Rightways: Bank Negara

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Friday, May 12, 2023

Gold reserves on uptrend

Why Gold Still Shines Through Inflation, Banking Crises and More | WSJ

Storage of bullion seen as key in inflation fight. Gold likely to perform better than the US$

PETALING JAYA: Asian central banks, including Bank Negara, were seen upping their gold reserves in the past decade given the versatile use of the precious metal as a hedge against inflation and, a protective measure against purchasing power risks.

Malaysia has emerged as having the fifth-highest increase in gold reserves between 2013 and 2022 among Asian countries, said Singapore-based brokerage firm City Index, which released the data yesterday.

The brokerage noted that Bank Negara has overseen a 6.84% increase in the country’s gold reserves, from 36.4 tonnes to 38.88 tonnes over the period under review.

This is 90% more than Indonesia, whose gold reserves only increased by 0.64% between 2013 to 2022

However, the republic continues to hold 50% more gold than Malaysia with 78.57 tonnes.

The increase in Malaysia’s gold reserves also paled in comparison to third-placed Singapore’s 20.7% climb in bullion stock at 153.7 tonnes, which itself is dwarfed by China’s near-doubling of its storage of gold to 2,010 tonnes, taking the top spot among Asian nations.

“Gold reserves in China averaged 1,694.78 tonnes from 2013 until 2021, reaching an all-time high of 2,010.51 tonnes in the fourth quarter of 2022, accounting for 3.6% of its total foreign reserves,” City Index pointed out.

Notably, the brokerage firm said China’s increase in gold imports is largely considered to be the result of an effort to reduce its reliance on the US dollar and to diversify holdings of the People’s Bank of China.

According to City Index head of market research Matt Weller, the surge in gold investment demand signals a growing concern among investors regarding the inflationary pressures in the market.

“As central banks continue to use gold as an inflation hedge, it’s not surprising to see individual investors following suit in the form of coins or jewellery, especially in countries such as India and China, where gold has long been considered a traditional store of value,” he said.

Meanwhile, the brokerage firm said Thailand has had the second-largest increase in gold reserves in the last decade, increasing by 60.2% from 152.4 tonnes to 244.1 tonnes.

Quoting the World Gold Council, City Index said gold remains a popular and effective inflation hedge amid global economic uncertainty in Thailand, exemplified by a 40% increase in demand for the metal year-on-year in 2022, fuelled by the rebound in tourism.

The debate, though, continues on whether gold could live up to its reputation as a buffer against inflation compared to other means employed to stem the inflationary tide, namely bonds, the greenback, and much more recently, cryptocurrencies such as bitcoin.

This is evidenced by the price of gold taking a beating from mid 2022, coinciding with the Federal Reserve’s 50-basis-point hike in May which was followed by four giant 75-basis-point surges, sending gold price from approximately US$1,800 (RM8,032) an ounce to just over US$1,600 (RM7,140) by November as the US dollar strengthened.

Meanwhile, Bernard Aw and Eve Barre, economists at Singapore-based Coface Services South Asia-Pacific Pte Ltd, pointed out that the relationship between the dollar and gold tends to be inverse, although this negative correlation has weakened since 2018.

“Although there is an easing trend, inflation rates are expected to be above historical trend at least through 2023, while global growth remains sub-par. Gold may therefore perform well relative to the dollar since the United States rate hike cycle appears to be nearing its peak.

“Moreover, geopolitical factors have also contributed to emerging market central banks stocking up on gold reserves, pushing up demand for gold, amid a very gradual shift away from the US dollar,” they told StarBiz.

Concurrently, chief executive of Centre for Market Education Dr Carmelo Ferlito also believes the decision to increase gold reserves among Asian countries may be seen as a signal of worry among these countries, and their consideration of the dollar as a less dominant currency in the future.

“Thus, despite the decrease in its price last year, gold is perceived as a more stable store of value,” he said.

Ferlito opined that the cessation of the gold standard has been the biggest source of inflation in history, as inflation in the last 50 years have exceeded any before it.

