What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks in investing, it's no secret that china's real estate market has been under tremendous stress for the past six months. It started out with liquidity issues at evergrand, which is the second largest developer in the country, with over 300 billion dollars in liabilities, contagion quickly spread across the industry, with fellow property giant kaiser, also on the brink of bankruptcy. Since then, chinese real estate companies have been falling like dominoes. Major developers are announcing liquidity issues on a nearly weekly basis of the major publicly traded developers.

All of their stocks are in the red for this year, with some of them falling as much as 70 to 80 percent. The latest shoe to drop is a company called shimao holdings which sold roughly 50 billion dollars of real estate. Last year, their stock price has fallen 85 since august. They are now facing severe liquidity issues in an attempt to raise cash they're attempting to engage in a highly questionable related party transaction.

Last year, the chinese government implemented their three red lines: regulation, which limits the leverage ratios on property developers. This was designed to decrease leverage and increase financial stability. The first developers to fall were the most heavily indebted ones like evergrand, whose leverage was far in excess of the three red lines, but ximao was compliant in all three of the red lines. So it came as a big surprise that they are now also on the brink of bankruptcy.

Contagion has spread across the market and otherwise healthy developers are seeing sharp declines in sales, and many of them are facing financial distress in this video. We'll look at the fall of shimao what they are doing to try to raise cash and how far the chinese property meltdown will go. Founded in 2001 xi. Mao grew to be the 13th largest property developer in china, with roughly 50 billion dollars of sales last year.

They also operate luxury hotels, mostly in shanghai, as of june 30th, 2021 xin mao had about 100 billion dollars worth of assets and 74 billion dollars of liabilities. This gave them 26 billion dollars of shareholders equity, which is a pretty good position. They were also compliant with all the government's maximum leverage ratios. The problem is the majority of their assets, were inventories of unfinished and finished properties held for sale.

If the property market goes south and they can't sell their inventory for as much as they expected, they can move from solvency to insolvency very quickly and looks like that's exactly what is happening right now. Recently, they are trying to sell 93 apartment buildings in shanghai to home buyers. However, after the buyers agreed to purchase these properties, legal issues arose, making it impossible for shimao to transfer ownership to them. As it turns out these properties, they were trying to sell, had already been pledged as collateral to one of shimao's.

Creditors selling them would breach their contract, they ended up cancelling the sales and they say they will help the buyers fairly resolve the situation, but this development is highly concerning the fact that ximena was trying to sell properties they are not legally allowed to sell indicates that They are having serious liquidity issues and are desperately trying to raise cash. In addition to the failed property sales, there is a questionable, related party transaction that brings further concern. The transaction was proposed this past monday december 13th. The she-mal group has multiple subsidiaries which are listed separately on the shanghai and hong kong stock exchanges, but are all effectively controlled by the parent company.

Their shanghai shimao subsidiary is the one having problems trying to sell properties that were already held for collateral. It's pretty clear that they are short on cash, so they agreed to sell some of their property management assets to shimao services. Another subsidiary of shima group for 267 million dollars jp morgan downgraded both stocks saying this related party transaction is suspicious, as it basically entails. The right hand giving to the left hand she-mal services engages in property management services.

It does not develop or sell real estate. Providing property management services is far less capital intensive and risky compared to property development. So shimao services was perceived as much safer than shanghai shimao, but by forcing ximao services to buy assets from shanghai gmail, the parent company is basically using one subsidiary to bail out the other. This type of transaction is a major red flag, as shareholders of one subsidiary effectively end up holding the bag for the other subsidiary's debt.

Also, the 267 million dollar price tag is likely just some number that the parent company made up the fact that they had to sell it to one of their other. Subsidiaries may indicate that they wouldn't be able to sell it to an unrelated company for this price. On the news, shares of gmail services fell by more than 30 percent shimao services. Shareholders feel like they're getting the short end of the stick, because cash is effectively being transferred from them to a different subsidiary, which is in financial distress.

The deal has already sparked scrutiny from the shanghai stock exchange, which recently ordered shima, to explain the rationale for the transaction, it's very possible that the deal could be blocked by the regulators. If this happens, shanghai shima will find itself in hot water as they'll need to find another way to raise cash. Things aren't really looking great for the company going forward. They have 4.4 billion dollars worth of bonds maturing within the next year and an almost 400 million payment.

This coming january, fitch ratings recently downgraded gmail's bonds to double b. This means that they believe the company has major ongoing uncertainties and exposure to adverse business, financial or economic conditions, which could lead to inadequate capacity to meet financial commitments. You can also see this in shima group stock price, which is down 85 percent. By this point.

It's pretty clear that there is major contagion across the chinese real estate sector. The rapid declines in share price is uncannily, reminiscent of the share price action of the large investment banks during the global financial crisis. While a few investment banks went bankrupt, most of them were saved at the last minute by unprecedented government bailouts. Surprisingly, the chinese government has not indicated that they will bail out evergrand or any of the other major property developers.

This fear was confirmed, as they recently allowed. Evergrand to fall into technical default ever grant's, creditors have already started suing evergrand with the company being so large and complicated. The case would get very messy and stay in bankruptcy court. For years, these types of disorderly bankruptcies are disastrous for the economy.

Typically, the majority of workers are laid off while the company's assets stand in limbo, and if the government continues to hold out on any bailouts, it won't just be evergrand. We would likely see kaiser, fantasia, shimao and countless others also go bankrupt and the payne won't even be contained just within the real estate sector. Many chinese banks and insurance companies are major creditors to property developers. For example, min chen bank has lent roughly 5 billion to evergrand.

This is roughly 15 percent of the bank's market cap fears around real estate exposure has caused its stock price to tumble this year with real estate, accounting for roughly 30 of the chinese economy. Almost all chinese banks have significant exposure to the sector. A complete meltdown of the property developers would almost certainly cause severe stress and possibly lead to insolvency for many of them, the more things unravel the worse and worse, it's going to be for the chinese economy. The 2008 financial crisis started in the u.s, but was exported across the world because financial markets are so interconnected.

Fortunately, china's financial markets are far more closed off than america's most of the real estate-backed securities are held domestically. So there is limited scope for contagion to other countries, but while china's financial markets are close to the rest of the world, contagion can still spread throughout the real economy. China is the single largest consumer of many commodities, such as steel and copper. Much of these commodities are used in real estate construction, for example, steel prices have increased rapidly over the past year, reaching as much as 80 above the pre-pandemic levels, but in recent months demand has cooled down.

If china's real estate sector continues to collapse, there could be a lot of further downside, but on the bright side the us economy is mostly consumption and services based, so a decline in commodity prices would be unlikely to have a substantial impact on the economy, but it Could have a serious impact on many south american countries that rely heavily on exporting basic commodities to china? Ximao was the latest shoe to drop, but chinese real estate woes are far raging and, in the absence of government bailouts, we'll probably see a slow bleed of more and more developers failing in 2022, alright guys that wraps it up for this video. What do you think about shimao? Is there a proposed inner subsidiary transaction appropriate? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.