China’s Top Real Estate Giants Struggle with Debt, Vanke Faces Default

This aerial photograph taken on August 30, 2023 shows a residential complex built by Chinese real estate developer Vanke in Zhengzhou, in China's central Henan province. (Photo by AFP) Photo by -/AFP via Getty Images

News Analysis

The largest residential real estate developer in China, Vanke, is in a debt crisis, along with other real estate companies ranked in the top ten. If the state-backed Vanke defaults, it could lead to a total collapse of China’s real estate sector, which would significantly impact the stability of the Chinese regime.

From around March 8 to 10, several insurance executives visited Vanke’s headquarters in Shenzhen, China, to negotiate matters such as extending the repayment period for at least one year and increasing credit enhancements and collateral. However, according to China’s Economic Observer, the negotiations reportedly yielded no outcome.

Several insurance companies involved in the negotiations believe that the key issue at present is whether Vanke can be classified as a state-owned enterprise. This will determine whether the administrative departments in China can provide more support to Vanke.

In China, the difference between state-owned or state-backed companies and private companies can often be quite ambiguous since many large corporations are privately owned in name but are actually backed by the elites within the Chinese Communist Party (CCP).

Established in May 1984, Vanke is one of the largest real estate developers in China and worldwide. After the debt crisis emerged in October 2023, Vanke’s major shareholder, Shenzhen Metro, stepped in, along with Shenzhen’s branch of China’s State-owned Assets Supervision and Administration Commission (SASAC). They repaid debts in advance and avoided a crisis.

Debt Extension Negotiations Rejected

Earlier this month, there was widespread speculation that Vanke’s debt extension negotiations were rejected. Yu Liang, the chairman of Vanke, reportedly led a team of senior executives to Beijing to negotiate a non-standard debt extension with lenders, which was rejected.

On March 4, China’s real estate development sector shook, with Vanke’s A-shares dropping nearly 5 percent, and its Hong Kong-listed companies fell by over 7 percent. Meanwhile, most of Vanke’s domestic bonds fell, with “22 Vanke 06” plunging by over 36 percent, triggering a temporary trading halt.

Chinese finance analyst Leng Shan said on his YouTube program, “Vanke’s debt extension being rejected means that debt default is just a step away. Investors are not confident about Vanke, often leading to short selling of Vanke stocks.”

Mr. Leng said that Vanke’s crisis will inevitably impact the wider financial sector in China. After Vanke encountered this debt crisis, the Shenzhen SASAC did not fulfill its promise to bail out Vanke. Banks such as China Everbright and Ping An Bank began to withdraw loans from Vanke, which will undoubtedly be detrimental to the failing real estate developer.

He further believes that if Vanke collapses, the impact on market confidence may far exceed that of Evergrande and Country Garden. Mr. Leng said, “If even real estate companies with state-owned backgrounds cannot be saved, all real estate developers in China are at huge risk of being wiped out.”

As rumors of Vanke’s imminent default spread, Mr. Leng said news emerged that the CCP authorities had requested banks to strengthen financing support for Vanke and asked private debt holders to discuss extensions.

Regarding this, Shenzhen-based attorney Li Ming (alias) spoke to The Epoch Times on March 11, saying that financial institutions in China are struggling to survive and are unwilling to help Vanke.

“From the government’s perspective, whether to save a company or not does not matter,” said Mr. Li. “The key is that ongoing projects cannot be abandoned, or it will lead to social instability.”

He pointed out that China’s Ministry of Housing and Urban-Rural Development has made it clear that bankruptcy and restructuring are acceptable as long as it can avoid widespread dissatisfaction and social unrest.

China’s Top Ten Real Estate Companies in Crisis

Since 2021, a large number of real estate companies in China have gone bankrupt. From Jan. 2021 to Aug. 2023, more than 30 large real estate companies defaulted.

In 2021, the top ten largest real estate companies in China were Vanke, Evergrande, Country Garden, Poly Developments and Holdings, Greenland Holdings, Sunac China, China Overseas Land & Investment, Longfor Properties, China Resources Land, and China Merchants Shekou Industrial Zone Holdings. Currently, they are all in debt, with Evergrande, Country Garden, Greenland Holdings, and Sunac China having already defaulted, and some other companies are on the brink of default.

At the end of June 2023, the balance sheets of 11 major real estate companies in China showed that the total assets were approximately 12.33 trillion yuan ($1.72 trillion), while the total liabilities were approximately 10.34 trillion yuan ($1.44 trillion). The difference of about 1.99 trillion yuan ($280 billion) is capital. Data compiled by the Nikkei Asia shows that a 33 percent drop in the value of unfinished real estate projects would directly lead to insolvency risks.

Recently, several large real estate companies have successively applied for restructuring, reorganization, debt extension, and other measures. On Feb. 21, China’s Jinke Property Group, which had been listed on the “Forbes Global Properties” and “Fortune China 500” for consecutive years, announced the company’s application for restructuring and the bankruptcy court’s acceptance of the application materials.

Mr. Li said that the real estate sector’s bankruptcy will impact the CCP’s governance and the regime’s stability. If the crisis also drags down the financial sector, the impact on the CCP’s authoritarian rule will be even greater.