“In fact, currently measuring inflation through the Consumer Price Index is meaningless with the fiat system. A more effective way would probably be to measure price indices against wage indices,” he said.

With Asian central banks embarking to fortify their bullion stockpile in an apparent effort to mitigate inflation, Ferlito said returning to the gold standard would be ideal but practically impossible at this point in time, as the quantity of money in circulation is exceedingly high.

“Free banking and competition among currencies may be a better option for the current financial climate,” he added.

Coface’s Aw and Barre too did not advocate a return to the gold standard, believing the system will deeply restrain the ability of governments to support economic activity when needed since money supply would be limited to the amount of gold detained.

They said: “Considering the way central banks acted during the last two economic crises by expanding their policy instruments, as well as the massive fiscal support provided by governments during the lockdowns, it is difficult to imagine a return to the gold standard, which would imply the end of this important interventionism.”

Providing an interesting balance to the gold against inflation idea, Forbes in an article published earlier this month reported that gold has at times in history been found wanting as an inflation hedge.

“From 1980 to 1984, annual (US) inflation averaged 6.5%, but gold prices fell 10% on average each year. Returns not only fell short of the inflation rate, but they also underperformed real estate, commodities and the S&P 500. Annual inflation averaged about 4.6% from 1988 to 1991, but gold prices fell approximately 7.6% a year on average,” the report revealed.

On the other hand, while concluding that gold has been an inconsistent inflation hedge, Forbes recommended holding some amount of the precious metal as a diversification strategy.

“Gold has historically had a low or even negative correlation to both stocks and bonds, suggesting it offers value as a tool of diversification,” it said.

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Tuesday, October 4, 2022

Malaysia not in crisis as State of economy goes beyond ringgit's showing

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State of economy goes beyond ringgit's showing

https://www.thestar.com.my/business/business-news/2022/10/05/state-of-economy-goes-beyond-ringgits-showing

Malaysia's weakening ringgit not reflecting state of economy ...

Inflation likely to peak in the third quarter of this year.

PETALING JAYA: One could not help but notice that Bank Negara governor repeatedly emphasised in her latest speech – three times to be exact – that the Malaysian economy is no longer in a crisis.

Tan Sri Nor Shamsiah Mohd Yunus highlighted that the economic recovery is well underway, although she acknowledged that the future ahead will be “challenging, highly uncertain and unpredictable.”

Interestingly, in the same speech at the Khazanah Megatrends Forum 2022 yesterday, Nor Shamsiah warned that Malaysia could be left behind if no reforms are done.

“As a country, we must now focus on strengthening our economic fundamentals, resilience and flexibility.

“Our neighbours within the region are actively pressing on with reform measures. We run the risk of being left behind if we do not act now,” she said.

Amid speculation that a recession is imminent, Nor Shamsiah advised Malaysians not to act in a manner that jeopardises the recovery and the confidence of investors, which in turn can create a “negative self-fulfilling cycle.” StarPicks

Commenting on the economy, Nor Shamsiah noted that Malaysia’s investment activity and prospects continue to be supported by the realisation of multi-year projects.

The country’s exports have also been recording double-digit growth since the start of 2021.

Nor Shamsiah also said that the labour market has shown strength.

“Wages in both the manufacturing and services sectors have been increasing since the start of the year, at around 5% and 7%, respectively.

“Unemployment is now less than 4% and income prospects remain positive,” she said.

On price pressures, the central bank head said Malaysia’s inflation remains well anchored, with headline inflation averaging 3.1% year-to-date.

“It is largely supply-driven but we have also seen stronger demand with the reopening of the economy.

“That said, we project that inflation will peak in the third quarter of this year.

“In addition, the extent of upward pressures to inflation will remain partly contained by the existing price controls and the prevailing spare capacity in the economy,” she said.

Despite her optimistic view on the outlook, Nor Shamsiah acknowledged that rising geopolitical tensions and conflict, global inflationary pressures and extremely volatile financial markets will lead to slower growth in 2023.

However, she also pointed out that the fundamentals of the local economy and financial system are strong.

