Vantage | Why China cannot afford the collapse of this big developer

In the ever-volatile landscape of China’s property sector, the turmoil shows no signs of abating. The latest casualty in this ongoing saga is Van-kee, a prominent developer teetering on the brink of collapse. As the country grapples with a spiralling debt crisis in the real estate market, the fate of Van-kee hangs in the balance with significant implications for the broader economy.

Van-kee in turmoil

Van-kee, a behemoth in the real estate industry, finds itself drowning in debt, owing a staggering 34 billion yuan, equivalent to nearly $5 billion. With a looming deadline for repayment by June 2025, the company faces a precarious situation, unable to meet its financial obligations. As fears mount over a potential collapse, Beijing has intervened, extending a lifeline to Van-kee in a bid to prevent further destabilization.

The Chinese government’s intervention comes as a surprise to many observers, given its historical stance of allowing large developers to fail. Since 2020, over 50 developers in China have either defaulted or failed to meet debt payments, with little to no intervention from authorities. However, Van-kee appears to have garnered special attention, with Beijing orchestrating a rescue effort involving 12 banks providing crucial financing to prop up the ailing company.

Is Van-kee special?

The question on everyone’s mind is: why is Van-kee receiving preferential treatment? The answer lies not just in the company’s fortunes but in its significance to China’s economy at large. Dubbed “the developer that will break China’s back” by some, Van-kee’s potential collapse poses a severe threat to the country’s economic stability. As the second-largest developer in China, founded by industry stalwart Wang Shi, Van-kee holds considerable sway in the real estate market and enjoys close ties with the state.

In 2017, when Van-kee faced a hostile takeover bid, the government of Shanghai stepped in, becoming the company’s largest shareholder and safeguarding its survival. Today, Shanghai retains around a quarter of Van-kee’s shares through the state-owned firm, Shenzhen Metro Group. This close relationship underscores the intertwined fate of Van-kee and the Chinese state.

However, the bailout of Van-kee is not merely an act of benevolence towards a struggling company. It is a strategic move driven by China’s urgent need to revive its flagging economy, heavily reliant on the real estate sector. Premier Li Qiang’s recent pledge to optimise real estate policies underscores the government’s commitment to stabilising the market and resolving debt risks while promoting steady development.

“We need to optimise real estate policies, promote the stable and healthy development of the real estate market, coordinate the resolution of local debt risks and stable development,” said Prime Minister Li.

Van-kee is in a much deeper trouble

Yet, Van-kee’s woes are emblematic of deeper structural issues plaguing China’s real estate sector. A drastic drop in sales, compounded by a lack of demand for property, has left developers like Van-kee grappling with dwindling cash flows. The company’s contract liabilities, totalling a staggering 408 billion yuan, predominantly consist of deposits from homebuyers for unfinished properties, highlighting the precariousness of the situation.

In the past, China might have tolerated such challenges, leaving homebuyers and investors in the lurch. However, the current climate dictates a different approach. Minister of Housing and Urban-Rural Development, Ni Hong, emphasizes the need for forceful measures to promote existing home sales, reflecting the government’s desperation to revive the market.

“On the supply side, it is necessary to reform and improve the basic systems for the development, financing and sale of commercial property. The sale of existing house sales should be promoted in a forceful and orderly way,” said Ni.

Ultimately, China’s willingness to intervene on behalf of Van-kee underscores the gravity of the situation. The stakes are high, with the country’s economic revival hinging on the stability of its real estate sector. As the crisis deepens, China finds itself walking a tightrope, balancing the imperatives of economic stability with the spectre of systemic collapse. In this high-stakes game, the fate of Van-kee may well determine the trajectory of China’s economic future.

Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views.