Spillover effects of Evergrande liquidity crisis on the global economy

The U.S. Federal Reserve warned Monday that the liquidity crisis of Evergrande, China’s real estate developer company, may have spillover effects on the U.S. and global economy. The Fed’s change in tone provides a contrast to Federal Reserve Chair Jerome Powell’s statement back in September, which brushed off the concern that the Evergrande situation does not pose a threat beyond China, dismissing a possibility of spillovers to global economy.

In its biannual report on financial stability, the Fed warned of the risk posed by China’s property developer Evergrande to the U.S. financial system. “Given the size of China’s economy and financial system as well as its extensive trade linkages with the rest of the world, financial stresses in China could strain global financial markets through a deterioration of risk sentiment, pose risks to global economic growth, and affect the United States,” analyzed the Fed.

“In China, business and local government debt remain large; the financial sector’s leverage is high, especially at small and medium-sized banks; and real estate valuations are stretched,” the report further pointed out. “In this environment, the ongoing regulatory focus on leveraged institutions has the potential to stress some highly indebted corporations, especially in the real estate sector, as exemplified by the recent concerns around China Evergrande Group,” the Fed stated in the report.

Evergrande Group borrowed heavily to support its aggressive business expansion until the Chinese government began a crackdown on real estate debt, prompting a liquidity crisis. “Stresses could, in turn, propagate to the Chinese financial system through spillovers to financial firms, a sudden correction of real estate prices, or a reduction in investor risk appetite,” the Fed said.


Jae-Dong Yu jarrett@donga.com