“The preemptive policy measures taken will help us to weather this storm,” she said.

With regard to the weakening ringgit against the US dollar, Nor Shamsiah said it is not a reflection of the state of the economy.

“The exchange rate is only one indicator among many.

“Like I said at the start, it is important to consider the strength and positive performance of the Malaysian economy.

“Growth is robust, the labour market is healthy and the financial system is resilient and continues to perform its role effectively,” she said.

Nor Shamsiah also noted that Malaysia has a strong external position with more foreign currency assets than foreign currency liabilities.

“Foreign currency borrowings only account for less than 3% of total federal government debt,” she said.

Between January and September 2022, the ringgit has depreciated by 10.2% against the US dollar.

The current depreciation of the ringgit is due to the strength of the US dollar.

Nor Shamsiah called upon corporate Malaysia to help maintain “orderly market conditions” by taking action that do not exacerbate the ringgit’s depreciation against the greenback.

“Bank Negara will ensure that our onshore foreign exchange market remains liquid, so businesses can be assured that all their foreign currency needs can be efficiently fulfilled.

“So there is no need to hoard or front-load US dollar purchases.

“Corporates and domestic financial institutions should also be prudent in managing their balance sheets.

“This includes to avoid creating new vulnerabilities, especially from foreign currency debt and financial imbalances, as well as hedging their risks appropriately,” she said.

As for businesses and investors that benefit from a ringgit depreciation, the central bank governor urged them to take advantage of the weaker ringgit.

“For example, for those in tourism and exports to increase production and capitalise on this opportunity, and for those with a global presence, to reinvest back home,” she added.

Khazanah Nasional managing director Datuk Amirul Feisal Wan Zahir, who also spoke at the Khazanah Megatrends Forum 2022, shared Nor Shamsiah’s views on reform initiatives.

He pointed out that Malaysia is still “too far down” the value chain of productive work and that growth has to be fully inclusive.

“Our past growth was based on foreign direct investments-driven, low-cost competitive manufacturing – this no longer serves at our current stage of development.

“Long term structural reforms are required – but these will require substantial resources.

“And future growth must not allow inequality to persist, it must be fully inclusive of all socio-economic classes, and fully include women – where structural norms have long impeded opportunities for this demographic,” he said.

Amirul also spoke on climate change, highlighting that there is much work to be done, globally and collectively.

“But this does not mean that all countries have the same work to do, the same amount of pain to bear, the same standards of accountability.

“There is nothing fair and equal about climate change,” he said.

He mentioned about the devastating floods in Pakistan, in which an area three times the size of the country of Portugal went under water, and yet Pakistan produces less than 1% of the global greenhouse gas emissions.

In order to meet critical climate goals, Amirul said the world needs to ensure a “just transition”, which is much more complex and nuanced than a common standard for all nations.

“Just six national entities are responsible for producing over 70% of the greenhouse gas already emitted in human history, namely the United States, the European Union, China, Russia, the United Kingdom and Japan.

“Malaysia’s contribution, as of 2020, has been a mere 0.37%.

“New ‘targets’ are not so easily attained by developing countries, who suffer the most from climate change, and yet historically have contributed the least to causing it,” he said.

Amirul also added that all businesses and organisations have an ethical duty to act immediately and must not just wait for regulations to be imposed.

“This is why Khazanah Nasional has already defined and adopted a Sustainability Framework which encompasses environmental, social and governance (ESG) standards.

“We have published these on our website to make them fully public, and they include carbon-neutral operations by 2023, net-zero emissions by 2050, 30% of board and senior leadership positions to be held by women by 2025 and ESG-linked key performance indicators for key leadership positions in our portfolio companies by 2023,” he said.

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Malaysia's economy is not in crisis: Bank Negara governor

https://www.nst.com.my/business/2022/10/836783/malaysias-economy-not-crisis-bank-negara-governor

Malaysian economy not in crisis: Bank Negara Malaysia

Governor's Feature Address at the Khazanah Megatrends ...

https://www.bnm.gov.my/-/g-spch-khazanah-megatrends-2022

We’re not headed towards a currency crisis, says Finance...

