Vanke's countdown to collapse! Dollar bonds fall to 44 cents, China's real estate crisis erupts again.

Bloomberg reported on November 26 that China's real estate market is preparing for a potential more severe crisis from China Vanke Co., Ltd. Vanke was once the largest developer in China and has now become a barometer for measuring the country's difficult efforts to contain the real estate dilemma. Its dollar bonds maturing in 2027 traded this week at a distressed price below 44 cents, the lowest level since January of this year.

Vanke's US dollar bonds have collapsed to a distressed price of 44 cents

(Source: Bloomberg)

This week, Vanke has significantly fallen in the credit market. Its dollar bonds maturing in 2027 recorded a historic drop of 12 cents on November 25, and continued to decline on November 26, with the latest transaction price falling below 44 cents, reaching the “distress price” and marking the lowest level since January of this year. Vanke's domestic bonds also fell, indicating that investor confidence in this once-leading Chinese real estate company is collapsing completely.

Distressed price usually refers to bond prices falling below 50 cents of par value, a level that indicates the market perceives a high risk of default. The price of 44 cents shows that investors expect Vanke may not only fully default but also undergo a massive debt restructuring, resulting in significant losses for creditors. The bonds maturing in 2027 still have about two years until maturity, but the price has already fallen to such a low level, reflecting the market's extreme pessimism regarding Vanke's short-term liquidity and mid-term debt repayment ability.

In the past month, the bond has fallen by more than 40%, a drop that is extremely rare in the investment-grade bond market, typically only occurring when a company faces bankruptcy or significant default events. Concerns about Vanke's collapse are shifting from a possibility to a high-probability event, which will have a cascading effect on the entire Chinese real estate market.

Vanke Bond Collapse Timeline

Early November: The price of US dollar bonds in 2027 is about 70 cents, and the market still holds hope.

Mid-November: Former Chairman Xin Jie resigned, Shenzhen Metro released signals of tightening loans, and bonds began to accelerate their fall.

November 25: A single-day fall of 12 cents, setting a record decline.

November 26: Continued to fall below 44 cents, reaching distress levels.

Why can't the 4.2 billion USD rescue fund save Vanke?

Vanke, headquartered in the southern city of Shenzhen, has long been seen as an important benchmark for observing the government's stance on China's real estate industry. Its largest shareholder, the state-owned Shenzhen Metro Group Co., Ltd., has provided this cash-strapped developer with approximately 30 billion RMB (about 4.2 billion USD) in shareholder loans—this crucial source of funding has helped Vanke repay bonds and avoid default so far this year.

However, this “lifeline” has been questioned since last month. At that time, former chairman Xin Jie resigned, and the state-owned major shareholder also released signals about tightening loan conditions for Vanke. Xin Jie’s resignation itself is a significant warning sign; as a long-term leader, his departure may indicate a loss of confidence in the company's prospects or a major disagreement with the major shareholder on rescue strategies.

The tightening of loan conditions by Shenzhen Metro has directly impacted market confidence. As a major shareholder with state-owned background, Shenzhen Metro has been continuously providing liquidity support to Vanke for more than a year, and the market generally believes this represents an implicit guarantee from the local government. However, when this most important supporter begins to hesitate, it signifies that even state-owned enterprises are starting to question the rationale of continuing the rescue. This shift in attitude has shattered the expectation of “government backing”, leading investors to naturally choose to vote with their feet.

According to Bloomberg's calculations, approximately 13.4 billion yuan of domestic bonds will mature or enter the put option period before the end of June next year. This scale is far higher than the unused loan quota that Vanke can obtain from Shenzhen Metro Group according to the latest agreement. Simple arithmetic can illustrate the problem: even if Shenzhen Metro is willing to continue providing support, the funds it can provide cannot cover the upcoming debt scale. This liquidity gap is the fundamental reason for the rising risk of Vanke's default.

December Double Debt Maturity Becomes Vanke's Life and Death Crisis

Vanke will face an imminent test next month as two domestic bonds are about to mature: one with a scale of 2 billion yuan and another with 3.7 billion yuan, maturing on December 15 and December 28 respectively. These two debts total 5.7 billion yuan, and although they are not the largest in Vanke's massive debt structure, their symbolic significance far exceeds the amount itself.

The period from mid to late December is a critical time before the Chinese Lunar New Year, and market liquidity is usually tight. If Vanke is unable to make a smooth payment during this time, it may trigger a chain reaction that affects the confidence in other debts that are about to mature. More importantly, the handling of these two debts will set a precedent for the 13.4 billion yuan debt due before June next year.

If the company proposes an extension for these two bonds, it may encounter increasing challenges in garnering sufficient support from bondholders. According to the bond offering memorandum, any extension plan requires at least 90% of the holders of each bond to vote in favor for it to pass. This threshold is extremely difficult to achieve in the current market environment, as bond prices have already fallen to distressed levels, and many holders may prefer direct litigation or enforcement rather than accepting an extension plan.

A 90% voting threshold is the standard setting for the Chinese bond market, aimed at protecting the rights of creditors. However, in times of crisis, this high threshold may instead become an obstacle to restructuring. If Vanke fails to obtain sufficient support for an extension, it will be forced to repay in cash or declare a technical default. Given the current liquidity situation, the former is almost impossible, while the latter will trigger cross-default clauses, leading to the acceleration of other debts.

Insufficient strength of China's real estate rescue policy raises doubts

Bloomberg pointed out that Vanke's predicament highlights a broader challenge faced by Chinese policymakers: on one hand, they need to work to revive the housing market, which has been hit hard by record developer defaults, while on the other hand, they must avoid getting trapped in the quagmire of bailing out individual real estate companies. Insiders indicated last week that China is considering introducing new measures to stabilize the housing market, such as subsidizing the interest costs of newly issued mortgage loans. For investors, these measures would come at a crucial time: despite a series of easing policies implemented over the past year, new home sales continue to decline.

The problems in the Chinese real estate market have evolved from individual corporate crises into systemic risks. Over the past three years, several large developers such as Evergrande and Country Garden have fallen into debt crises one after another, causing the entire industry's credit system to nearly collapse. Although the government has introduced a series of measures such as lowering down payment ratios, reducing mortgage interest rates, and relaxing purchasing restrictions, the weakness on the demand side continues. The continued decline in new home sales shows that the Chinese real estate market is facing not only liquidity issues but also a deeper imbalance between supply and demand.

While striving to reduce the impact of debt issues, authorities are also conducting stricter reviews of borrowers. According to reports from Chinese media, financial regulatory agencies are intensifying their scrutiny of violations in the bond market, focusing on the lack of information disclosure related to debt defaults, especially in the real estate sector. Although this regulatory tightening helps to enhance market transparency, it may also accelerate the exposure of problematic companies in the current crisis environment.

If Vanke's collapse really happens, its impact will far exceed the company itself. As once the largest developer in China and a state-owned enterprise, Vanke's downfall will completely break the market expectation of “state-owned enterprises providing a safety net.” This collapse of psychological defense may trigger a chain reaction among other state-owned real estate companies, as investors will reassess all enterprises considered to be “government-supported.” China's real estate crisis may thus enter a new and more severe phase.