What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing over the past few months. The evergreen disaster has made it painfully apparent that there are systemic problems with excessive leverage in the chinese real estate sector, but the problems in the real estate sector are merely a symptom of china's rapidly increasing corporate debt balances since the end of the global financial crisis. In 2008, the total amount of debt in the chinese economy has more than doubled, from 140 of gdp to almost 300 percent. The substantial majority of this is held by corporations, as the chinese economy has rapidly grown during the post-recession recovery.

All types of corporations have borrowed previously unimaginable amounts of money to fund their business expansions. One of the most egregious binge borrowers of the past decade has undoubtedly been the airline and tourism conglomerate hna group, which earlier this year collapsed into bankruptcy with close to 200 billion dollars in unpaid liabilities. They owned significant stakes in a wide range of chinese airlines, including grand china, air and hainan airlines. Throughout the 2010s, they went on an acquisition spree worth over 50 billion dollars acquiring airlines, airports and tourism companies.

They bought a 25 stake in hilton worldwide, which is one of the largest hotel chains in the world, and surprisingly, they bought a 9.9 stake in german banking giant deutsche bank, making them the single largest shareholder. It was unclear why they made the acquisition, as it had nothing to do with their core air travel and tourism businesses. They funded this acquisition spree primarily through issuing new debt, which ran into the hundreds of billions of dollars. They basically had a 200 billion investment portfolio which they primarily funded with margin loans.

This works great when the market is going up, but in 2020 many of their portfolio companies were negatively impacted by a pandemic, and the value of their portfolio decreased substantially. They desperately tried to liquidate their assets to make good on their liabilities, but in january of 2021 they were forced to file for bankruptcy with their creditors, demanding 187 billion dollars substantially. All of their assets were to be transferred to their creditors, and the former shareholders will be wiped out. The proceedings are still ongoing and given how large and complex h a is, it probably will take more than a year before the bankruptcy process fully plays out.

So what went wrong with h a at first? It might just look like an airline company that grew too confident and flew too close to the sun, but there's actually much more to the story than that. Hna had a very complex corporate structure that was strifed with conflicts of interest in related party transactions, corrupt insiders, allegedly expropriated, billions of dollars from the company to line their own pockets. They also received financing from state-run banks, including bank of china, even after their leverage ratios were way higher than would be allowed. This indicates possible involvement from corrupt government officials.

In september of this year, h, a's, chairman and ceo, was arrested on unspecified charges likely relating to corruption and embezzlement. This came just a few months after h, a co-chairman wang jian, passed away after falling from a cliff during a business trip in france. French police claimed that it was an accident, but many observers think the circumstances and timing were suspicious. Wong was the second highest ranking executive at h, a and was the architect behind their 50 billion acquisition spree.

The h a disaster shows that there is still a lot of corruption and excess leverage in china's financial systems, and this has gone far beyond the recent problems with evergrand in this video, we'll explain what h a did, how they were able to grow into a 200 Billion dollar conglomerate and how it all finally came crumbling down in 1993, two chinese businessmen by the names of chen fung and wang jian founded a new airline in the country's hainan province. Hainan is an island province of the country's southern coast. It's ideal for tourism and you can think of it as kind of like china's equivalent to hawaii. They named the company hainan airlines and it became incredibly successful as the island developed as a tourism hub, but they had ambitions far beyond running a single airline company.

They created the h, a group which was to be a conglomerate to hold heinen airlines, as well as other companies they plan to take over in the future. In the early 2000s billionaire hedge fund manager, george soros invested 25 million dollars into hna group. They used this money to buy stakes in other chinese airlines, airports and tourism companies. Their goal was to build a travel and tourism empire centered around the hainan province by the 2010s chen and wong's ambitions expanded beyond china.

They wanted to grow their h, a empire to encompass the entire world. By this time they had a great deal of assets on their balance sheet, but they didn't have a whole lot of excess cash. If they wanted to expand, they would need to use their equity stakes in their airlines and other businesses as collateral to borrow money. Fortunately, for them they had developed strong relationships with local government officials in hainan province.

Having a good relationship with the communist party is almost a prerequisite for having a successful business in china, they leveraged their close ties with the government to get billions of dollars in debt financing from china's massive state-run banks throughout the late 2000s and 2010s. They used this money to go on a massive acquisition spree across the world. They started close to home with their 2006 acquisition of hong kong airlines. This acquisition kind of made sense.

There are economies of scale in the airline industry by acquiring smaller airlines. They could potentially increase efficiency by cutting costs and having greater negotiating leverage with their suppliers, but by the 2010s. Their acquisitions started to make less and less sense. In 2011, they spent close to 400 million dollars to acquire the casa hotel, as well as other commercial real estate in new york city.

