Vanke adds to China property gloom

Published 24 January 2025, 23:07

By Pan Yue

Chinese property developers are again under mounting pressure despite some early signs of sector recovery late last year.

After a couple of developers were served winding-up petitions by creditors this month, China Vanke became the latest to come under fire on January 16 when Chinese media reported that CEO Zhu Jiusheng had been detained and that the city of Shenzhen, which indirectly controls the company, had set up a taskforce to bail it out. The news article was later deleted, and other local media reported that Zhu had answered a call from a reporter and made a post on social media app WeChat the following day.

Vanke did not respond to a request for comment and has not made any public announcement.

The company, one of the few privately owned developers that has not defaulted following a liquidity crunch that began in 2021, has seen dramatic swings in the prices of its US dollar bonds several times in the past two years.

An onshore investor said the market is used to shorting Vanke in response to any news as a proxy of bearishness towards the property sector.

Troubled times

This time, however, the company appears to be in serious trouble. It has a Rmb3bn (US$410m) 2.95% bond due on Monday and a US$423m 3.15% note due in May. All three international rating agencies downgraded Vanke by two notches in the past week, citing weakened cash generation and a huge maturity wall this year of Rmb36bn-equivalent. Vanke is now rated B3/B–/B–.

"Vanke's ability to repay its 2025 notes now appears to be driven by the likelihood of financial support from the government, given its weak sales and lack of progress in monetising its assets," said Leonard Law, a senior credit analyst at Lucror Analytics.

The 3.15% 2025s lost almost 10 points in two days following the CEO disappearance reports to close at a cash price of 63 on January 17. Its 3.975% 2027s and 3.50% 2029s also dropped about five points to 32 and 31, respectively.

The onshore bonds bounced back after the company made an interest payment on another onshore bond on Wednesday, but the US dollar notes were hovering at depressed levels.

“Low investor confidence in Vanke and other developers isn’t unreasonable. Things may have to get worse before authorities consider difficult but necessary steps. 2025 will likely see some restructuring deals, and that’s a positive step, but it still looks like a tumultuous year,” said Brock Silvers, CIO at asset manager Kaiyuan Capital.

Vanke is not alone in the spotlight. Defaulted borrowers Shimao Group Holdings and Sunac China Holdings have received winding-up petitions this month. Sunac in 2023 became the first major Chinese property developer in the current wave of defaults to get approval for its debt restructuring, but the company faces a maturity in September that it may not be able to meet.

Country Garden Holdings was also asked by the high court in Hong Kong to reach agreement with certain creditor groups for its restructuring by the end of February.

Government help

Developers continue to struggle to repay debt even as countrywide contracted sales rose 7% year on year in December, the third consecutive month of growth, and as new home prices stopped falling on a monthly basis for the first time since October 2023.

But market participants say it is still too soon to know if the recovery is sustainable. Fitch forecasts another 15% decline in new home sales this year to Rmb7.3trn, reflecting a 10% decrease in gross floor area and a 5% drop in average selling prices.

“It’s uncertain whether the recovery momentum will be sustainable and we still see a lot of pressure on secondary home prices. Consumer confidence is unlikely to come back if the home prices remain unstable, so now the focus is on the home prices in the higher-tier cities,” said Tyran Kam, head of China property at Fitch.

As always, any hopes revolve around more government support for the sector and individual companies. Broader economic stimulus would also benefit the property sector.

“I’m confident there will be more supportive measures, but the uncertainty is to what extent and the timing,” said Sheldon Chan, Asia fixed-income portfolio manager at T Rowe Price. “The financial stability remains very important; there is no sign of that breaking so I don’t think there’s a need for aggressive stimulus right now.”

Chan expects government support to come from better execution of policy, including local governments taking inventory off the market, as well as stimulus to boost consumer confidence.

A government bailout of Vanke would also help. The developer is indirectly government-owned through Shenzhen Metro Group and Shenzhen Investment Holdings. Lucror Analytics' Law said that unlike China Evergrande Group and Country Garden, which defaulted when the government’s priority was deleveraging, the policy has now shifted to stabilising the sector.

“Sentiment took a positive turn in the fourth quarter of last year after the government pledged to stabilise and stem the sector's decline. That’s the turning point. More are expecting the government may coordinate financing support to help Vanke avoid default,” he said.

A Vanke default would hurt market sentiment for other developers such as Longfor Group, another of the few major privately owned companies that are still servicing their debt, but the spillover would likely be limited to the property sector. High-yield industrial names, which have performed well this year, are likely to be unaffected.

Longfor's US dollar bonds, with maturities between 2027 and 2032, were trading at 63–79, according to LSEG data.

“What is important is that the sentiment remains isolated to the sector. Initially China property had a spillover effect on other pockets of China high-yield, but that contagion is much lower now,” said Chan.