Even a state-linked giant can’t escape China’s real-estate crisis

A struggling property developer in southern China has become the litmus test for investors trying to answer that question.

China Vanke is one of the biggest survivors of the property downturn, which has pushed real-estate companies to default on $140 billion of dollar bonds, according to S&P Global Ratings. It has also left millions of homes unfinished and fueled widespread alarm about a slump in the world’s second-largest economy.

Vanke, which had around $97 billion in annual sales at its peak, has managed so far to avoid a default, but it is under pressure. One of its dollar bonds, which matures in 2027, was bid at around 48 cents on the dollar on Thursday, according to Tradeweb. Its Hong Kong-listed shares have lost two-thirds of their value over the past year.

That is bad news for those hoping the worst is over for China’s real-estate market.

“Vanke seems to be the new barometer for how low the China property sector can go,” said Nicholas Chen, an analyst at debt-research firm CreditSights.

The reason is simple: Although Vanke isn’t majority-owned by the government, around one-third of its shares are held by Shenzhen Metro, a state-owned rail operator. That means it is likely to be one of the first in line for government assistance if Beijing decides it needs to draw a line under the property crash. And some economists think that, without the government’s help, China’s property slump could last for years.

Vanke met with investors on April 14 and said that while the company is “facing short-term liquidity pressures,” it is confident the problems could be resolved.

Last year, investors were more focused on Country Garden, China’s largest surviving privately owned developer, with many assuming it was too big to fail. But when it defaulted on a dollar bond, many investors concluded it was no longer safe to make assumptions about how much pain Beijing was willing to accept in the property sector.

On Thursday, Country Garden missed the deadline for two domestic bond payments but said a state guarantor would step in to help.

Credit-rating company S&P Global Ratings slashed Vanke’s rating by three notches on April 10, an unusually aggressive downgrade. In late April, Moody’s Ratings also downgraded the company. Vanke criticized Moody’s for the rating cut, saying it could “mislead the market and exacerbate unnecessary panic.”

So far, government officials are wishing Vanke well—but not taking much action.

Shenzhen officials and representatives of Shenzhen Metro voiced their “substantive support” for the company late last year. Vanke said in early April that the government of Shenzhen, one of China’s wealthiest cities, is coordinating with state-owned companies to help its cash flow.

The company also has said it secured new financing of around $2.3 billion for 42 of its projects, part of a “white-list” program launched by Beijing that encourages banks to lend to support approved projects.

All of that hasn’t been enough to convince investors that the worst is over. Vanke’s stock is down 35% so far this year, though it has recovered somewhat from mid-April, when it was down 49%.

The next step for the company is repaying a $600 million bond that comes due in June. That bond is trading at around 97 cents on the dollar, showing investors aren’t concerned about a near-term default. The company has another $5 billion of dollar-bond debt to repay before the end of 2029.

Founded in 1984 in Shenzhen, Vanke became one of China’s biggest real-estate companies, known for its high-end apartments and its celebrity founder Wang Shi, an avid mountaineer. Vanke made the Fortune 500 list in 2016 and expanded into other businesses, including ski resorts and projects abroad in places such as San Francisco, London and Singapore.

But with China’s property crisis now stretching into its third year, Vanke’s sales have continued to decline and concerns around its liquidity have grown.

Though many analysts believe Vanke can avoid default in the near term, it is hard to rule out the chance of a longer-term liquidity squeeze, according to Owen Gallimore, a credit analyst at Deutsche Bank.

Vanke executives have said they intend to reduce the company’s interest-bearing debt by around $14 billion—from a total of around $44 billion—by the end of next year. They are now planning a series of asset disposals to help it get there.

On Wednesday, a week after making the pledge, Vanke listed a commercial land parcel located in Shenzhen Bay, an area between Shenzhen and Hong Kong, for roughly $310 million, according to a notice on the Shenzhen Public Resources Trading Center. Vanke first bought the parcel in December 2017 for $434 million, according to state media.

Vanke’s new home sales totaled $3.4 billion in March, down 42% from the same month last year. When S&P downgraded the company’s credit rating from BBB+ to BB+, it said Vanke’s sales were likely to drop over the next two years and its leverage would rise.

Rebecca Feng contributed to this article.

Write to Cao Li at li.cao@wsj.com