A RARE BAILOUT IN CHINA SENDS MIXED SIGNALS / GEOPOLITICAL FUTURES

A Rare Bailout in China Sends Mixed Signals

Beijing hopes the illusion of improvement in the real estate sector will bring back foreign investors.

By: Victoria Herczegh

After years of trying to stabilize its troubled real estate sector, Beijing has unexpectedly intervened to support Vanke, the country’s second-largest property developer. 

This follows a downgrade in Vanke's credit rating to Ba1, considered junk status, by Moody’s. 

Chinese state media reported that 12 major banks, including the top six state-owned lenders, are arranging a syndicated loan of 80 billion yuan ($11 billion) for Vanke to help it meet upcoming repayment deadlines. 

The surprise intervention suggests the Chinese government may now offer stronger financial aid to prevent company collapses. 

Yet, with this initial bailout for Vanke, Beijing risks sending the wrong signal about its ability and willingness to offer similar support to other failing developers.

China’s strategy to stabilize the real estate sector has looked wobbly for some time. 

Since mid-2021, major developers have been defaulting on or delaying debt payments due to a liquidity crisis exacerbated by a regulatory crackdown on high leverage. 

The government’s previous measures to control housing prices, such as limiting purchases and setting price caps, have largely failed and were soon discarded. 

In 2023, property sales fell by 6.5 percent from the previous year, while property investment dropped by 9.6 percent, the second consecutive year of decline. 

Real estate behemoth China Evergrande Group collapsed in January and Country Garden Holdings faces liquidation in Hong Kong, despite earlier beliefs in their stability. 

Similarly, Vanke was considered financially robust until it revealed its financial troubles. 

What is unclear is why the Chinese leadership is now willing to rescue such struggling developers. 

After all, recent statements from the Communist Party’s annual “two sessions” meeting clarified that struggling companies should face bankruptcy and restructuring without expecting significant government help.

Vanke stands out from companies like Evergrande and Country Garden because it is partly state-owned; around 30 percent belongs to Shenzhen Metro, overseen by Shenzhen's state asset regulator. 

The State-owned Assets Supervision and Administration Commission of the State Council, or SASAC, manages such enterprises. 

Beijing's support for Vanke likely stems from its partial state ownership. 

Specifically, the collapse of a state-backed entity would challenge the Communist Party's credibility. 

A rescue, on the other hand, aligns with President Xi Jinping's emphasis on state control, especially in critical sectors like real estate. 

Vanke's situation is also significant because of its location in Shenzhen, a key tech hub. 

With the government keen to bolster high-tech industries following a lengthy crackdown, maintaining stability in Shenzhen is crucial.

A more ominous possible explanation for China’s U-turn is that leaders have become alarmed by the continued reluctance of foreign investors to return to business as usual with Beijing. 

Despite China's efforts to attract foreign investment through expos, sending business leaders abroad and repeatedly promising better conditions for foreign firms, direct investment liabilities dropped in the third quarter of 2023 for the first time since 1998. 

Companies are increasingly leaving China for Southeast Asia, India or Western countries, signaling that the situation may not improve soon. 

In addition to the country’s persistent economic challenges, a major deterrent for foreign companies is China's stricter regulatory measures under Xi, including amendments to the state secrets law and enforcement of a broader definition of espionage. 

There are some bright spots, like the fact that German foreign direct investment in China rose by 4.3 percent to a record 11.9 billion euros ($12.9 billion) last year. 

But a few megafirms concentrated in a handful of sectors will not provide enough outside investment to drive significant growth.

The fact remains that China’s leaders are not ready or willing to alter their market practices. 

Instead, they aim to attract foreign capital by creating the illusion of improvement, particularly in troubled areas like real estate. 

The collapse of partially state-owned firms such as Vanke would undermine this effort. 

However, bailing out the company risks creating the perception that Chinese banks can and will rescue other struggling developers, when in fact this bailout is likely a one-off. 

China’s banks, burdened with extensive mortgage loans, cannot bear further developer debts without risking their own stability.

Beijing likely hopes that recent economic bright spots, driven by manufacturing and fixed-asset investment, can fund the Vanke bailout and protect its reputation, delaying a severe debt crisis. 

But delaying is not solving, particularly if the tactics employed lead to moral hazard. 

One way or another, China’s over-indebted property market will continue to unwind. 

There is little that Chinese leadership can do but focus on the areas of the economy that are showing improvement and use the gains from these sectors to mitigate the downturn.