China seems to find solutions to the world’s thorniest economic problems. Its exports juggernaut is marching on despite US President Donald Trump’s tariffs. The domestic artificial intelligence industry is booming without Nvidia Corp’s high-end chips.
However, once in a while, a dormant zombie comes back to haunt it, serving as a reminder to global investors that the government has not dealt with its most pressing economic issues even as the stock market rallies.
Shenzhen-based Vanke Co, one of China’s biggest developers, is this zombie. Shenzhen Metro Group Co, a state-owned enterprise that is its largest shareholder with a 27 percent stake, seems to have had a change of heart on how much financial support it is willing to give.
The urban rail operator is asking Vanke to retroactively pledge collateral for existing unsecured loans worth 20.4 billion yuan (US$2.9 billion). It is also setting a cap on the loan facilities it would provide.
This came as a shock. Throughout the year, Shenzhen Metro has been seen as the entity the city government will use to rescue Vanke. As of Thursday last week, about 70 percent of its loans were unsecured, in what investors perceive as the most concrete sign of an informal bailout.
The burning question now is who will be responsible for Vanke’s bills. The company needs to repay 5.7 billion yuan of public bonds next month, and another 7.7 billion yuan in the first half of next year. As of June, the developer’s cash pile was only able to cover 44 percent of its short-term debt, the lowest since data became available in 1992.
It is understandable why Shenzhen Metro is balking. Vanke is growing into an ever-expanding black hole.
Contracted sales are at risk of falling by 40 percent this year, creating a cash shortfall north of 100 billion yuan, Bloomberg Intelligence said. Without the Shenzhen government’s support, Vanke might not be able to survive, and its bondholders could be staring at debt restructuring — or even worse, default.
Five years into a property downturn, Beijing has been using partial, unofficial bailouts to diffuse potential financial crisis caused by developer blowups. Shenzhen Metro, for instance, is widely seen as the lender of last resort to Vanke, even though its stake could classify the enterprise as a passive investor.
Until recently, this half-baked effort has worked reasonably well. The pace of corporate delinquencies has slowed. Meanwhile, the biggest developers that defaulted have largely hobbled toward the end of their restructuring, as creditors accept more onerous terms.
Beijing, in turn, is more than happy to declare mission accomplished. In recent policy meetings, the property recovery was put on the back burner, while technology and innovation took the center stage. Unlike last year, the government no longer pledges to “halt the real-estate market decline.”
This big headache will not go away on its own. New-home sales extended a slump last month, falling 42 percent from a year earlier, data compiled by Bloomberg showed. In other words, Vanke is the norm, not an exception.
Meanwhile, the latest kerfuffle is reigniting a debate over how Beijing plans to diffuse the developer time bomb. Some believe there is no too-big-to-fail in China, and that the likes of Vanke would eventually ask to extend their borrowings or spiral into a default. Others have more political stability in mind. In their view, the government does not want to rock the boat any further and would find another state-owned enterprise to come in as a liquidity provider.
Either way, Shenzhen’s reluctance to give unconditional love to Vanke shows that China’s real-estate woes are deepening. Beijing cannot turn the page just yet.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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