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© Reuters.
Investing.com – Chinese real estate giant’s crisis appears to have crossed the line after heavy losses in US and European stock markets, everyone is watching cautiously and worried it could turn into a snowball sweeping away everything the country.
Wall Street indices closed their trading on Monday with steep declines, with losses exacerbated by growing fears over the bankruptcy of Evergrande, whose debts exceed $ 300 billion and are exposed to nearly 240 banks and financial institutions.
But will this crisis affect the US Federal Reserve’s decision to cut asset purchases … will Fed policy change and what about the biggest danger to United States ?
Pierre Verrett, Technical Analyst at ActivTrades, said: “Several influences have put pressure on market sentiment, with the debt crisis in the world’s two largest economies, the Chinese group Evergrande (HK 🙂 and the ceiling of US debt.
you will not be late
William Dudley, the former chairman of the New York Federal Reserve, said concerns about the Chinese real estate sector rocking global stocks would not stop the Fed from signaling it was on the right track.
“They will not react to small movements in the market and will postpone the reduction on that basis,” said the former New York Fed chairman.
“They have to change their economic outlook, at this point it’s really too early to come to that conclusion,” Dudley said in an interview on Bloomberg TV with Lisa Abramovich, Tom Keene and Jonathan Ferro.
US stocks followed other European indices all lower on Monday as investors were alarmed by the risk of contagion from the debt crisis at developer Evergrande Group.
next november
What happens in China matters to the global and US economy, Dudley said, and he expects federal officials meeting this week to still signal that they are on track for a gradual decline during their November meeting.
Dudley said the Fed should be a bit more flexible about when to raise interest rates to reassure Americans that it intends to keep inflation under control.
“If inflation expectations are really not proven anymore, that’s a problem for real inflation and I think they will have to react,” Dudley added.
On the other hand, if more officials anticipate a rate hike next year, “it could reduce concerns about a Fed delay,” Dudley said.
Policymakers will release their latest quarterly forecast along with the policy statement at 2 p.m. in Washington on Wednesday, including a new dot chart for interest rate expectations through 2024.
He won’t turn into a new Lyman
Mohamed El-Erian, former CEO of PIMCO and chief economic adviser at Allianz, said on Monday that concerns about defaults by Chinese real estate company Evergrande had not reached the “Lehman moment”.
However, El-Erian told CNBC that a crisis in Evergrande “is shaking the broad principles of this global investment subject.”
Specifically, the former CEO of PIMCO argued that the uncertainty surrounding Evergrande undermines the assumption that governments will always step in to save the financial sector when a major player reaches a time of crisis.
Some analysts believe that Evergrande will undoubtedly survive the crisis on the basis of Too big to fail, or “too big to fail”, because the government will not let the crisis escalate and will have to intervene.
Strategists Citigroup (NYSE :), Barclays (LON 🙂 and UBS Group say the debt crisis of the world’s most indebted real estate developer, China Evergrande Group, is unlikely to become Lehman for China for a moment.
Barclays considers the market environment not to be similar to what happened during the collapse of Lehman Brothers, UBS notes that default levels are too low for the size of the Chinese economy, and Citi expects policy makers to intervene.
While Jefferies Financial Group also sees low potential for systemic risk from Evergrande, it advises investors to buy bank stocks when they dip.
China will not intervene
Standard & Poor’s Global Ratings said the Chinese government was unlikely to step in to provide direct support to the debt-burdened developer.
“We don’t expect the government to provide direct support to Evergrande, we believe Beijing should only step in if there is long-term contagion that causes many major developers to fail and poses systemic risks. for the economy, “added analysts from the rating agency.
Evergrande has commitments of around $ 300 billion and is expected to pay interest on the bonds starting next Thursday, but he said the company may default on those payments.
It is reported that “Evergrand” chairman Hui Ka tried to reassure the markets in a letter to employees on Tuesday, and said the company will shoulder its responsibilities to real estate buyers, investors, partners and institutions. financial.
Some analysts believe that Evergrande will undoubtedly survive the crisis on the basis of Too big to fail, or “too big to fail”, because the government will not let the crisis escalate and will have to intervene.
“Evergrand” is exposed to around 128 banks and 121 non-bank financial institutions, prompting the People’s Bank to warn that Evergrand could pose a source of danger to the entire Chinese banking and financial system.
Evergrande, which owes more than $ 300 billion, said on Sunday it had started paying investors for wealth management products through real estate.
Expectations
Standard & Poor’s Global sees a default by debt-laden Chinese real estate developer China Evergrande could test the government’s ability to withstand potentially large defaults.
“The events could shake investor confidence in China’s real estate sector,” said Matthew Zhao, the agency’s credit analyst.
The challenges Evergrande faces come as China Horang Ast Management is in the midst of a recapitalization process.
“This means that two of China’s largest issuers of foreign debt are testing the government’s ability to withstand potentially large defaults,” Zhao said.
greatest danger
US Treasury Secretary Janet Yellen said: “This October the Treasury’s cash balance will fall to an insufficient level to meet its commitments and the government will not be able to pay its bills.
“The United States has always paid its bills on time, but the overwhelming consensus among economists and Treasury officials on both sides is that failure to raise the debt ceiling will lead to widespread economic disaster,” he said. added Yellen.
“Within days, millions of Americans could be in financial trouble, and we could see unlimited delays in critical payments,” she said.
“Social Security checks might not be issued to nearly 50 million seniors for some time,” Yellen said.
“Millions of families who depend on the monthly child care tax credit could face credit delays,” Yellen said. “In short, the United States will default on its commitments.”
This is what Janet Yellen, the US Secretary of the Treasury, wrote in an opinion piece for the Wall Street Journal. Yellen warned that failure to meet financial commitments “is likely to precipitate a historic financial crisis that will worsen the damage caused by the ongoing public health emergency.”
This will lead to a suspension of Social Security payments, delays in monthly family tax credit payments and potentially we will have to increase interest and reduce inventory.
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