China Attempts to Save Developer Vanke From Default

In China, local banks are currently trying to save another large developer which is on the verge of collapse.

China Attempts to Save Developer Vanke From Default

Last Monday, March 11, Moody’s downgraded the credit rating of construction company Vanke to the so-called junk. It is worth noting that this developer is one of the largest in China, which is why the deterioration of its financial condition will be another blow to the local real estate sector, which has been in a state of deep crisis over the past few years, affecting the entire economic system of the Asian country. Whether the banks’ efforts to rescue Vanke, which is on the verge of collapse, will be successful, so far it is extremely difficult to accurately predict and the probability of such assumptions being realized in the practice plane is far from being characterized as guaranteed.

Beijing is currently making significant efforts to restore confidence in the real estate sector, which has been in a state of deep crisis and, for this reason, is something of a no-go zone for investors. The media reports that the Chinese authorities are trying to do everything possible to ensure that the negative experience of other local large developers, such as Evergrande and Country Garden, who defaulted on their debts and were threatened with liquidation, does not repeat in the history of Vanke’s existence.

On Tuesday, March 12, reports were published on the state information platforms of the Asian country that 12 large banks, including six major financial institutions directly subordinate to the Chinese leadership, are negotiating to provide a syndicated loan of up to 80 billion yuan (11.2 billion dollars) to a construction company facing the risk of collapse. If a positive decision is reached on this issue, Vanke will receive funds to meet the upcoming repayment deadlines.

Chinese state media, at the same time, note that currently there is no unambiguous certainty about the prospects for the developer to get the mentioned loan. The relevant information was published with reference to an insider who was aware of some details of the negotiations of the largest financial institutions in the Asian country. Also, several media reported that certain insurance companies sent teams of specialists to Vanke headquarters to conduct a round of debt negotiations and try to prevent default.

The developer, who found himself in a situation that calls into question the prospects of his continued existence, was founded 40 years ago. Last year, Vanke became the second-largest construction company in China in terms of sales volume. At the same time, the developer faced significant damage amid a sharp drop in demand for apartments and a fast decline in the cost of housing.

After news of potential financing from China’s largest banks was published, the value of Vanke shares in Hong Kong and Shenzhen showed rapid growth. On Tuesday, the company’s securities listed in Hong Kong rose by 10.3%. In Shenzhen, this indicator increased by 5.7%. At the same time, the price of the developer’s shares continues to be in negative territory.

Moody’s, as above mentioned, downgraded Vanke’s rating to Ba1, which is also called junk. This means that the developer must offer a higher yield on its bonds to compensate for the greater risk of non-payment that investors in the specified bonds take on.

Kaven Tsang, a senior vice president of Moody’s, said that the agency’s rating actions reflect expectations that Vanke’s credit metrics, financial flexibility, and liquidity buffer will weaken over the next 12-18 months due to circumstances such as a decrease in contracted sales and increasing uncertainty regarding access to external funds amid a prolonged downturn in the Chinese real estate market.

Other international agencies S&P and Fitch have kept Vanke’s ratings at the investment grade.

A developer facing a realistic prospect of collapse has a kind of flagship firm status in the Chinese real estate sector. The founder of the company, Wang Shi, is called the Godfather of the mentioned sector. Vanke was the first listed property firm in mainland China, which boasted a high-profile IPO in 1991 on the still-nascent Shenzhen Stock Exchange.

In 2017, the developer allowed the Shenzhen government to become its main shareholder. This decision was made to fend off a hostile takeover attempt by a Chinese activist investor. Currently, 33.4% of the company is owned by Shenzhen Metro.

In 2023, Vanke was considered by international rating agencies as one of the few financially sustainable developers. But this perception changed dramatically at the end of last year when it became known that the company was in a crisis situation.

Moody’s decision reflects concerns that even relatively stable firms in the Chinese real estate sector are at risk of collapse. In this case, the main factor of the external negative impact is unfavorable market conditions, including weak demand and a tough financial environment. Moreover, in the current realities that have formed in the real estate sector, even government support is not a guarantee that the company will be able to cope with external challenges.

Vanke’s contracted sales in 2023 amounted to 376.12 billion yuan. This indicator decreased by 10% year-on-year. In January 2024, the mentioned sales showed a 32% drop compared to the result for the same period in 2023.

Over the past few months, investors have been trying to get rid of Vanke shares. Since November, the developer’s securities have fallen in price by almost 30%. The company’s share price has decreased by 9% this year.

The crisis in the Chinese real estate sector began in 2021. Beijing is striving to meet this challenge. In 2021, Evergrande, the developer with the largest debt in the world, defaulted on its international debt. After that, a process began that can be called the scaling of the crisis. Against the background of the corresponding trend, dozens of major developers were unable to repay creditors. The consequences of this situation are a factor of negative impact on the entire Chinese economic system. The crisis in the real estate sector has caused a drop in the confidence of home buyers, investors, and businesses.

The Chinese leadership has taken measures to improve the situation in the real estate sector. So far, these decisions of the country’s authorities have not brought significant positive results. In 2023, sales in the Chinese real estate sector showed a decrease of 6.5% year-on-year. Investments in this sector fell by 9.6% last year compared to the result for 2022. The decrease in the mentioned indicator is recorded for the second year in a row.

Last week, Ni Hong, the Asian country’s housing minister, told reporters during the National People’s Congress that regulators would support the reasonable financing needs of developers. He mentioned the whitelist mechanism, which was created to inject liquidity into the crisis-hit Chinese real estate sector. In China, more than 6,000 projects in the mentioned area have been matched by banks with development loans.

Ni Hong also said that Beijing will not save those developers who find themselves in an extremely difficult situation. In his opinion, the authorities should allow those companies that are seriously insolvent and have lost their operational capabilities to go bankrupt.

Nomura analysts said on Monday that they negatively perceive Ni Hong’s statement, which, according to them, is evidence that the Chinese government’s priority is the implementation of projects in the real estate sector, rather than protecting the business of developers.

Serhii Mikhailov

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Serhii’s track record of study and work spans six years at the Faculty of Philology and eight years in the media, during which he has developed a deep understanding of various aspects of the industry and honed his writing skills; his areas of expertise include fintech, payments, cryptocurrency, and financial services, and he is constantly keeping a close eye on the latest developments and innovations in these fields, as he believes that they will have a significant impact on the future direction of the economy as a whole.