Fed says China’s real estate troubles could spill over to the US – Community News
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Fed says China’s real estate troubles could spill over to the US

Ornamental statues at China Evergrande Group’s Life in Venice, real estate and tourism development in Qidong, Jiangsu Province, China, on Tuesday, September 21, 2021.

Qilai Shen | Bloomberg | Getty Images

BEIJING – The US Federal Reserve warned Monday of a possible spillover of China’s real estate problems into the US financial system.

Since this summer, China Evergrande, a highly indebted developer, has awakened global investors as the company has tried to avoid an official bankruptcy. Other Chinese developers are also struggling to repay their debts, adding to concerns about a broader fallout in the world’s second-largest economy – about a quarter of which is driven by real estate.

“Stress in China’s real estate sector could put pressure on China’s financial system, with potential spillovers to the United States,” the Federal Reserve said in its latest financial stability report, published twice a year.

The report pointed to the size of China’s economy and financial system, as well as global trade relations.

Most of the paper discussed domestic financial conditions in the US, from historically high stock prices to risks of rapid growth in stablecoins – digital currencies pegged to a fixed asset such as the US dollar. Analysts downplayed the significance of the Fed’s comments on Chinese real estate.

“The nexus of the Fed’s concern is that real estate activity in China is slowing, but developers are heavily in debt [and] some of them (like Evergrande) have diversified into other parts of the economy,” said Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, in an email.

These far-reaching ties mean that a slowdown in China’s housing market could eventually lead to unemployment, a decline in Chinese inventories and deflation — which could spread through global trade channels if China cuts its purchases of goods from other countries, Christopher said.

However, he said such a fallout is unlikely. “The Chinese government has struggled with high corporate debt for years, is on alert and has resources to deal with the real estate sector,” said Christopher, noting that authorities can still spend more to deal with a deflationary shock as they do. have done in the past.

The latest report from the Fed earlier this year also analyzed the role of retail investors and social media in stock market volatility, as well as the role of foreign investors in a March 2020 Treasury sell-off.

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Previous Fed financial stability reports have cited China, its high debt levels and “stretched property prices” as risks that could spill over to the US

Ilya Feygin, senior strategist at New York-based brokerage WallachBeth Capital, said the latest Fed report likely included China’s real estate problems “for the sake of completeness.”

“The Fed has been criticized for failing to recognize the fragility of the US housing market and US banks before 2008,” he said in an email, referring to the financial crisis of the time. “Therefore, anything related to real estate risk and the banking system anywhere will be disproportionately investigated.”

He did not expect the Fed’s comments to make much sense for emerging market investments.

Growing concerns about China

One difference in the Fed’s latest financial stability report from previous reports, however, was the finding that China was prominent among concerns about risks to US financial stability, according to a Fed survey of “26 market contacts” from August to October.

While ongoing inflation, monetary policy tightening and vaccine-resistant coronavirus variants were the main concerns for survey respondents, they were followed by concerns about China’s regulatory and real estate risks.

Then came concerns about tensions between the US and China, according to the survey. A slowdown in the Chinese economy came in last in 13th place.

Those results differed from the Fed’s previous survey, conducted from February to April, where the only concern related to China was tensions with the US. The biggest concern at the time was vaccine-resistant variants of the coronavirus.

The investigation included representatives from broker-dealers, investment funds, political consultancies and universities, the Fed report said.

Arthur Kroeber, who helped found China-focused research firm Gavekal Dragonomics in 2002, said in an email that the Fed’s comments about China were “pretty vague and general” and focused on the potential impact on the U.S. , mainly based on the large size of China.

“I think the risks to the US are small, as the closed nature of the Chinese financial system means that contagion is unlikely to be a major problem,” Kroeber said. prices from China.