The Strategist

US Fed: Problems in China's real estate market could affect global and US economy

11/11/2021 - 10:27

The US Federal Reserve has published another edition of its biannual Financial Stability Report.

Essnglkoerm Huong
Essnglkoerm Huong
In the report, the Fed reports on current and potential risks to the global and US economy and financial system. The latest issue, the Fed, touches on problems in the Chinese real estate market, "which could complicate the Chinese financial system with possible implications for the US".

At issue were the problems of Evergrande Group, one of China's largest real estate developers. At the end of September the company was on the verge of bankruptcy because of accumulated multi-billion-dollar debts. The problems at Evergrande have also affected other Chinese property developers, leading to a massive examination by Chinese regulators of 25 major state-owned banks and investment funds.

In its report, the Fed notes that "the level of debt of companies and regional authorities in China remains very substantial, the debt burden on the financial sector is high, especially in small and medium-sized banks. In such a situation the increased regulatory scrutiny of indebted companies, especially in the real estate sector, is heightened by concerns over the Evergrande Group. Such tension may spread to the Chinese financial market through financial companies as well as through a sudden correction in real estate prices or through a sharp decrease in investor interest.

Given the size of the Chinese economy and financial system, as well as China's very extensive trade links with the rest of the world, tensions in the Chinese financial market could increase tension in global financial markets and affect investor sentiment. This, in turn, poses a threat to global economic growth and could affect the US".