The U.S. Federal Reserve Board’s Financial Stability Report in May highlighted the current crisis facing the real estate sector in Communist China and its potential impact. The report notes that China’s corporate sector has a higher leverage rate, which means they will be very vulnerable when the crisis comes. The Data shows that the Chinese non-financial corporate credit has reached about 160% of GDP, a level well above most other emerging market economies, and the real estate sector is a particularly high debt rate.
In recent years, the Chinese government has cooled its real estate market through intervention. This was followed by a sharp slowdown in real estate sales, a decline in home prices and construction activity, payment defaults by some real estate developers, and a sharp tightening of domestic and foreign liquidity for all developers. After years of strong growth, domestic bank lending to real estate developers has declined, and some developers are trading lower prices for bonds issued in the offshore dollar market. While the Chinese government has been trying to control, the significant deterioration in the real estate market will definitely affect the CCP’s financial system. Meanwhile, a large part of the revenue of local government comes from land sales and the leverage rate is high. According to IMF, CCP local government debt exceeds 70% of GDP in 2021.
The Federal Reserve report said that the current decline in real estate in China has limited impact on the U.S, but if the decline in the real estate market continues to intensify and leads to major pressure on domestic banks to reduce bank loans and GDP growth, the pressure could be transmitted to the U.S. through both physical and financial channels. The collapse of the CCP economy would result in a decline in global commodity prices and a shrinking global trade. Accelerating the outflows of Chinese capital and the depreciation of the Renminbi will affect the stability of U.S. and global financial markets, and enhance global risk sentiment, thereby amplifying the blow to the U.S. economy and promoting a significant appreciation of the dollar.