This is despite having zero relevant experience in the new york real estate market, but at least hotels are related to tourism, which is tangentially related to their core business of airlines. In that same year, they bought a 20 stake in the massive spanish luxury hotel company nh hotel group and finally, they paid 1 billion dollars for shipping container company seaco. In 2013, they bought tip trailer leasing services, which was europe's largest trailer leasing company by the mid-2010s. Their acquisitions became larger and they no longer even pretended to have any strategic rationale.

In 2016 they bought american technology distributor, ingram micro for 6 billion. In 2017. They purchased a 9.9 stake in deutsche bank, germany's largest commercial and investment bank. As you can see, they were pretty much just buying random companies from all around the world.

Chen fung and wang jian succeeded in turning hna into a global conglomerate, with close to 200 billion dollars worth of assets, but this growth came at a very high cost. The acquisitions we mentioned really represent only a small fraction of h, a's business dealings throughout the 2010s. They would acquire dozens of companies per year for hundreds of millions or even billions of dollars each most of the time. They had little expertise in the countries or industries of their acquisition targets and would end up massively overpaying for them.

They were able to do this because they had access to cheap and plentiful credit from china's state-run banks, but behind the scenes not everything was perfect for the company, while they had support from the local government in hainan. The central government was starting to get concerned about their excessive debt levels and the effect that they were having on the country's strict capital controls. H a would borrow money from chinese banks and chinese yuan. They would then convert these yuan to foreign currencies such as the us dollar or euros to fund their acquisitions of foreign companies.

Given how big h a was getting, they could have a material impact on the un's international exchange rates, while china technically has a floating currency exchange rate. The people's bank of china carefully restricts capital flows to keep the exchange rate within desired ranges. They do this to control, export and import volumes and manage the economy. In 2017, the government told the state-run banks to stop extending new loans to agent a this effectively ground, h, a's expansion to a halt.

By 2018 they had 97 billion dollars of debt and an annual interest expense of 5 billion. Things were getting desperate for them, as their cash balances were running tight, they were running a highly leveraged stock portfolio and large declines in any one of their positions could threaten to throw them into insolvency. They bought their 9.9 stake in deutsche bank in 2017. by 2019.

The stock price had been cut more than in half leading to billions of dollars in losses for h, a even their core airline businesses weren't doing very well h. A has an extremely arcane corporate structure, with dozens of different business groups, which would lend money to each other guarantee each other's loans and act as customers and suppliers to each other. According to former h, a executives h, a's airline companies would end up paying up to 50 more for aviation materials than other competitors. This is because corrupt insiders at h a would buy materials for inflated prices from outside companies that these insiders also own stakes in, but because the corporate structure was so opaque, hna's creditors didn't really know what was going on while h a was already in a precarious Financial position since 2018, the covent pandemic of 2020 was the final nail in the coffin, their core airline business ground to a near halt as international air travel was shut down, their equity investment portfolio was heavily weighted to tourism in financial companies, which were also major losers.

At the beginning of the pandemic, through various financial engineering and shifting cash between their subsidiaries, they were able to barely stay afloat through 2020, but in january of 2021 they finally ran out of cash and filed for bankruptcy. Their creditors are demanding 187 billion dollars in unpaid debts and will take control of substantially all of hna's assets. Most of their subsidiaries, including hainan airlines, are continuing to operate under government supervision, while bankruptcy proceedings are ongoing. In september of this year, the authorities arrested h a chairman and co-founder chen fung, as well as the group's ceo tan xian dong on unspecified charges.

They probably have to deal with embezzlement, corrupt related party transactions or bribery. Co-Chairman, wang jin, probably also would have been arrested had he not passed away a few months earlier, while on a business trip in france, he fell off a 50-foot high cliff, while on a sightseeing tour. The french police say that this was an accident, but some eyewitnesses say that wong fell off the cliff intentionally, but regardless of what happened, hna will likely be dissolved and its assets will be sold off to the highest bidder piece by piece, a tragic end for what Was once the largest and fastest growing chinese conglomerate on the international stage, with evergrand on the brink of default, we could see two of china's largest conglomerates declare bankruptcy in 2021 and the country's problem with overly leveraged business empires is probably just getting started. Many property developers and other large corporations develop close ties to the communist party and receive favorable financing from state-run banks.

They often use this money to expand into new business ventures, far outside their circle of competence, which eventually leads to their downfall. Alright guys that wraps it up for this video, what do you think about aj's bankruptcy? Let us know in the comments section below as always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.