Federal Reserve chairman Jerome Powell and Prime Minister Scott Morrison have agreed that the debt concerns in China surrounding real estate company Evergrande will be contained and that strong central bank balance sheets around the world will be able to handle any instability that may come from broader effects.
Speaking to reporters in Washington ahead of the weekend Quad Summit, Mr Morrison outlined his discussions with Mr Powell on the economic outlook and the pandemic recovery. He speaks with World Bank and International Monetary Fund representatives later on Thursday (Friday AEST).
China Evergrande – the world’s most heavily indebted property company, with bondholders including US-based BlackRock – has suffered a liquidity crunch and there are fears it could default, triggering a crash in property markets that could weigh further on equity markets.
“When it comes to Evergrande, this is principally an issue in China that addresses their financial stability,” Mr Morrison said.
“It’s a serious issue and of course, it’s a very large company. These things can have broader confidence impacts in the global marketplace. But China is seeking to manage the impact of debt in companies such as this.”
Mr Morrison said China’s three red line policy, which asserts certain debt ratios levels, should withstand any shocks from the property company.
“The broader exposures from our assessment that’s been provided to me and which I was able to discuss today, substantively limits its effect to China. Our expectation is that China will address that issue and seek to contain it.”
Analysts are debating whether the looming default of Evergrande marks a Lehman Brothers moment for the world’s second-largest economy.
Evergrande’s bonds have fallen toward 25¢ on the dollar but some fund managers including BlackRock, UBS and HSBC Holdings have been increasing their holdings.
Some investors are becoming increasingly concerned Beijing could be preparing to bail out Evergrande’s real estate arm in China, and leave the holding company – which owes most of the debt – to either default, or to reach a deal with its bondholders.
Mr Morrison said he and Mr Powell agreed Australia had shown remarkable economic performance and that despite the near exhaustion of fiscal and monetary levers following the COVID-19 crisis, the world economy was in a safe place with strong central bank balance sheets.
“I was able to talk about what has been a pretty remarkable economic performance for Australia, which the Fed chair agreed. He made particular note of it. The use of many similar tools and our economic interventions he agreed have proven to be highly effective,” Mr Morrison said.
“The aftershocks that come from going through a global pandemic, and the impact of the many rather unusual fiscal and monetary measures that have had to be used through this crisis to keep our economy stable and keep them growing have been quite extreme.
“What was a very interesting part of the discussion today was that in both the United States and Australia, there is a similar dynamic of there being some rather strong balance sheets.
“I have great confidence in the work that’s been done by our own central bank – by [governor] Philip Lowe and the team to ensure that we’ve been able to minimise any of these sorts of ripple effects that come from these other policy tools that have been deployed around the world.”