The Fed Says China’s Real Estate Issues Could Impact the U.S.

On Monday (11-8-21), the U.S. Federal Reserved released its latest Financial Stability Report (FSR), which is released twice a year. In the report, the Fed said, “Stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States.” The report pointed to the size of China’s economy and financial system, and global trade links.

However, the bulk of the FSR document discussed domestic U.S. financial conditions, from historically high stock market prices to risks from rapid growth in stablecoins — digital currency tied to a fixed value such as the U.S. dollar.

Paul Christopher, U.S.-based head of global market strategy at Wells Fargo Investment Institute, said in an email in regard to the FSR, “The nexus of the Fed’s concern is that China’s real estate activity is slowing, but the developers have large debts [and] some of them (like Evergrande) are diversified into other areas of the economy.”

Christopher added that these wide-reaching links mean a slowdown in China’s housing market could ultimately lead to unemployment, a drop in Chinese stocks, and deflation — which could spread through global trade channels as China cuts its purchases of goods from other countries. However, he said such fallout is unlikely.

“China’s government has been wrestling with high corporate debt for years, is alert and has resources to deal with the real estate sector.” Christopher noted that authorities can still spend more to address a deflationary shock, as they have in the past.