By Reshma Kapadia
Four years into China's property downturn, one of the country's biggest real estate developers is facing a reckoning over its bonds. Many stock investors see that as more of the same, but Charlene Chu, a debt-focused senior analyst at Autonomous Research, sees it as a sign that China's economic problems are likely to get worse next year.
China Vanke, the embattled developer, unveiled yet another proposal overnight to move back the repayment deadline on roughly two billion yuan ($284 million) of debt. Bondholders had already rejected three earlier attempts, so the question now is whether a company with state backing that has weathered the property collapse so far will default on its debts.
Fund managers are taking the situation in stride. They see Vanke's troubles as an inevitable part of the slow and painful fallout from Beijing's efforts to shrink the real estate sector and deal with years of debt-fueled overbuilding.
Property prices are falling across cities. November marked the 29th consecutive decline, building on a spectacular slide since 2021, with predictable and unpleasant consequences for consumer confidence. Fund managers don't expect Vanke's troubles to change the picture much, reasoning that Beijing would step in with help if fears emerged that defaults might spread.
Chu is more worried. She says Vanke's troubles signal the depth of China's challenges and fuel her expectation that the world's second- largest economy is in for a tougher 2026. Barron's spoke with Chu on Tuesday to see what she is monitoring in terms of fallout and what investors may be overlooking.
The Bond Market
A first issue is that a default could cause investors to reassess the implicit government guarantee on borrowings by state-owned enterprises that allows these companies to borrow at lower rates, Chu says. About half of Chinese corporate bonds are issued by state-owned companies, so Chu is keeping tabs on whether a default sparks a selloff, pushing up yields on that debt.
Consumer Confidence
The effects on the economy would be equally significant. A default would also feed concern that developers -- even the biggest, with the most state support -- can't follow through and deliver the apartments that families and investors have paid for. That would make people who are already concerned about falling prices even more reluctant to buy.
Housing starts are already down 73% and property investment for the first 11 months of the year is down 16%, more than last year. And the few Chinese willing to buy homes are purchasing existing properties, Chu says.
Over the longer term, that could help address China's real estate glut, but in the near term, it does little to stabilize consumer confidence. Data in November painted a bleak picture: Retail sales grew 1.3% from a year earlier, the slowest growth since 2022.
While China's stock market is up 28% this year, investors have largely ignored the "old economy" that is reflected in the grim data. Instead, they have focused on China's continued investment in the "new economy" of artificial intelligence, robotics, semiconductors, and biotech.
But even with all the investment, the new economy accounted for only 18% of gross domestic product in 2024, compared with almost 15% in 2015. The old economy is vastly larger, at 82%.
"There's a logic in the market that [everyone] knows the old economy problems but as long as consumption holds up and as long as we have these bright spots of high-tech, China will muddle through," Chu says. "But if there's weak consumption growth, it's difficult for that narrative to hold together."
Capital Spending
A related source of concern is sluggish capital spending by corporate China. Investment has been a driver of China's GDP, accounting for 40%. But it has been slowing. For example, investment in fixed assets shrunk 2.6% over the January to November period versus a year earlier, the sharpest slump since 2020. If companies pull back on spending, Chu cautions, that could put added pressure on banks. Loan growth has slowed because households aren't buying property, and local governments are under pressure not to add to their debt loads. A decline in capital spending threatens borrowing by corporations, the major remaining source of loan growth.
It is particularly significant because recent rate cuts that have left banks' net interest margins near 1% have made rising loan volumes that much more important to net income. If China gets stuck in a deep, persistent capex recession, that could force banks and others to scale back their own debts rather than invest . A slump in investment could mean less hiring, prompting consumers to double down on savings. Demand would take an additional hit, pushing China toward a Japanese-style deflationary rut, Chu says.
What the Government Could Do
Partly in response to all this, officials have started talking more about tackling domestic demand and bolstering consumption, but Chu isn't convinced that significant action will follow. She noted that declines in property prices are worse this year, even though officials pledged to halt the slide late last year. "The reason [Beijing] isn't freaking out is that they had a really strong first-half that is enabling them to absorb a pretty weak second half," says Chu.
While the economy may be poised for a weaker start to 2026, a significant effort to bring faster growth may not be in the cards, she says. "Some of these problems are really big and going to require significant resources to fix. Beijing has no interest in allocating a significant amount nor do they have the resources," Chu said.
China's broad fiscal deficit is 9% of GDP, including borrowing by local governments, Chu says. That is far greater than levels that have caused consternation regarding U.S. and European spending, and a reason Beijing may not make a major move to revive domestic demand.
Policymakers are more likely to tinker around the edges until things get far uglier.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 17, 2025 15:36 ET (20:36 GMT)
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