China gives rare show of support to stressed developer Vanke

SHANGHAI – After letting two of the world’s biggest property developers plunge into default, the Chinese authorities are attempting to save a third-industry giant from following suit.

China Vanke, the country’s second-largest builder by contracted sales, received an unusually strong show of support from officials in its hometown of Shenzhen on Monday – following a dollar-bond plunge that made Vanke Asia’s worst investment-grade performer last month. Its notes climbed as much as four US cents on Tuesday after some surged a record 12 US cents a day earlier. Still, several of them remain at distressed levels of below 80 US cents.

In an online call with financial firms on Monday, the city’s State-owned Assets Supervision and Management Commission said it has confidence in Vanke and enough cash and tools to support the builder if needed, according to people who listened into the call. State-owned Shenzhen Metro Group, Vanke’s largest shareholder, said it has no plans to cut its stake and is actively preparing to purchase Vanke’s publicly-traded bonds at the right time.

“The show of support from local authorities for Vanke is stronger than anticipated,” said Mr Leonard Law, senior credit analyst with Lucror Analytics. While the move “certainly bodes well” for developers partially or fully owned by the state, it’s “unlikely to benefit those that have already defaulted” or to be a turning point for the wider industry. 

Founded by Mr Wang Shi in 1984 when China’s economy was in the early stages of opening up, Vanke was the country’s largest property developer for years before more aggressive peers Country Garden Holdings and China Evergrande Group topped it. Apart from its quality projects tailored to China’s emerging and vast middle class, Vanke also became famous for a unique corporate style in the industry – an engaged board, diffuse shareholders and an entrepreneurial culture.

After Mr Wang cautioned in 2013 that China’s real estate sector faced the risk of a “bubble”, Vanke made early efforts to diversify from property development. It operates rental apartments and has built a logistics portfolio and growing services business that has included an investment in and partnership with US-based office-property broker Cushman & Wakefield. 

The authorities’ comments on Monday about Vanke – one of China’s few remaining investment-grade builders – contrast with more muted official efforts to restore market confidence in Evergrande and Country Garden. Both of them defaulted on dollar bonds and are facing uncertain futures that include drastic restructurings or possibly liquidation. 

As China’s property crisis heads into its fourth year, the authorities at both the national and local level have expressed greater urgency to stem the fallout from a sector that by some estimates had accounted for about a quarter of economic output.

Vanke is no stranger to having official support. State-owned conglomerate China Resources (Holdings) was its largest stakeholder for almost two decades, until a year-long takeover drama emerged in 2016. Evergrande briefly owned more than one-quarter of Vanke before Mr Wang brought in Shenzhen Metro, owned by the city’s state-owned assets supervisor. He then stepped down as Vanke’s chairman.

Recent sector worries, fuelled in part by Country Garden’s woes, engulfed Vanke’s notes last month. They lost 35 per cent, the worst in a Bloomberg index of Asia investment-grade dollar bonds. 

One note fell as low as 36 US cents last week; it’s since rebounded to 57 US cents. That’s the low end of Vanke dollar bonds’ indicated range, which goes as high as 96 US cents for a security due in March. The price disparity highlights how near-term investor concerns have eased substantially, even as longer-term uncertainty about repayment prospects persists.

The builder said in a statement after Monday’s call that it “will definitely repay offshore and onshore debt on time,” and that the “market doesn’t need to worry about that at all.”

Whether this marks a turning point for the broader property industry is unclear. Vanke’s government-backing via Shenzhen distinguishes it from other privately run developers that have struggled to gain access to financing despite recent government efforts to provide more funding. Dollar bonds of investment-grade peer Longfor Group Holdings trade at low levels below 50 US cents.

Still, putting a line under the Vanke sell-off would help the authorities reduce the risk of another major property giant collapsing while they grapple with the fallout at Country Garden, Evergrande and a slew of other smaller distressed developers.

While regulators are unwilling to see defaults expand to other property firms, be they privately-run or state-backed, the reality is there has been no significant improvement in property sales or financing channels, said Mr Wang Chen. He is co-founder of The Belt&Road Origin (Beijing) Tech, a credit risk analysis provider.

“If sales cannot improve,” he said, “it is meaningless to talk about anything else.” BLOOMBERG