Vanke Share Slide May Spur Liquidity Squeeze at Baoneng Fund

  • Baoneng borrows funds from banks to buy Vanke shares: JPMorgan
  • Banks have option to liquidate funds if Vanke shares tumble

China Vanke Co.’s shares have fallen below the level that JPMorgan Chase & Co. analysts said might trigger a liquidity squeeze at funds managed by its largest shareholder, Baoneng Group.

The Shenzhen-traded Vanke shares have tumbled almost 30 percent after they resumed trading July 4 following a six-month halt. The shares fell to 17.15 yuan on Tuesday, below the price that JPMorgan analysts estimated may trigger a forced liquidation of funds that Baoneng set up with borrowed cash from banks so it could build up its stakes in Vanke. Many private funds and hedge funds in China have agreements with investors spelling out mandatory liquidation levels if their holdings drop below a certain value.

Vanke, China’s largest publicly traded developer, has been embroiled in a tussle for control since last year, when Baoneng, until then an obscure conglomerate, displaced China Resources (Holdings) Co. as the developer’s largest stakeholder. At the time, Vanke’s management labeled it a “hostile takeover,” and later formed a share sale plan that was widely viewed by analysts as a way to dilute Baoneng’s ownership.

Representatives at Baoneng didn’t return calls seeking comment, and calls to the press office of its Jushenghua unit went unanswered.

Six Banks

Baoneng has used about 43 billion yuan ($6.4 billion) to purchase Vanke shares in the secondary market, JPMorgan analysts led by Katherine Lei wrote in a July 12 note. About 26 billion yuan was lent by six banks through asset-management plans, or AMPs, a type of shadow-banking arrangement that is used for stock purchase in China, according to the note. Banks including China Construction Bank Corp., China Minsheng Banking Corp. and China Zheshang Bank Co. participated in the financing, according to a China Business News report on July 8.

Baoneng established the funds between Nov. 24 and Dec. 14 last year, according to a Vanke filings with the Shenzhen Stock Exchange.

According to industry practice, if a stock’s drop hits a stop-loss level leading to a 20 percent decline in the fund’s net asset value, Baoneng would need to inject more cash into it, otherwise senior investors such as the banks can liquidate the fund to limit their losses, according to JPMorgan analysts.

While the average cost for the fund works out to about 15.6 yuan per share, some tranches invested in Vanke at higher prices, according to the JPMorgan note. That means if Vanke’s shares fall below 17.8 yuan, there is a risk of liquidation, the analysts said.

“This could lead to panic sentiment” if the correction is greater than 10 percent, according to the JPMorgan note. “As such, banks may not be able to exit the AMP investment, and would have to suffer a loss on the principal.”

Vanke has been in a public spat with shareholders Baoneng and China Resources over a restructuring proposal involving a public transit operator. Baoneng and China Resources together own more than 40 percent of the firm’s stock and have opposed a share sale that would dilute their stakes and make Shenzhen Metro Group the largest owner.

— With assistance by Emma Dong

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