FirstFT: Fed warns of risks posed by Chinese real estate

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The Federal Reserve yesterday warned that stresses in the Chinese real estate sector “posed some risk to the US financial system”, pointing to heavily indebted property companies such as Evergrande as a potential source of global contagion.

In its semi-annual Financial Stability Report, the US central bank said it was worried about China because the nation’s “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”.

It highlighted Evergrande Group, the heavily indebted Chinese real estate company, as a cause for concern and said there was a risk the contagion could spread beyond the country’s property sector.

But speaking at a news conference, Fed chair Jay Powell said he did not see a lot of “direct United States exposure” although he said he was worried that the turmoil could have a broader effect on global financial conditions and investor confidence.

The Financial Times reports today that global holdings of Chinese stocks and bonds have jumped by about $120bn this year as foreign investors chase returns in the country’s markets, highlighting the risk of contagion.

Meanwhile, Kaisa Group Holdings, a Chinese property developer, asked investors for more “time and patience” yesterday evening as it sold off assets to ease a liquidity crunch. Kaisa is a big borrower on international bond markets and faces about $3bn in bonds coming due in the next year.

Separately, Fed governor Randal Quarles announced yesterday he is to leave the US central bank next month. The departure of Quarles, who was appointed by former president Donald Trump in 2017, creates another opening for the Biden administration to fill amid uncertainty about the institution’s leadership.

  • Go deeper: In today’s Unhedged email, Robert Armstrong highlights the panic gripping China’s junk bond market.

  • Comment: Joe Biden should reappoint Jay Powell for a second term as the chair of the Fed, says the FT’s editorial board.

Do you think stresses in the Chinese real estate sector pose global risks? Tell me what you think at firstft@ft.com. Thanks for reading FirstFT Americas. Here’s the rest of today’s news — Gordon.

Five more stories in the news

1. S&P 500’s winning streak The blue-chip index yesterday inched up 0.1 per cent, enough to mark an eighth straight record close — the longest streak of record closing highs since 1997. The S&P 500 has now closed at a record high 65 times this year, according to S&P analyst Howard Silverblatt — the second-highest total in history.

2. Tesla shares slide One company to miss out on the rally was Tesla. Its shares closed nearly 5 per cent lower yesterday after millions of Twitter users polled by chief executive Elon Musk concluded that he should sell 10 per cent of his stake in the electric carmaker. The share price slide wiped almost $60bn off the value of the electric carmaker.

3. Trump’s national security adviser subpoenaed The congressional committee investigating the January 6 attack on the US Capitol has issued subpoenas to six allies of Donald Trump, including his erstwhile national security adviser Michael Flynn and Jason Miller, one of the former president’s closest aides.

4. Ukrainian and Russian charged over ransomware attacks
The US justice department charged two men for their alleged involvement in large-scale ransomware attacks, including the Kaseya hack in July. US authorities said both individuals were part of Sodinokibi/REvil, a prolific Russia-linked ransomware gang which has also been blamed for a crippling attack on meat supplier JBS.

5. Mexico’s once roaring auto sector falls on hard times Once a magnet for billions of dollars in investments and rapid job creation, Mexican monthly auto production and sales are languishing at their lowest levels in a decade as the industry is pummelled by the pandemic and semiconductor chip shortages.

COP26 digest

  • A global deal to eliminate new car emissions by 2040 is struggling to attract support from the world’s largest carmakers and governments including the US and China.

  • Indonesia’s venture into renewables has been short-circuited by the lack of a deal to sell its power to the state utility.

  • Former US president Barack Obama said young people had the “most important energy” in the climate change battle, in a rousing speech in Glasgow.

Barack Obama speaks at COP26
Barack Obama is given a standing ovation after his speech: ‘Vote like your life depends on it, because it does,’ he said © REUTERS

Today’s Moral Money, our sustainable finance newsletter, has five things to watch at COP26 this week. Click here to read and sign up to the newsletter, publishing every weekday during the Glasgow summit.

The day ahead

Earnings The US’s largest cryptocurrency exchange, Coinbase, releases third-quarter earnings today. DoorDash, the biggest US food delivery group, also publishes results.

Macron to address France French president Emmanuel Macron is to address the nation about his economic reform plan and increasing infections in the coronavirus pandemic. (Reuters)

What else we’re reading

‘An unbelievable feeling’ Families, couples and friends rushed to reunite after US pandemic-era border controls that banned most travellers from the UK and Europe were lifted yesterday. We had reporters at Chicago’s O’Hare International Airport, New York’s John F Kennedy International Airport and London Heathrow.

Michael Williams embraces friend and business partner Craig Pettigrew at Chicago’s O’Hare International Airport
Michael Williams embraces friend and business partner Craig Pettigrew at Chicago’s O’Hare International Airport © Claire Bushey/FT

Central bankers’ different readings of inflation Policymakers have outlined starkly different responses to the global surge in inflation, with senior US and UK officials signalling that interest rates are likely to rise soon whereas it is a “completely different” situation in the eurozone.

Investment industry gets tougher on climate Tired of holding quiet conversations with companies about emissions and how global warming will hit long-term valuations, many investors are now threatening to divest. Their change in attitude could have huge ramifications for global business.

China’s self-isolation is a global concern Beijing’s zero-Covid policy is damaging international business and global governance, writes Gideon Rachman. And as the outside world transitions towards living with low levels of the disease, contact with foreigners may look even more dangerous to China.

Don’t chuck out the chintz — or the Billy bookcase Ikea is rolling out an international programme to take back used items and resell them under the name “Buy Back and Resell”. It is quite the U-turn by furniture’s global superpower in the name of sustainability. But If Ikea now feels the need to atone for its past, how about you, the consumer?

House & Home

Take a look at these five homes for sale with literary connections. They range from a Georgian house in Berkshire where Jane Austen was a frequent guest to John Steinbeck’s cottage on Long Island.

itzer Prize-winning novelist John Steinbeck referred to this cottage as “my little fishing place” in his 1962 book Travels with Charley
Pulitzer Prize-winning novelist John Steinbeck referred to this cottage as “my little fishing place” in his 1962 book Travels with Charley

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