Chinese authorities are making efforts to prevent a third major property developer from defaulting after two prominent real estate giants faced financial turmoil. China Vanke Co., the country’s second-largest builder based on contracted sales, received a remarkable show of support from officials in its home city of Shenzhen. This backing comes after a plunge in its dollar-bond performance, which made Vanke Asia’s worst investment-grade performer last month. Despite some bond price recoveries, several of these bonds are still trading at distressed levels below 80 cents.
Officials from Shenzhen’s State-owned Assets Supervision and Management Commission expressed their confidence in Vanke during an online call with financial firms. They assured that they have the necessary resources and tools to support the builder if required. Moreover, Shenzhen Metro Group Co., which is Vanke’s largest shareholder, declared that it has no intention of reducing its stake and is actively preparing to purchase Vanke’s publicly-traded bonds at the right opportunity.
This show of support, stronger than expected, is a positive sign for developers with partial or full state ownership, but it may not significantly impact those that have already defaulted or the broader property industry, according to Leonard Law, a senior credit analyst with Lucror Analytics Pte. While Vanke is one of the few remaining investment-grade builders in China, Evergrande and Country Garden, two of the sector’s top players, have faced defaults on dollar bonds and uncertain futures.
Vanke, known for its unique corporate style and efforts to diversify from property development, has had a history of official support. However, the recent turmoil in the property market, influenced partly by Country Garden’s troubles, led to a sharp drop in Vanke’s notes. Nevertheless, Vanke’s statement following the call reassured that it would meet its debt obligations both offshore and onshore.
The Chinese authorities aim to minimize the risk of another major property developer collapsing while dealing with the challenges posed by Country Garden, Evergrande, and other smaller distressed developers. The continued property crisis, which is entering its fourth year, calls for more urgent measures, given that the real estate sector has historically contributed to a significant portion of China’s economic output.
While authorities are hesitant to allow defaults to spread across the property sector, the fundamental issues of property sales and financing channels need to improve for a meaningful recovery in the market, says Wang Chen, co-founder of The Belt&Road Origin (Beijing) Tech Co., a credit risk analysis provider.
