What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing if you've been following this channel over the past few months. I'm sure you know about the ongoing train wreck, that is the chinese real estate market. Within the past couple days, there have been two new developments that are worth covering up. Until recently, the chinese government has refrained from bailing out any of the distressed developers without government support.

Evergrand was forced to enter technical default in december. The lack of government intervention led many economists to fear widespread contagion across the real estate market, plunging the country into a deep recession. This is why it came as a big surprise on december 31st, when a developer by the name of china, south city announced a roughly 240 million dollar investment from a state-owned entity. This is effectively a bailout which will see the shenzhen city government become the single largest shareholder in this private company.

This is potentially a positive sign for the real estate sector as a whole, as it shows the government is willing to provide financial support, at least in some cases, but at the same time the ever grant situation is getting even worse. It has recently been reported in the local media that evergreen has been ordered to tear down 39 buildings within the next 10 days, because their building permit had been illegally obtained with the company already bankrupt. The last thing it needs is the government forcing them to demolish their own buildings. Just a few days after that media report evergrand asked the hong kong stock exchange to halt trading of their shares, pending the imminent release of material insider information.

Given the precarious situation they're in right now, the announcement probably won't be great in this video we'll go over. Why china is bailing out some property developers why evergrand is being forced to demolish its own buildings and what it all means for the country's real estate sector. Going forward china's south city holdings is a diversified holding company; they develop logistics, centers such as warehouses and operate shopping malls they've also expanded into residential, real estate development and property management services. They operate in many cities across china, but their flagship assets are in the mega city of shenzhen.

As of september 30th. 2021. They appear to be in pretty good shape in their interim financial report. They had roughly 16 billion us dollars worth of assets enough to comfortably cover their 11 billion dollars of liabilities, while they're a diversified company.

It's pretty clear from their financials that real estate development is the most important part of their business of their 16 billion dollars in assets. Roughly 80 of this was either properties under development or properties held for sale. That's the problem with all these property developers. Their liabilities require fixed cash payments, but the vast majority of their assets are real estate, which is very illiquid and takes a long time to sell when the property market slows down.

The value of these assets can decrease substantially and a previously healthy company can turn insolvent. Very quickly, in november, ratings agency, fitch ratings downgraded china's south city's credit rating to b minus. This means that they think the company has a degrading financial condition and their bonds are highly speculative in the downgrade. They cited slowing new property sales, almost 8 billion chinese yen worth of bonds coming due over the next 12 months, insufficient cash on their balance sheet and the fact that they have already pledged a significant portion of their property portfolio as collateral.

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It also really supports the channel so go check it out and now back to the video. Unsurprisingly, china's south city's stock price has not done very well over the past year before a recent rally. It lost more than half its value since the beginning of 2021, but in late december the stock was surprisingly able to make a comeback with the share price rebounding. 50, in the past few weeks, on december 19th, the people's bank of china, which is a country's central bank, issued a directive to help the property sector.

They said they encourage healthy private developers, as well as state-owned property developers to acquire real estate projects from distressed developers. They also encourage financial institutions such as banks to help facilitate these acquisitions in china. These types of announcements carry a lot of weight because many of the major banks and property developers are state-owned enterprises. They will follow through with the government's policy objectives.

If the state-owned companies can acquire unfinished real estate projects from weaker distressed players like kaiser and evergrand, consumers will have confidence that the projects will be completed. This confidence will encourage chinese home buyers to sign down payments for new properties and, finally, reverse the trend of plummeting new home sales in the country. By doing this, the government is basically bailing out some of the distressed developers by buying their assets when nobody in the private sector would touch them. The news sent the share price of china south, as well as other developers soaring to the upside and a couple weeks later, on december 30th, china's south announced a capital injection roughly equivalent to 240 million us dollars, shenzhen scc construction and development group, which is owned and Operated by the shenzhen city government agreed to purchase a 29 stake in china's south city, making them their single largest shareholder.

They say that they'll use the funds to pay down their preexisting indebtedness, as well as for general corporate purposes. The news of this investment proved that the chinese government is serious about providing support to the property sector, given how important real estate is to the chinese economy. It seems almost inevitable in hindsight that they'll have to give some type of bailout. The government is hoping to avoid a systemic collapse like we saw in 2008, but unfortunately it may already be too late to avoid serious damage in aggregate distressed.

Chinese real estate developers have an estimated 197 billion dollars worth of liabilities that they have to pay out in the month of january alone. These include offshore bonds, domestic bank borrowings and payments to suppliers, but the single biggest liability is workers, wages, property developers employ millions of workers, either directly or indirectly, with cash running out. Many of them may not be able to make good on wages for work. They have already done if these wages aren't paid.

There will be massive discontent from the workers. In a worst case scenario. They could even protest against the government for failing to protect them. President xi jinping is up for re-election as general secretary of the communist party in november of 2022.

If there are any signs of social unrest or economic weakness, this will give an opening for his rivals within the communist party to try and overthrow him. This is why it's of the utmost importance that the workers get paid. Many of evergran's direct employees and contractors have not been paid for months leading to protests at evergrand corporate buildings. On december 26th, evergrand put out a statement from founder and chairman xiujin.

He told senior evergrand executives that they are prioritizing finishing homes and delivering them to end customers. 92 percent of their projects nationally have resumed construction and they plan to triple their home deliveries in december from the prior month at the behest of the government. They seem to be ramping, their production back up, bringing back their workers. Remember that evergrand is currently in technical default.

They have not been able to pay their creditors. It appears like the government is pressuring evergrand to prioritize paying their workers. Creditors, especially foreign-based bondholders, will be lower on the priority list. In fact, they've even set up a risk management committee which counts executives from state-owned enterprises as its members.

So while they haven't received a bailout yet evergrand is under a tremendous amount of influence from the government with the company's bond holders not even getting paid the chances their stockholders will receive. Any residual value is quickly. Evaporating shares are down almost 90 percent from the past year and they would probably be even lower if trading of the shares wasn't altered. On monday january 3rd, they asked the hong kong stock exchange to halt trading of their shares, pending the release of material information.

This comes just days after local media reported that the company was being forced to demolish 39 of their properties under development. For years, evergrant has been working on a 24 billion dollar artificial island development called ocean flower of the southern province of hainan. During the 2010s zhang qi, a high-ranking government official in hainan allegedly accepted millions of dollars worth of bribes. In return, he approved the property developments that were in conflict with environmental regulations.

This put endangered coral reefs at risk, along with other things of environmental concern. In 2020, he was sentenced to life in prison. It appears that evergren may have been a beneficiary to some of zhang's regulatory approvals. Now that he's gone, the new local government officials ruled that 39 of everground's buildings were built with illegal permits.

Having to take down 39 buildings could cost the already unbattled company hundreds of millions of dollars of impairment charges. This is not great for the company, especially when you add the fact that new home sales are progressing at only a snail's pace compared to normal levels. It's looking increasingly likely that they won't have enough cash to pay their workers, even if they completely stop paying their bond payments. The business has deteriorated to the point where it's very hard for them to continue operating as a going concern as a company with systemic importance to the chinese economy.

The government will likely be forced to bail them out in some form, as they did with china's south city, but unlike china, south evergrand is already in technical default, so even if they do get bailed out, the existing equity holders will probably only get a few pennies. If anything at all, alright guys that wraps it up for this video, what do you think about the recent chinese real estate bailouts? Do you think it'll be enough to save their economy? Let us know in the comments section below, as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.