Fed says China’s real estate troubles could spill over to the U.S.
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China Evergrande Group’s Life in Venice tourism and real estate development in Qidong in Jiangsu, China on Tuesday September 21, 2021.
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BEIJING — The U.S. Federal ReserveWarning Monday about potential spillovers from China’s real-estate problems to the U.S. finance system
This summer, a highly indebted developer has been since. China EvergrandeThis has shaken global investors, company has attempted to avoid official default Others Chinese developers have also struggled to repay debt, adding to concerns of wider fallout in the world’s second-largest economy — roughly a quarter of which is driven by real estate.
Federal Reserve’s latest statement stated that China’s real-estate sector struggles could cause financial instability in China, and possibly spillover effects to the United States. financial stability reportPublished twice each year.
This report highlighted the importance of China’s financial and economic system and its global trade connections.
The bulk of the document discussed domestic U.S. financial conditions, from historically high stock market prices to risks from rapid growth in stablecoins — digital currency tied to a fixed value such as the U.S. dollar. Analysts minimized the importance of Fed comments about Chinese real estate.
“While China’s realty activity has slowed, the Fed worries that developers have huge debts. [and]”Some of them (like Evergrande), are diversified in other areas of economy,” Paul Christopher from Wells Fargo Investment Institute said by email.
These wide-reaching links mean a slowdown in China’s housing market could ultimately lead to unemployment, a drop in Chinese stocks and deflation — which could spread through global trade channels as China cuts its purchases of goods from other countries, Christopher said.
But he believes such an outcome is unlikely. Christopher noted, “China’s government is struggling with high corporate debt for many years. It is aware and has the resources to handle the realty sector.” Christopher also said that authorities still have the ability to spend more on deflationary shocks, just as they had in the past.
In its latest report, the Fed also examined social media and retail investors. stock market volatility earlier this yearThe role of foreign investors and the impact on a company’s bottom line sell-off of Treasurys in March 2020.
The Fed has previously mentioned China’s high levels of debt and its “stretched” real estate prices as potential risks to financial stability.
Ilya Feygin is a senior strategist with WallachBeth Capital in New York. She said that the Fed’s latest report probably included China’s real-estate problems “for completeness.”
In an email, he stated that “The Fed was criticised for failing to see the vulnerability of US Housing and US Banks prior to 2008”, referring to the financial crisis. All matters relating to the real estate or banking system risks anywhere in the world will therefore be thoroughly scrutinized.
He was not expecting the Fed to be of much importance for emerging markets investing.
China worries growing
There was however one major difference between previous financial stability reports by the Fed: it discovered that China was prominently included in its concerns about U.S. economic stability. This is according to Fed research of “26 market contact” data from August to Oct.
Survey respondents were most concerned about persistent inflation, tightening monetary policies, and the development of vaccine-resistant coronavirus varieties. However, these concerns were closely followed by their concern over Chinese property and regulatory risks.
The survey revealed that concerns over U.S.–China tensions came in second. In 13th position, a slowdown in China’s economic growth was the last concern.
These findings were not consistent with the Fed’s prior survey which was conducted between February and April. The only concern about China in that survey was the tensions with the U.S. There were also vaccine-resistant coronavirus variants that were the top concern.
According to the Fed report, respondents included representatives from brokerage-dealers and investment funds as well as political advisory firms, universities, and other institutions.
Arthur Kroeber is a founder of Gavekal Dragonomics, a China-focused research agency. In 2002, he said that Fed comments regarding China were “pretty general and vague”. He focused his remarks on possible U.S. impacts mainly on China’s huge size.
Kroeber indicated that the US risks are minimal because China’s financial system is closed. He said that contagion would not be a major problem, but that additional inflationary pressures from China’s supply chain and higher export prices will be of concern.
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