The US Federal Reserve warned on Monday that China’s ongoing real estate troubles may exacerbate “financial tensions in China, [which] could put further pressure on global financial markets and negatively impact the United States.”
In its semi-annual report on financial stability, the Fed specifically pointed to the crisis at Evergrande, the most indebted developer in China. The company has feared contagion since September after warning it could default on its debts of more than $300 billion. Several other real estate developers are also in trouble.
While “Chinese authorities have taken steps to cool down real estate markets,” there is a risk that “financial vulnerabilities will continue to increase,” the Fed noted.
The central bank warned that given the size of China’s economy and financial system, and its global ties, “financial tensions in China could weigh on global financial markets as risk sentiment deteriorates, pose risks to global economic growth and could affect the United States.”
Evergrande is one of China’s largest real estate developers. The company is part of the Global 500, which means that it is also one of the world’s largest companies in terms of revenue.
Stocks in Hong Kong, New York and other major markets were previously impacted by fears of contagion from Evergrande and a slowdown in Chinese growth.
Those concerns have subsided in recent weeks as Evergrande managed to raise enough money to meet international debt payments, including raising about $144 million in recent days through the sale of a small stake in media company HengTen Networks Group. But it faces much higher bills in the coming months.
The conglomerate’s ongoing fiasco is seen as a major test for Beijing. Initially, some even pointed to the possibility that a default by the company could culminate in China’s “Lehman Brothers moment,” though many analysts later said the government is unlikely to let that happen.
The People’s Bank of China has previously said Evergrande had mismanaged his business, but the risks to the financial system were “manageable.” And Chinese Vice Premier Liu He has emphasized that risks are generally under control, despite what he calls “individual problems” in the real estate market.
Last month, authorities also called on companies to pay off their debts — and to repay the principal and interest payments on their foreign bonds, according to a government statement. It did not specify which companies the message was addressed to. But in recent weeks, a slew of real estate developers have revealed their own cash flow problems, asking lenders for more time to repay them or warning about potential defaults.
The stakes are high: real estate – and related industries – account for a whopping 30% of China’s GDP.