Thursday, December 2, 2021

Federal Reserve warns of turmoil in the Chinese real estate sector

The Federal Reserve is warning that the spillover effect from the worsening debt crisis in the Chinese real estate sector could overwhelm global financial markets and hurt economic growth, including in the United States.

This warning was given on Monday in the Financial Stability Report released twice a year by the US central bank. Previous versions of the report have expressed concerns about high levels of debt among Chinese companies.

But the most recent report specifically mentions China Evergrande Group, a heavily indebted real estate conglomerate that could face a catastrophic default on bonds issued to international investors late Tuesday.

Evergrande has become a symbol of an ongoing effort by the Chinese government to force large companies to shoulder huge debt burdens. The government has created new restrictions that make it difficult or impossible for companies like Evergrande to “roll over” their loans because they come only because of taking on new loans. As a result, many are trying to sell the property to pay off their debt.

Although construction on dozens of its projects across China has been halted because workers and suppliers are not paid, Evergrande has kept a brave face on its situation. In a note to employees published on WeChat, the management said, “All employees of the group vow to ensure the construction of the project with the greatest determination and strength, and the delivery of the real estate with the highest quality and quantity.” accomplish.”

risk of miscalculation

Forcing large Chinese firms to decommission is, overall, considered a worthy goal. Many analysts believe that excessive debt from Chinese businesses, most of which are on the books of Chinese banks, put too much risk in the Chinese economy.

However, experts consulted by the Fed said they were concerned that the Chinese government could miscalculate, break too harshly and create a crisis that Beijing cannot control.

The report said, “Many noted that Chinese officials are willing to face greater volatility than in the past as they pursue their devolution and regulatory targets, while worrying that officials may be emanating from the campaign’s volatility and May misunderstand the scale of infection.”

‘tip of the iceberg’

“It is tempting to use metaphors such as ‘the tip of the iceberg’ to describe what is happening in China’s real estate sector,” US-China Business Council spokesman Doug Barry told VOA in an email exchange. “But when we’re talking about the world’s second-largest economy, that in itself is distracting – the one tied to most others, including the United States.”

Barry noted that many Chinese banks are considered “zombies” by most analysts – meaning they have so much bad debt on their books that they are essentially insolvent and are proceeding only with government support. .

“The time has come for Chinese leaders to reorganize their macroeconomic policy house, in line with a message like the mantra of reform and opening up,” Barry said. “Aid is available from many quarters, including the US government and business community. How to help should be on the agenda for the Biden-Xi summit. If the iceberg finds its mark, we all lose.”

global results

According to the Fed’s report, if the crisis in China gets out of control, its impact on the rest of the world could be serious.

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“Given the size of China’s economy and financial system, as well as its extensive trade ties with the rest of the world, financial tensions in China could impact global financial markets through a decline in risk sentiment, with global economic may pose a risk to development and may affect the United States,” the report found.

A narrow escape

Evergrande has been in the news in recent months because it has been unable to make payments on the bonds it has issued. On Wednesday, $141.8 million was expected to be paid in late payments on three separate bonds, as was due to expire the 30-day grace period and sink the company into default.

Evergrande came up with the money by orchestrating what appeared to be a last-minute sale of a $144 million portion of its interests in Hong Kong-based Internet company, Hengten Networks Group, according to the South China Morning Post.

Expected payouts don’t mean Evergrande is out of trouble. The company still has more than $300 billion in outstanding loans, with regular payments coming every few weeks in 2022.

signs of infection

Evergrande’s share price has already fallen, and the rates investors are asking for on existing bonds have skyrocketed. If the effects were limited to Evergrande, it might be manageable. But there is increasing evidence that an “infection” infecting the company and other large real estate firms is spreading.

Investors are now selling bonds issued by other Chinese real estate giants considered far less risky than Evergrande, such as Country Garden Holdings and Vanke Inc., the country’s largest and second largest real estate companies, respectively. are firms.

Worse yet, there are signs that investors are worried about companies outside the real estate sector. The Bloomberg Index, which tracks investment-grade bonds issued by Chinese firms, indicates that the impact is being felt in many sectors of the Chinese economy.

For example, Tencent Holdings, an entertainment conglomerate that owns TikTok and WeChat, among other popular services, saw a sharp drop in the prices of its bonds over the past two days.

restructuring required

In general, following developments in China’s property market, investment analysts expect Beijing to, at some point, take steps to prevent a major crisis. But this may not happen in the near future.

In a research note published on Monday, economists Ting Lu and Jing Wang from investment bank Nomura International (Hong Kong) wrote, “We expect most of Beijing’s asset restrictions to remain in place for some time, the worst prospect yet for both.” China’s wealth sector and macro-economy.

“Policy makers in Beijing may choose to increase support in the coming months to prevent worsening defaults,” he said.

It’s unclear what the government-led restructuring of Evergrande will look like, but most experts think it will see investors face a significant “haircut” in the company’s dollar-denominated bonds. That is, they will be forced to accept less than what is owed by the company in the final payment of their obligations.


This article is republished from – Voa News – Read the – original article.

Nation World News Desk
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