's up guys and welcome back to wall street millennial on this channel and podcast. Podcast. We cover everything related to stocks and investing in 2021. One of the biggest in the financial world was the collapse of the massive chinese property developer.

Evergrand and the knock on effects of the broader real estate market with 300 billion dollars of liabilities. There was widespread fear that evergrand would be china's equivalent of lehman brothers and its failure could trigger a financial crisis. This culminated in december of 2021 when they failed to make an interest payment. Putting them into technical default.

Their stock price fell by 95 before being halted in march of this year. And to this day. It has not resumed trading six months later the apocalyptic predictions about china's economic collapse. Have largely been avoided since the beginning of evergrand's.

Troubles real residential real estate prices have fallen by 35. Percent. While this is certainly a slowdown. It's a far cry from a.

Crash fitch ratings estimates that the chinese economy will grow by 43. Percent in 2022. While that's slightly lower than previous forecasts. The slowdown is primarily due to covid lockdowns and high energy prices not the real estate market and 43.

Percent. Still makes it one of the fastest growing major economies in the world in this video and podcast. We'll look at what happened with the evergrand bankruptcy and how the government avoided an economic collapse. This video was brought to you by masterworks this summer.

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People they developed large scale real estate projects in over 100 cities across the country over the past 20 years. Hundreds of millions of people have moved to cities from rural areas. Greatly increasing demand for residential real estate. This combined with leverage and speculation has led to an epic bull market of home prices.

The average home price to income ratio in beijing is 50 times for comparison. New york city. Which is not exactly renowned for its affordability has a price to income ratio of just. 10 of course.

Evergrand was one of the largest beneficiaries from 2014 through 2020. Their assets. Grew 12 fold from 25 billion dollars to 300 billion dollars. As they invested in new development projects as real estate prices were inflating evergrand was able to rake in massive profits by selling their developments for higher.

And higher prices. Their share price surged making them one of the most valuable companies listed on the hong kong stock exchange at its peak. Founder xiujian became the richest man in china with a net worth exceeding 40 billion dollars real estate is a slow moving industry. The only way to make that much money this quickly is to use leverage and a lot of it they would borrow money by issuing bonds taking down payments from buyers before the construction is complete and even borrowing money from individual investors through their wealth management products by 2021 they had amassed 300 billion dollars of liabilities making them one of the most indebted non financial companies in the world by 2021.

The chinese government started to grow concerned about excessive leverage in the real estate industry. So they implemented the three red lines policy. Which limits the leverage ratios of property developers to comply with the three red lines evergrand was forced to liquidate some of its properties at a loss this sparked. A chain reaction.

Which sent the whole house of cards. Crumbling down after incurring these losses. They didn't have money to pay interest payments to their wealth management customers who protested on mass at the company headquarters. They also didn't have money to finish.

The real estate project still under construction. This was a big problem because many of these properties were already pre sold and they were obligated to finish them in december. Evergrand. Missed an interest payment on spawns contagion spread across the industry as credit froze up and many other developers also headed towards financial distress.

Real estate is incredibly important to the chinese economy by some estimates construction and other real estate related services make up 30 of total gdp. A downturn in the property market could lead to tens of millions of people losing their jobs. Real estate also makes up more than 40 of household wealth. If people see the value of their homes decline.

They'll cut back on consumption further slowing down the economy by the end of 2021. Things were looking pretty bleak in november. Evergrande officially defaulted. When it missed interest payments on some of its offshore bonds.

They had almost completely run out of cash and were forced to halt construction on many of their projects as the empty construction sites fell into disrepair this dug the struggling property developers into an even deeper hole in march. The hong kong stock exchange halted trading in evergrand stock its suppository receipts still trade on the over the counter markets where they have lost more than 97 of their value. It's increasingly looking like common equity holders will be completely wiped out. An analysis carried out by the advisory firm fmpc consulting found that in the event of a liquidation.

There would only be enough to pay evergrands bondholders at most 10 cents on the dollar. It looked like the company was almost completely worthless when a company goes bankrupt. That doesn't mean that it immediately shuts down and lays off all of its employees. The core business may be completely viable.

