estate crisis will continue to spread and escalate,” he predicted.