Tag Archives: U.S. Federal Reserve

Evergrande Worries The US Fed After All

THE US FEDERAL RESERVE’S latest semi-annual financial stability report comes with an uncommon warning about China’s financial stresses, not the sort of thing it typically comments on.

Its concern is that the stresses in China’s real estate sector could strain the Chinese financial system, with possible spillovers to the United States:

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. 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. 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. 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.

Was it just two months ago that Fed Chair Jerome Powell said that the risks from Evergrande’s troubles seemed very particular to China?

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America Demotes China As Its Banker

How do you get tough on your banker? As we know from Wikileaks, that was the rhetorical question U.S. Secretary of State Hillary Clinton posed to Australia Prime Minister Kevin Rudd in 2009. She may not realize it but she has just changed banker, from Beijing to New York.

New figures from the New York Federal Reserve Bank show that its holdings of U.S. Treasury securities now exceed those of China (via FT). Thank the Fed’s quantitative easing, under which it has been buying up Treasury debt under several programs that the New York Fed conducts, the New York Fed now holds $1.1 trillion of U.S. government paper. China holds $896 billion-worth and Japan $877 billion, according to the U.S. Treasury’s most recent data on foreign holdings. Foreigners hold $2.6 trillion of U.S. Treasuries in all.

Once the Fed’s quantitative easing program is complete in June, the New York Fed may be holding $1.6 trillion in U.S. government debt, close to Beijing and Tokyo’s combined total.

Footnote: If China isn’t buying U.S. debt, what is it buying? Gold, or at least ordinary Chinese are buying it by the ingotful, according to the FT:

China’s gold imports are estimated to have more than doubled from a year ago in the run-up to Chinese new year, putting the country on track to overtake India as the world’s largest consumer of the precious metal.

We noted late last year that China’s gold bugs were shining bright. They have clearly not lost their luster. The FT quotes the estimate of one banker that China has imported 200 tonnes of gold over the past three months.

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