Pegging the ringgit not in Malaysia's best interest - YouTube

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Friday, July 8, 2022

BANK NEGARA RAISES OPR TO 2,5% , Still a good hedge against inflation

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PETALING JAYA: The Monetary Policy Committee (MPC) of Bank Negara has increased the overnight policy rate (OPR) by 25 basis points to 2.25% amid positive growth prospects for the local economy.

“For the Malaysian economy, economic activity continued to strengthen in recent months.

“Exports and retail spending indicators affirm the positive growth momentum, supported by the transition to endemicity, “ the central bank said in a statement yesterday.

The ceiling and floor rates of the corridor of the OPR are correspondingly increased to 2.5% and 2%, respectively.

The OPR, which is a benchmark rate that allows banks to determine their lending and deposit rates, had been reduced by a cumulative 125 basis points during the course of the Covid-19 pandemic, bringing it to a historic low of 1.75%.

Yesterday’s increase was a second consecutive one after a 25-basis-point hike in May, which was also the first time the OPR was raised since the onset of the pandemic.

OCBC Bank economist Wellian Wiranto said the fact that the central bank had not gone more “ballistic” with a 50-basis-point hike yesterday speaks of a “heavy preference for a gingerly approach in tightening.”

“That is a prudent thing, given how global recession fears are on the rise,” he said.

Going forward, he said he expects at least one more 25-basis-point hike this year that will be seen as a further normalisation of policy rate rather than outright tightening.

“It might then pause in the last meeting of the year in November to assess the balance between inflation and recession risks before undertaking any action thereafter,“ he added.

In its statement, the central bank said the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.

“The inflation outlook continues to be subject to global commodity price developments, arising mainly from the ongoing military conflict in Ukraine and prolonged supply- related disruptions, as well as domestic policy measures,“ it said.

Year-to-date, headline inflation averaged 2.4%.

.In its statement, the central bank said the extent of upward pressures on inflation will remain partly contained by existing price controls, fuel subsidies and the continued spare capacity in the economy.

“While it is projected to remain within the 2.2%-3.2% forecast range for the year, headline inflation may be higher in some months due mainly to the base effect from electricity prices.

“Underlying inflation, as measured by core inflation, is expected to average between 2% and 3% in 2022, as demand continues to improve amid the high-cost environment,” it said.

Bank Negara said that in recent months, the unemployment rate had declined further, with higher labour participation and improving income prospects.

“Looking ahead, while external demand is expected to moderate, weighed by headwinds to global growth, economic growth will be supported by firm domestic demand.

“Additionally, the reopening of international borders since April 1 would facilitate the recovery in tourism-related sectors.”

Nevertheless, the central bank warned of downside risks to growth that continue to stem from a weaker-than-expected global expansion, further escalation of geopolitical conflicts and worsening supply chain disruptions.

“Even as it continues to project a strengthening economic recovery, things are likely to turn less rosy from here,” OCBC’s Wiranto said.

Bank Negara said that at the current OPR level, the stance of monetary policy remained accommodative and supportive of economic growth.

“The MPC will continue to assess evolving conditions and their implications on the overall outlook to domestic inflation and growth.

Rakuten Trade head of equity sales Vincent Lau told StarBiz yesterday’s hike was a reflection of confidence in the continued growth of the Malaysia economy.

“Any adjustments to the monetary policy settings, going forward, would be done in a measured and gradual manner, ensuring that monetary policy remains accommodative to support a sustainable economic growth in an environment of price stability.”

Meanwhile, Rakuten Trade head of equity sales Vincent Lau told StarBiz yesterday’s hike was a reflection of confidence in the continued growth of the Malaysian economy.

“With the increase in our benchmark rate, this may also stem the outflow of foreign money, which will technically see higher returns alongside the higher rate,” he said.

That said, the stock market fell over 20 points at the close yesterday after the hike was announced.

