China Vanke’s year of reckoning has finally arrived

Shuli Ren, Bloomberg

In China, no private enterprise is too big to fail, especially when market narratives change and a new industry dynamic takes shape. China Vanke Co., the country’s largest privately held developer, might just be in that uneasy spot even as Beijing vows to stabilize housing prices in 2025.

Vanke is facing a liquidity crunch. It’s scheduled to repay 33 billion yuan ($4.5 billion) of onshore bonds this year, versus 9.3 billion yuan in 2024. As of last June, the company no longer had enough cash to cover short-term debt. Meanwhile, property sales remain anemic, hovering at around 20 billion yuan per month and not enough to break even at the operating cash flow level. The builder is hardly benefiting from the noticeable price rebound in China’s biggest metropolises, despite being headquartered in Shenzhen, the southern tech hub bordering Hong Kong. Tier-one cities account for only 11% of its land bank, according to Bloomberg Intelligence.

On its own, Vanke is unlikely to survive by year-end. As such, investors are debating whether there will be enough government support, and if top officials still see the company as an important barometer for homebuyers. Is it still perceived, as I argued last March, as the developer that will break China’s back?

Much has changed since — and not to Vanke’s advantage. A different pecking order is taking shape. Those buying new flats are going to state-owned builders, as concerns over unfinished homes and late deliveries linger. For instance, sales at state-owned China Overseas Land & Investment Ltd. rose 0.3% last year, while Vanke suffered from a 35% decline, according to preliminary data from China Real Estate Information Corp. Alternatively, homebuyers can dabble in the secondary housing market, taking advantage of steeper price discounts offered by individual sellers.

Vanke’s position in China’s residential real estate market has gone from essential to peripheral. For homebuyers, the developer may no longer be the gauge that reflects the health of the real estate market.

When it comes to a housing rescue, it’s clear that Beijing is relying on stimulating demand, as opposed to cutting oversupply that immediately benefits builders. Since late last year, the government has cut mortgage rates, relaxed home purchase restrictions in big cities, and lowered transaction taxes. Meanwhile, efforts to curb supply, such as local governments purchasing unsold homes and unused land from developers, is going slowly.

Politics may be at play. In smaller cities, there have been hardly any land transactions or new home sales in recent years, making it difficult for local officials to determine what their repurchase prices should be. As Beijing’s anti-corruption drive rages on, bureaucrats have little incentive to take responsibility and buy large inventories from developers.

As far as Beijing is concerned, government entities have done a lot for Vanke already. The company is in the midst of replacing maturing loans with collateralized bank borrowings, with the hope of lowering future interest payments. In the first half of 2024, it managed to obtain 63 billion yuan of secured bank credit with an average cost of only 3.66%. Anticipating Vanke’s liquidity crunch, the Shenzhen municipal government is considering waiving 9 billion yuan of local taxes for 2024, REDD Intelligence reported.

Nonetheless, Beijing has not shown unconditional love for Vanke. Financial support from its largest state-owned shareholder, Shenzhen Metro Group Co., has been below market expectations. And policymakers may be asking if a bond default from the developer will shock consumers back into their shells, now that the housing market is seeing green shoots. They may say no, arguing that recent macroeconomic measures are strong enough to withstand one company’s idiosyncratic woes. [Abridged]

Courtesy Bloomberg/Shuli Ren