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Chinese property developers: Bailouts and connections

In China, especially in property, it’s always been a case of who you know and whether there is powerful government or Communist Party influence.

China Evergrande and Country Garden were China’s two biggest and most embattled privately-controlled property developers. Evergrande collapsed after defaulting on its debts, but the Chinese government won’t enforce a Hong Kong court order winding up Evergrande.

There’s a similar order sought from the same Hong Kong Court for Country Garden.

Between these two broken groups, they have over $US540 billion in debt and no hope of paying interest, let alone principal. The Chinese government looks like allowing them to escape foreign creditors, but at a price of going broke slowly inside the Communist Party overseen economy.

Not so for state-controlled China Vanke, a developer with smaller debt – around $US46 billion – but with better connections and state-controlled owners who are rallying together to bail it out, though with big losses.

Vanke is part-owned (and effectively controlled) by the local government of Shenzhen. On Monday, the state-controlled Shenzhen Metro (which owns 22.7% of Vanke) and a Shenzhen company called Baishuoyinghai were confirmed as buying a key property from the stricken developer at a massive loss.

Last week, Vanke surprised by getting a 20 billion yuan, $US2.8 billion loan facility that was led by the government-controlled Industrial and Commercial Bank of China. That was three days after it borrowed $US166 million from Bank of China to help develop a number of properties. With other loans, the developer has so far been able to borrow $US4 billion from state-backed banks and other companies.

This money seems to be coming from a $US11 billion in loans organized in March by the government for Vanke from 11 state-controlled banks and finance companies.

Before these loans were revealed, Vanke had reported total debt of $US45.6 billion – it could now be around $US50 billion.

The high debt and borrowings saw Fitch downgrade China Vanke’s rating to ‘BB-‘ from ‘BB+’, citing weaker-than-expected sales and a negative outlook. That was after Moody’s cut Vanke to a ‘junk’ rating in March.

Monday saw the most telling bailout deal so far when Vanke sold a Shenzhen block of land via auction for 2.24 billion yuan ($US309.18 million), more than 27% below the price it paid for the same 19,000 square-meter block nearly seven years ago.

Its largest shareholder, state-owned Shenzhen Metro, and a Shenzhen-based company Baishuoyinghai jointly bought the plot at Vanke’s reserve price, according to an online filing uploaded to a trading center in Shenzhen on Monday, according to Western news reports.

Theirs was the only bid for the asset, the same filing, made after the mainland stock market was closed, showed.

Vanke bought the land in late 2017 for 3.1 billion yuan, according to previous reports.

In a statement to Reuters, Vanke said the deal reflects that its largest shareholder is “supporting the company with market-based, legitimate measures, and real money”. It said the deal will help the firm free up capital from non-core business assets.

The bailouts have seen Vanke shares jump more than 40% so far in May, trimming the year’s losses to date to around 12%. Great, mate!