The turmoil surrounding one of China’s largest real estate developers highlights the severity of the country’s real estate crisis. At the center of the problem is China Vanke, which remains the country’s sixth-largest construction company in terms of contract sales.
The trigger was a declaration on November 26: to guarantee the payment of interest and principal on a bond maturing on December 15, the company called a meeting of creditors to discuss extending the deadline. The vote will take place virtually on December 10.
As doubts grew about its ability to service its debt, the company’s publicly traded bonds fell more than 50%; one of them fell to around 20 yuan for a par value of 100. Stocks listed in Shenzhen hit an 11-year low. Despite this, there was no wider contagion: the CSI 300 index rose slightly after the news.
The bond whose extension is being discussed was issued in 2022, worth 2 billion yuan ($282 million) and bearing 3 percent interest. On Friday, the company presented several proposals – all with a 12-month deadline – that require approval from 90% of holders. Another extension request, concerning a 3.7 billion yuan bond maturing on December 28, was also filed.
However, it is unlikely that postponing deadlines will resolve the liquidity crisis. S&P, which downgraded the company on Nov. 28, says Vanke has 11.4 billion yuan of debt maturing over the next six months and is expected to operate at negative cash flow with a “limited liquidity buffer.” The agency said it could downgrade the rating again if it considers the postponement a “difficult” restructuring. Moody’s has already called the proposal a “problematic trade.”
Vanke reported a net loss of 28 billion yuan in the first nine months of the year, compared with 17.9 billion a year earlier. Its interest obligations totaled 362.93 billion yuan in September.
The Chinese real estate crisis has already driven giants like Evergrande and Country Garden into bankruptcy. The surprise now is that Vanke’s largest shareholder is state-owned Shenzhen Metro Group, which had previously suggested strong government support.
“It is extremely significant that a large construction company with state support asks to defer payment of a national bond,” says Zichun Huang, an economist at Capital Economics. This indicates that “links with government do not always guarantee local payment”.
Shenzhen Metro owns 27% of Vanke and started the year by taking greater control of the company. He replaced the previous president with his own boss, Xin Jie, and placed more executives in the management. It also lent billions of yuan and supported the company’s operations, such as testing robot deliveries this year.
But the situation has been reversed. The fall in Vanke shares led Shenzhen Metro to record a net loss of 8.48 billion yuan between January and September, mainly due to the devaluation of its investment. Xin resigned in October and was replaced by Huang Liping.
Although it provided support in the form of loans, the Shenzhen metropolis began to demand stricter guarantees. Last month, Vanke mortgaged all of his shares in a Hong Kong-listed subsidiary – a sign of tightening state support.
“The new command appointed by the Shenzhen metro could not reverse the Vanke situation,” says Duncan Wrigley of Pantheon Macroeconomys. He says the central government wants to redistribute the burden of restructuring so that creditors share losses equally, thereby easing pressure on local governments.
For Edward Chan, an analyst at S&P Global Ratings, Shenzhen Metro’s support has always been limited: the state-owned company has never had more than 50% control of shares and its representation on the board of directors was not a majority either.
The backdrop is the persistent decline in property prices and the growing financial burden weighing on local authorities.
Prices in 70 cities have been falling since the start of 2022. Vanke properties are following the trend: apartments in Xiamen were selling for around 13,000 yuan/m², 40% below the 2023 peak, according to the Beike platform.
Even with the stimulus measures – loosening rules, lower mortgage interest rates and resources allowing local governments to purchase inventory – prices have not responded. In some third-tier cities, inventory is equivalent to 40 months of sales, according to Gavekal.
“The main reason for this decline is excess supply in the face of weak demand,” explains Hiroya Yamauchi of Amova Asset Management. He predicts a recovery only in 2027 or beyond.
Even as the government emphasizes the need to reduce inventories, it is also pressuring cities to fund construction companies so they can complete unfinished projects. According to S&P’s Chan, total housing stock has barely declined this year, which should continue to put pressure on prices.
Local governments, once fueled by land sales to developers, are now struggling. In October, the Ministry of Finance authorized an additional issuance of 500 billion yuan of bonds, bringing cumulative issuance to 10 trillion in the first 11 months – an all-time high.
Investors, however, seem little concerned about the risk of contagion: the promoter shares index increased by 4% over the year, much less than the 16.5% of the CSI 300. Banking shares, exposed to the risk of default, also remained stable.
Beijing, in turn, is resisting more aggressive interventions. Priorities for the next five-year plan include industrial modernization, technological self-sufficiency and increased domestic demand. As for the real estate market, the recommendation is simply “to optimize the supply of affordable housing”.
S&P predicts a further 6% to 7% decline in real estate sales in 2025, due to low buyer confidence. The decline is expected to continue to put pressure on prices.
Serena Zhou, an economist at Mizuho, expects more announcements after this month’s Central Economic Work Conference. “If that doesn’t happen, it’s probably going to get worse before it gets better next year,” he said.
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