And it's not in anybody's interest to fire sell all the equipment at scrap metal prices. The government's goal is to find a way to restructure evergrand while preserving as many jobs as possible and avoiding contagion to the rest of the market evergrand raised money from thousands of institutions and individuals. Which broadly fall into seven main categories. The lowest on the priority are the shareholders who own the common equity.

Even if some individual investors are ruined by the stock price falling to zero. This does not represent a systemic risk to the economy. The next group on the chopping block are foreign bondholders to which evergrant owes about 20 billion dollars. These are mainly big multinational hedge funds and other institutions like blackrock the next group is domestic bondholders and banks within.

China. They may get some priority over foreign bondholders. But they too will likely see a big haircut. If they get anything at all for the most part these lower priority stakeholders can stomach the losses without going bankrupt.

So from an economic stability perspective. There's no need to bail them out that leaves the last three groups of stakeholders. The wealth management customers the suppliers and the home buyers. Many of these buyers put up substantial portions of their life savings to pre pay for evergrand apartments.

Which have not yet been finished. If these apartments remain unfinished. They will be financially ruined. If homebuyers are left holding the bag.

People will be hesitant to give prepayments on other developments in the future. This will make it more difficult to fund developments and be a drag on the industry for many years to come on top of that many evergrand customers also invested in the company's wealth management products. These were basically working capital loans. Which sometimes yielded as much as 10 percent between the apartment prepayment and the wealth management products.

Many ordinary people had the majority of their net worth tied up in evergrand. And it's not just the customers who would feel the pain. Many of evergrand suppliers and construction contractors are small businesses. If the developer defaults on its accounts.

Payable. There would be a wave of bankruptcies putting millions of people out of work. The main goal of the chinese regulators is to save the top three buckets of stakeholders and to dump the losses on the bottom four. So how will they do this before the crisis.

Evergrants financing structure. Would work something like this they collect cash from customers from prepayments. They use some of this money to fund the construction of the apartment. But some of this money would also go to their bondholders as interest payments given.

How large their debt had grown there may not be enough money to complete the construction and the apartment is left unfinished to prevent this the provincial governments. Within china started taking control of the customer. Prepayments and put them into special accounts. Which they control this money can only be used to finish construction of the apartments.

Even if the bondholders sued to try to get their interest payments. It's unlikely that they could get their hands on any of this money. Because of this 95 of evergrand developments had resumed construction by april this year. This has all happened even though the embattled developer is still in technical default evergrand.

Still has money coming in as they deliver finished apartments to end customers and without having to make interest and principal payments for the time being they just might be able to make good on the obligations to their customers. If homebuyers are made whole the panic will be averted and people will still have confidence to buy new homes going forward. And so far this appears to be the case as prices have only fallen marginally. But in economics.

There is no free lunch and every policy has its pros and its cons the publicly traded bonds on almost all chinese real estate developers are trading at pennies on the dollar foreign investors. Understandably don't want to lend any more money to them because they know they'll be near the bottom of the priority list in the event of a bankruptcy over the years chinese developers have tapped hundreds of billions of dollars worth of foreign investment mostly through debt financing and with many of the domestic wealth management customers still waiting to be paid this source of financing will also be greatly diminished while a real estate crash and financial crisis has been averted in the short term the eye popping economic growth rates that china has boasted over the past 20 years are likely coming to an end. And this is probably a good thing since the turn of the millennium china's gross domestic product has more than quadrupled far outpacing. The united states and other developed economies a lot of this growth can be attributed to the inflation of a massive real estate bubble.

Where developers build empty apartment blocks theme parks and even artificial islands. These developments technically contribute to economic growth but they're largely funded by cheap debt bought by speculators at the end of the day nobody benefits from a massive ghost city filled by empty skyscrapers over the next. Few years. Evergren will be slowly wound down under government supervision and most of its financial backers will be wiped out.

While the downfall of china's second largest developer was certainly spectacular it doesn't spell the death of the chinese economy. It just means the days of debt field. Exponential growth are finally over alright guys that wraps it up for this video. What do you think about evergrand is the chinese real estate crisis finally over let us know in the comments section.

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