Bank Reserve Cut Expected This Month as Borrowing Costs Stay High

Despite a late November interest rate cut by China’s central bank, the country’s economy continues to be hampered by high lending costs that could bring further action by the bank – including a reduction in reserve ratios – as early as this month.

The potential for cheaper lending could be good news for mainland property developers, who have among the highest leverage ratios of any industry and continue to be stretched by slow sales and falling home prices.

Analysts believe that the ongoing scarcity of funds for lending may be related to increased capital outflows as China’s investors head overseas in search of returns, as well as by a surge in the country’s equity markets.

Borrowing Costs Have Yet to Fall in China

According to a recent report in Bloomberg, even after the rate cut, the actual cost of borrowing in China has continued to climb. The rising costs of funding are reflected in a 13 basis point ascent in the Shibor (Shanghai one-month interbank offered rate), a money metric which rose to 4.20 percent since November 21st, when the People’s Bank of China (PBOC) announced its first interest rate cut in over two years.

When that previous rate cut occurred in July 2012, the Shibor fell by 113 basis points.

The rise in the bank financing barometer indicates that the rate cut has yet to have the intended effect of bringing down borrowing costs, and raises the likelihood of further loosening of the money supply in the near future.

Analysts Expect a Reserve Ratio Cut Soon

With the PBOC’s 40 basis point reduction in the country’s benchmark one-year loan rate failing to make cash available.

The Bloomberg account cites analysts from ANZ Bank, Bank of America and Credit Agricole CIB as forecasting an upcoming cut in bank reserve ratios, which had previously been cranked up to 20 percent of deposits in an effort to deflate the country’s asset bubbles.

The high cost of funding China has helped to contribute to a seven-month slide in the country’s home sales, which in turn is seen as putting China at risk of missing its target of 7.5 percent GDP growth for 2014.

Outbound Investment and Stock Market Contributing to Capital Shortage

Part of the reason that a reduction in the reserve ratio could be on the way is a record decline in China’s foreign reserves in recent months.

The country’s supply of foreign exchange slid by an unprecedented $105.5 billion during the third quarter, as figures from China’s Ministry of Commerce showed a surge of investment out of the country. The Ministry’s estimates now predict a record high of $120 billion in overseas investment by Chinese entities in 2014.

Also contributing to the cash shortage is the rush of capital into China’s stock market and the traditional need to hoard cash before China’s Spring Festival.

All of these factors point to a reduction in the reserve ratio sooner rather than later.

Property Developers Could Benefit from Easier Lending

While many analysts expect residential real estate prices to remain flat well into 2015 due to the large backlog of unsold homes, the prospect for better times does seem to be helping sales.

A survey of real estate developers by a research firm belonging to the Financial Times found that home sales in 42 Chinese cities rose 11 percent in November, compared to October. On an annualised basis, transaction volumes were up 6 percent – the first year on year rise since October 2013.

While the increases were being made from a very low base, the survey results do indicate the potential for further monetary easing to stoke more buyer demand and bright developer prospects.