“It was probably a knee-jerk reaction as the hike had more or less been priced in already,” Lau said.

Bursa Malaysia’s fall was also in line with most regional markets as the fear of a global recession continued to rear its ugly head.

Nevertheless, at the close of the market yesterday, lenders like Malayan Banking Bhd and CIMB Group Holdings Bhd finished higher as investors bought the stocks, banking on a higher OPR that could likely boost the lenders’ earnings.

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Still a good hedge against inflation

https://www.thestar.com.my/business/business-news/2022/07/07/still-a-good-hedge-against-inflation

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Wooden table between armchair and couch in cozy living room interior with pouf and ficus

Sunday, October 3, 2021

Should we be worried about debt?

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

IN recent weeks, global markets were roiled by the mere mention of a four-letter word, debt. From China’s Evergrande Group’s near collapse, as it sat on a mountain of liabilities, to the United States government’s need to raise its debt ceiling.

In Malaysia’s case, we too have not much choice either but to raise our debt ceiling as we look at ways to re-generate the economy with a higher debt room of 65% of gross domestic product (GDP) from 60% currently.

It seems like debt has become one dirty word for investors for the time being, as we all know there is a price to pay when it comes to debt as there is no such thing as a free lunch.

For the US, there is no doubt that they have constantly raised their debt ceiling over the years to ensure they do not default on their obligations.

According to the US Treasury website, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the nation’s debt limit.

Currently suspended, the US debt ceiling was reset on Aug 1, 2021, to US$28.4 trillion (RM118.9 trillion). For the US, failure is not an option as it will lead to a catastrophic chain reaction to not only the financial market but to the economy as a whole.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, (pic) the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

According to Treasury Secretary and the former Federal Reserve (Fed) chairperson, Janet Yellen, the US has never defaulted on its debt before and she was “confident” that the issue would be addressed, despite warning the Congress that the deadline for the debt ceiling is “around Oct 18”.

For now, while a nine-week stopgap funding bill has been endorsed by the President on Thursday, which in all likelihood will avoid a government shutdown at least up to Dec 3, 2021, the threat of a US defaulting on its debts remains.

While the US is able to continue to print money by simply passing the law to keep borrowing, the US, just like any other country, cannot go on borrowing forever. With a greater supply of money, sooner or later, interest rates will have to rise as the increase in money supply will likely fuel inflation.

After all, the Fed too expects rates to start rising in 2022 and much more in 2023 onwards.

In the last Federal Open Market Committee just over a week ago, the 10-year and 30-year US benchmark rates have already moved 17 basis points (bps) and 21 bps to 1.50% and 2.06% respectively – as the market begins to price in expectations of the Fed’s tapering move as well as worries if there is going to be lengthy impasse between the Democrats and the Republican or grand old party (GOP) to raise the debt ceiling.

Having said that, as the US has been running budget deficits for the longest time, it would not be too far-fetched to assume that given time, the US will need to raise the debt ceiling yet again in the future.

Hence it was also of no surprise when Yellen commented on Thursday that the debt ceiling ought to be permanently abolished.

In any government’s financial management, it’s either shortfall or revenue, mainly due to inadequate tax collections or excessive spending, which are also a function of debt service charges, and to a certain extent, over-priced development spending or operating expenditures.

With a current debt-to-gdp of about 125%, the US is not the only country with a huge mountain of debts.

So is the rest of the world. In fact, according to the Institute of International Finance (IIF) in its Global Debt Monitor report published on Sept 14, 2021, global debt, which includes government, household and corporate, and bank debt increased by US$4.8 trillion (RM20 trillion) to reach a new alltime high of US$296 trillion (RM1.24 quadrillion).

In essence, over the past six quarters, as the pandemic has caused significant damage to the global economy and unprecedented response from governments, total global debt has expanded by US$36 trillion (RM150.7 trillion) or 13.6% from just about US$260 trillion (RM1.09 quadrillion) as at end of 2019.

Money has to go somewhere

When a debt is raised, be it by the government, a company, or a household, it has to go somewhere. For most governments, debts are mainly raised for development expenditure, and if it is allowed by the constitution, on operating expenditure too.

