In the previous review, we noted that the Federal Reserve had been inconsistent lately in its stance on inflation in the first place. The same can be said about China's real estate crisis. Several months ago, one of China's largest property developers, Evergrande, literally went bust. On top of that, the company has many debt obligations that could not be paid off if it ceases to exist. It reminds us of the Lehman Brothers collapse during the 2008 financial crisis. Anyway, the Chinese government had to step in to save Evergrande. It provided financial support for the sinking company. The property developer was rescued, and the most urgent loans were restructured. At the same time, it does not mean that Evergrande can now breathe a sigh of relief. Firstly, the property developer is still on the verge of bankruptcy. The government simply cannot bail out every struggling company and pay its debts. In fact, China is now facing serious problems in the construction industry. In the country, there are many ghost towns. Given that its population is exponentially increasing, the pace of construction is rising even faster. The big problem is that companies are accelerating the pace of construction, taking loans, but cannot sell all property they have built due to low demand. Lastly, Evergrande could not be the only suffering company, other property developers may also experience liquidity problems.
The Federal Reserve reported on China's issue in its Financial Stability Report. According to the regulator, China's real estate crisis is posing risks to the US economy. Large construction companies in China could trigger the same financial crisis as we saw in 2008. It could lead to a sharp increase in interest rates, a plunge in property prices, and a decrease in investments and employment in China. Under such circumstances, a new financial crisis could arise given the size of China's economy and the fact that many countries are now connected. In other words, any crisis in China could affect half of the globe. Interestingly, the Federal Reserve is worried about the high debt obligations of many small and middle-size banks in China and mounting property prices. The situation in the country could aggravate if property prices, or investors' appetite for risk, plunge. In other words, the real estate market in China is somewhat similar to the cryptocurrency market. Real estate is used there as an investment, but sooner or later this bubble is likely to burst. Unfortunately, too many such bubbles have appeared all over the world over the past several years.