Fed warns ailing Chinese real estate sector poses risks to US economy – Community News
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Fed warns ailing Chinese real estate sector poses risks to US economy

The Federal Reserve warned on Monday that tensions in China’s real estate sector posed “certain risk to the US financial system,” pointing out that highly indebted real estate companies like Evergrande could be a potential source of global contagion.

“Given the size of China’s economy and financial system and extensive trade relations with the rest of the world, financial tensions in China could put pressure on global financial markets due to a deterioration in risk sentiment, pose risks to global economic growth and the United States,” the Fed warned in its semi-annual Financial Stability Report.

On the domestic front, the Fed also warned that a “strong rise” in interest rates could lead to a “big” correction in risky assets, in addition to a decline in housing demand, which could in turn lead to lower house prices. Employment and investment could also take a hit as corporate borrowing costs rose.

The US central bank said it is concerned about China because “the debt of the country and the local government remains high; the leverage of the financial sector is high, especially among small and medium-sized banks; and property valuations have been stretched.”

“In this environment, the continued regulatory focus on leveraged institutions may have the potential to put pressure on some highly indebted companies, especially in the real estate sector, as evidenced by the recent concerns surrounding China Evergrande Group,” said China Evergrande Group. the.

The Fed said the Chinese financial system could come under pressure if there were “spillovers to financial companies, a sudden correction in real estate prices or a reduction in investor risk appetite”.

The central bank’s warning came about two months after Fed chairman Jay Powell described the situation in Evergrande as “very special” for China. At a news conference, Powell said he didn’t see much “direct exposure to the United States” but was concerned the turmoil could have a broader effect on global financial conditions and investor confidence.

In its report, the central bank warned that highly indebted emerging market economies could also pose a risk to financial stability, especially in the event of a “sudden and sharp” tightening in financial conditions. These have eased to historic levels in the wake of the Covid-19 crises as a result of actions taken by central banks and other policymakers worldwide.

“A sharp tightening in financial conditions, possibly driven by a rise in bond yields in advanced economies or a deterioration in global risk sentiment, could drive up debt service costs for EME governments and corporations, trigger capital outflows and put pressure on EMEs’ financial systems. put,” the Fed wrote in its report.

“Widespread and ongoing stress” could affect the US financial system, the Fed said, adding that especially companies with “strong ties” to the most vulnerable countries were at risk.

“There was an idea of ​​correlation [in the report]”, says Padhraic Garvey, regional head of research for America at ING. “The fear is that if one thing goes, the rest may disappear.”

In a special section of the report, the Fed also analyzed “recent volatility in so-called meme stocks.” So far, it said that “the broad implications of these developments for financial stability have been limited” as trade volatility declined but merited “continued monitoring”.

The Fed said reasons for concern were the relatively high leverage ratios of younger investors and the possibility that it would make them “more vulnerable to large swings in stock prices,” especially when so many market participants trade stock options.

The central bank also said it was concerned that the interaction between social media and retail investors “may be difficult to predict” and that “the risk management systems of the relevant financial institutions may not have been calibrated for the increased volatility”.

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