Debts raised due to the pandemic perhaps has become the norm globally as well, as the government has no choice but to raise the required funding to support the economy.

In the US, the Fed also buys US treasuries and agency mortgage-backed securities and this effectively makes its way into the financial markets.

So while the Fed has expanded its balance sheet by more than 100% since the pandemic, the liquidity it has provided has caused significant gain not only in traditional asset classes but into everything else. Home prices are rising, commodities have boomed and markets are buoyant and cryptos have soared.

In the case of Evergrande Group, many are left wondering if it was a case of a “too-big-to-fail” company. Evergrande became a property developer largely by borrowing.

As a group, they also ventured into other businesses, which among others include electric vehicles, Internet and media production, theme park, football club, and even into mineral water and food production.

Evergrande’s massive business empire, grown out of debt means, while it has substantial assets, it also had huge liabilities. As Beijing has been strong in putting its house in order in the form of new regulations and guidelines for many industries, Evergrande too was not spared.

As early as August last year, the Chinese government had introduced a “three red lines” test for developers to meet if they wanted to borrow more.

This was firstly, liability to asset ratio of not more than 70%; secondly, net debt to equity ratio of not more than 100%; and thirdly cash to short-term debt ratio of more than 1.0.

Hence, the writings were already on the wall on Chinese developers more than a year ago that the regulators were serious in addressing debt-driven growth pursued by these companies. In Evergrande’s case, the debt hit the ceiling.

Why do we go into debt?

Debts taken by individuals are rather straightforward. Of course, there are good debts and bad debts. For most of us, it is for the purchase of big-ticket items like a roof over the head, and for mobility purposes, where most of us own a car.

Of course, we also indulge ourselves with material stuff, either from our savings or credit cards that we will pay off when the time comes. Some of us, due to lack of income or due to financial mismanagement, take on bad debts and that’s where the trouble starts as we are unaware of the consequences of rising personal debts and high-interest cost.

Stories of debts owed to money lenders are common within our society while Bank Negara statistics also show that one of the fastest-growing debt profiles among individuals is personal loans.

This has remained relatively high and has increased by 87.4% over the last five years alone to about Rm73.7bil as at end of August 2021, while its share of the banking system loans outstanding has increased from 2.7% to as much as 4.0% now.

According to Bank Negara’s Financial Stability Review report for the first half of 2021, Malaysia’s household debt to GDP has declined to 89.6% from 93.2% as at end of last year. Although a small achievement, the household debt level remains elevated. For a company, debts should be part of capital management as companies need to not only sustain their business operations but look at opportunities to grow and expand their market share, either via acquisition or via borrowings. However, similar to what we have seen in Evergrande’s case, companies too must observe their own “three-red-lines” to ensure they have the right mix and remain vigilant of its exposure.

Does Malaysia have the room to borrow more?

For Malaysia, with a higher debt ceiling of 65%, the government is effectively allowing itself to have some headway to borrow an additional Rm75bil to support the recovery momentum that most economists now expect will be much stronger in this fourth quarter period and 2022 and as we prepare ourselves for the post-pandemic period.

While we have created this room to enable us to borrow more, we must be mindful to borrow responsibly as debts that are taken today will be borne by future generations.

We also need to chart our way out of this debt-dependency black hole that we have been in since the Asian Financial Crisis of 1998 and get out of this conundrum.

While debt-to-gdp is just a denominator that is divided by a numerator that is steadily growing, we must find ways to manage our overall federal government debt and plan to reduce them post-pandemic.

That is a whole new topic altogether, and next week, this column will explore strategies that Malaysia can deploy to reduce its debt dependency.

PANKAJ C. KUMAR Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own. Source link

US federal debt crisis uglier than Evergrande trouble

There is much buzz amongst global investors recently about two possible debt defaults, though they are of different proportions in their would-be impact on global equity markets. One is the US federal government's rivers of borrowed money running dry and in urgent need of replenishing. The other is a major Chinese property developer which has run into financial trouble, because the company veered off the road by squandering too much on making electric cars and sponsoring a football club.

