Efforts in China to Avert Another Major Property Developer Collapse
Reports indicate that Chinese financial institutions are rushing to rescue a prominent property developer, facing a credit rating downgrade to 'junk' status by Moody's. The situation highlights efforts to prevent a potential financial crisis in the real estate sector.
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Chinese banks are working hard to rescue a major property developer in China after Moody's downgraded its credit rating to "junk" status.
Beijing is making efforts to rebuild trust in the struggling real estate sector in China. The focus is on preventing China Vanke from facing the same fate as Evergrande and Country Garden, both of which have defaulted on their debts and are at risk of liquidation.
According to Chinese state media reports on Tuesday, discussions are underway with 12 major banks, including the six largest state-owned lenders, to provide a syndicated loan to Vanke. The loan could amount to as much as 80 billion yuan ($11.2 billion) to help Vanke meet its upcoming repayment deadlines.
The loan provision is still uncertain, according to state media outlet Cailianshe, which cited an unnamed source close to the potential deal. Additionally, the Economic Observer reported that multiple insurance companies have dispatched teams to Vanke's headquarters for a new round of debt negotiations to prevent a default. CNN has contacted Vanke for a statement.
Vanke, established 40 years ago, was the country's second largest developer by sales last year. However, the company has been significantly impacted by the decrease in demand for apartments and the decline in home prices.
Vanke's stock saw a significant increase in both Hong Kong and Shenzhen after reports of potential new financing. In Hong Kong, shares rose by 10.3%, while in Shenzhen, they closed 5.7% higher. Despite this positive movement, the stock is still in negative territory for the year.
Moody's downgraded Vanke's rating to Ba1 on Monday, which is considered a junk rating. This means that the company will need to offer a higher yield on its bonds to offset the increased risk of payment default for bond investors.
Moody's expects China Vanke's credit metrics, financial flexibility, and liquidity buffer to weaken in the next 12 to 18 months due to lower contracted sales and uncertainties in funding amidst the property market downturn in China, according to Kaven Tsang, a senior vice president at Moody's.
S&P and Fitch, other international ratings agencies, have maintained Vanke's ratings at investment grade.
Residential buildings being built by Vanke in Nanjing
Residential buildings being built by Vanke in Nanjing
Founded in 1984 in Shenzhen, Vanke is a leading company in China's real estate industry. Its founder, Wang Shi, is often referred to as the "Godfather" of the industry and has been compared to Donald Trump by Time magazine. Vanke made history as the first real estate company to be listed on the mainland China stock market, with a highly successful IPO in 1991 on the emerging Shenzhen Stock Exchange.
In 2017, the company allowed the Shenzhen government to become its largest shareholder to prevent a hostile takeover by a Chinese activist investor. Currently, Shenzhen Metro owns 33.4% of Vanke, under the city's control, as reported by Refinitiv Eikon.
Before its financial difficulties were revealed to the public at the end of last year, the company was seen as financially stable by international rating agencies.
Property prices in Hong Kong have been in the correction territory since last year.
Property prices in Hong Kong have been in the correction territory since last year.
Zhang Wei/China News Service/Getty Images
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Moody's recent actions show that there is a growing concern about the challenging conditions in China's property market. These conditions include low demand and difficulties in obtaining financing, which are affecting not only weaker companies but also those with strong government support.
Vanke's contracted sales decreased by 10% in 2023 to 376.12 billion yuan ($52.4 billion). In January 2024, there was a further decline of 32% in sales.
Investors have been selling off Vanke's shares in recent months, leading to a drop of nearly 30% in its Hong Kong-listed stock since November. Year-to-date, the stock is down by 9%.
Beijing has been working hard to address its real estate crisis since 2021, when Evergrande, the developer with the most debt in the world, failed to pay its international debt. This crisis then spread, with many other major developers also unable to repay their creditors. This situation has shaken the confidence of homebuyers, businesses, and investors, threatening the overall economy.
Despite the efforts of Chinese authorities to stimulate the economy, the real estate sector has not yet shown signs of improvement. In 2023, property sales decreased by 6.5% compared to 2022. Additionally, property investment decreased by 9.6%, marking the second consecutive year of decline.
Last week during the National People's Congress, China's housing minister, Ni Hong, mentioned that regulators will assist real estate developers with their "reasonable" financing needs.
He also highlighted the implementation of a "whitelist" mechanism to provide liquidity to the struggling sector. Banks have already allocated development loans to over 6,000 property projects nationwide.
But he also mentioned that Beijing will not provide financial support to developers facing serious financial difficulties.
He suggested that real estate companies that are severely insolvent and unable to operate effectively should either declare bankruptcy or undergo restructuring.
Nomura analysts expressed their view on Monday, stating that they perceive the tone as negative. They mentioned that Ni has emphasized the government's focus on ensuring the completion of property projects rather than safeguarding the developers' businesses.
Editor's P/S:
The article highlights the ongoing crisis in China's real estate sector and the efforts by Chinese banks to prevent a major property developer, China Vanke, from facing the same fate as Evergrande and Country Garden. Vanke's financial difficulties are a symptom of the broader challenges facing the real estate sector in China, including low demand, difficulties in obtaining financing, and a decline in property prices.
Despite government efforts to stimulate the economy and provide liquidity to the struggling sector, the real estate market has not yet shown signs of improvement. The government's focus is now on ensuring the completion of property projects rather than safeguarding the developers' businesses. This suggests that the government is taking a more hardline approach to the crisis, and that more developers may face bankruptcy or restructuring in the future.whitelist" mechanism to provide liquidity to the struggling sector is a positive step, but the government's reluctance to provide financial support to developers in serious financial difficulty suggests a prioritization of project completion over business preservation. The article provides valuable insights into the interconnectedness of China's property market and its broader economic implications, leaving readers with a better understanding of the challenges and potential solutions surrounding this critical industry.
