The Fed warns that the downturn in China’s real estate industry poses risks to the U.S. economy
The Fed warned on Monday that the pressures facing China’s real estate industry “posed some risks to the U.S. financial system”, noting that debt-laden real estate companies such as Evergrande As a potential source of global infection.
“Given the scale of China’s economic and financial system and its extensive trade links with other parts of the world, China’s financial pressure may put pressure on global financial markets through the deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” the Federal Reserve Warned in its semi-annual financial stability report.
On the domestic front, the Fed also warned that a “surge” in interest rates may lead to a “significant” correction in risky assets. In addition, a reduction in housing demand may lead to a fall in housing prices. As corporate borrowing costs rise, employment and investment may also be hit.
The U.S. Central Bank stated that it is concerned about China because the country “is still huge in corporate and local government debt; the financial sector is highly leveraged, especially small and medium-sized banks; and real estate valuations have been pushed up”.
“In this environment, the continued regulatory focus on leveraged institutions is likely to put pressure on some debt-laden companies, especially in the real estate industry. Recent worries about China Evergrande Group are an example,” it said.
The Fed stated that if “spillover effects on financial companies occur, real estate prices suddenly pull back or investors’ risk appetite declines,” China’s financial system may be under pressure.
In the description of Federal Reserve Chairman Jay Powell (Jay Powell) Evergrande The situation is “very special” for China. Powell said at the press conference that he did not see a lot of “direct exposure to the risks of the United States,” but worried that the turbulence might have a broader impact on global financial conditions and investor confidence.
The central bank warned in its report that debt-laden emerging market economies may also pose risks to financial stability, especially when financial conditions are tightening “suddenly and sharply.”After the epidemic, these have been relaxed to historical levels Coronavirus disease A crisis triggered by actions taken by central banks and other policymakers around the world.
“The sharp tightening of financial conditions, which may be caused by rising bond yields in advanced economies or worsening global risk sentiment, may push up the debt servicing costs of sovereigns and enterprises in emerging market countries, trigger capital outflows, and give financial incentives to emerging market economies. The system brings pressure,” the Fed wrote in its report.
The Fed stated that “extensive and sustained pressure” could have an impact on the US financial system, adding that companies with “close ties” to the most vulnerable countries are particularly at risk.
“There is a concept of relevance [in the report],” said Padhraic Garvey, Regional Director of ING Americas Research. “The worry is that if one thing happens, the rest will happen. “
In a special part of the report, the Fed also analyzed “the so-called recent volatility EmoticonsSo far, it stated that as trading volatility subsides, “the wide-ranging impact of these developments on financial stability is limited,” but it deserves “continuous monitoring.”
The Fed stated that the reasons for concern include the relatively high leverage of young investors and that this may make them “more vulnerable to large fluctuations in stock prices,” especially when so many market participants trade stock options.
The central bank said it is also concerned that the interaction between social media and retail investors “may be unpredictable” and that “the risk management systems of relevant financial institutions may not be calibrated for increased volatility.”