China has asked 12 banks to provide financing to the beleaguered state-owned real estate firm, Vanke Group, just days after the housing and urban-rural development ministry vowed to let insolvent property developers go bankrupt.
The Chinese government’s support bucks its recent trend of letting indebted developers take their own downward course, which has compounded a spiraling crisis in the sector, once a major economic growth driver.
Privately-held Evergrande Group and Country Garden Holdings were left to their own devices as their debts soared, leaving their creditors and homebuyers high and dry in trying to recover investments. The Hong Kong High Court issued a liquidation order for Evergrande in January. A similar fate looms for Country Garden which received a liquidation petition from one of its creditors in Hong Kong. Both companies are listed in Hong Kong.
In contrast, rescue efforts for Vanke, part-owned by the Shenzhen government, are being coordinated by the State Council, China’s cabinet amid Chinese President Xi Jinping’s policy of advancing state enterprises and a retreat of the private sector.
The State Council has requested financial institutions to make swift progress and called on creditors to consider private debt maturity extension, according to a Reuters report on Monday, citing unnamed sources.
Separately, the state-owned Cailian Press reported that the 12 institutions are expected to raise as much as 80 billion yuan (US$11.1 billion) for Vanke. But the report cited sources saying that the attitude maintained by each bank was conservative.
Shaky ground
Nonetheless, Vanke is likely to stay on shaky ground among investors after rating agency Moody’s lowered its credit rating to “junk.”
“The rating actions reflect Moody’s expectation that China Vanke’s credit metrics, financial flexibility and liquidity buffer will weaken over the next 12-18 months because of its declining contracted sales and the rising uncertainties over its access to funding amid the prolonged property market downturn in China,” said Kaven Tsang, a Moody’s senior vice president in a statement this week.
The rating agency said it has placed all the ratings on review for downgrade, as it saw the company’s ability to recover sales, improve funding access, and maintain an adequate liquidity buffer to be worrying.
The government’s bid to save Vanke has aroused discussion online. Some netizens questioned the discrepancy between saving Vanke and abandoning Evergrande, while others worried that saving Vanke would reduce national resources at a time when the economy is growing at its slowest pace since 1990. There are also many posts rationalizing the government’s efforts to support Vanke.
The blogger “Wuxinxinshuofang” believes that propping up Vanke is to ensure that the “hunt” for foreign capital won’t be disrupted by a Vanke-triggered real estate crisis.
“The collapse of Vanke will bring about the debt crisis and liquidity crisis of all real estate companies. Efforts so far to prop up the market have only begun to show effects. Vanke can fail next year, but not this,” the blogger wrote.
Zombie developers to zombie banks?
Frank Xie, a professor at the University of South Carolina Aiken Business School, attributed Beijing’s support to Vanke’s state-owned background.
“The Chinese Communist Party cannot let Vanke fail, because the CCP [Communist Party of China] treats its own people and outsiders differently,” Xie pointed out.
The failure of any state-owned assets would be “tantamount to the bankruptcy of national capital, questioning the Communist Party’s ability to run enterprises.”
Xie said that Chinese banks have accumulated a large backlog of mortgage loans involving real estate, and even assisting Vanke will only delay the explosion.
“As for other private companies facing the same problems as Evergrande, the CCP cannot save them, nor does it want to save them,” he added.
Beijing has also established a “white list” of approved property projects by distressed developers that banks and financial institutions should support in a stop-gap measure. Those deemed beyond rescue should go bankrupt.
Chen Songxing, director of the New Economic Policy Research Center at National Donghua University in Taiwan, said that the Chinese official statement of “bankruptcy should be bankrupt” is merely to show the outside world Beijing is unable to save real estate developers.
Chen said the amount of rescue for Vanke this time was insufficient to solve the problem, given how intertwined the real estate and banking industries are. He warned this was only a delay tactic which could lead to a bigger crisis.
“China’s current financial situation actually does not have the ability to save the real estate industry, as this is just transferring the debts of real estate developers and local governments to banks.
“If you continue to save these zombie real estate developers this year, it is very likely that banks will also become zombies in the future. It is very detrimental to China’s economic development,” Chen said.
Edited by Taejun Kang and Mike Firn.