As US federal debt default looms, US Treasury Secretary Janet Yellen is facing her biggest test in her eight-month tenure to convince reluctant Republican lawmakers to agree to raise the US' national debt limit, which is currently set at $28.5 trillion. The stakes are high, because if Yellen's effort fails, the US financial system will collapse.

Yellen has called Republican leaders to convey the economic danger which lays ahead, bluntly warning that the Treasury Department's ability to stave off default is limited, and the failure to lift the debt cap by late October would be "catastrophic" for the country and the world.

Six former US treasury secretaries last week sent a letter to top US lawmakers, warning them a default would roil financial markets and blunt economic growth. According to US media reports, Yellen last week also warned the nation's largest banks and financial institutions about the very real risk of a default. She has spoken to chief executives of JPMorgan Chase, Bank of America, BlackRock and Goldman Sachs, briefing them the likely disastrous impact a federal default will produce.

To make things worse, both Democrats and Republicans in the US are at each other's throats now over US President Joe Biden's new $3.5 trillion spending bill, which proposes heavy tax raises on rich families and corporations, and has met fierce opposition from Republican lawmakers. Whether they will compromise on the debt limit, by making a last-minute deal with the White House to reduce Biden's giant spending plan remains to be seen.

Market analysts say if the US government defaults on its colossal debt, a financial system crisis of a magnitude larger than the 2008-09 debacle could occur, which is estimated to lead to an evaporation of $15 trillion in wealth and loss of 6 million jobs in the US. The capital market is now on tenterhooks facing a potential financial time bomb.

Last week, the US' major media outlets also focused their reportage on a possible default of a leading real estate developer in South China, but by all metrics, it is a risk of much smaller scale. The case is being closely watched by China's financial authorities and will never be allowed to develop into a systemic risk.

With regard to the privately-run property developer Evergrande, many fear the knock-on effects of the company's imminent difficulty to pay back principals and interests of borrowed money, including corporate bonds and bank loans. But, even if the city of Shenzhen with its deep pockets, where the company is headquartered, refuses to bail out Evergrande, one bankrupt company can hardly impact the stability of China's financial system, and the risks linked to this possibility have been widely overblown by a hyperventilating media.

Executives at Evergrande are launching a last-ditch rescue effort, trying to sell the company's electric car subsidiary and other assets in China and abroad, including the Guangzhou Evergrande Football Club. It is also selling its housing projects scattered in dozens of Chinese cities at a discount to speed up its cash flow. Whether the company is able to stave off a debt default remains unknown.

Evergrande said on Wednesday that it would make an interest payment on an onshore bonds due Thursday, but the company didn't say whether it had plans to make a $83 million coupon payment due on its US dollar bonds within a month.

The city government of Shenzhen, or the central government in Beijing, has not rushed to bail out Evergande most likely in the belief that the company itself is to blame for the predicament - too much leverage and squandering of borrowed funds ploughed into auto making and other fringe businesses and budgeting largesse. Authorities probably want the case to serve notice to investors at home and abroad, that they need to do their due diligence and enforce accountability on debtors.

However, the central government is almost certain not to tolerate a possible bankruptcy of Evergrande to spill over to draw down the broader Chinese economy, as the central bank has done numerous pressure tests since the 2008 global financial crisis, which was caused by the sub-prime housing debts in the US. Last year, the central bank required property developers to bring down their debt levels below certain thresholds before they are able to borrow more money from financial institutions. And, many Chinese commercial banks have ascertained their exposure to Evergrande is restricted.

So, debt-beleaguered Evergrande is unlikely to produce a firestorm and disrupt China's financial system. In addition, both the government and the central bank have plenty of policy tools, including easing overall monetary policy, to tide over Evergande if it goes under. But of course, the last resort is to bail it out and restructure the company, as China has done with other troubled corporations like HNA, Huarong and Baoshang Bank.

The author By Wen Sheng is an editor with the Global Times.

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