China’s central bank acted decisively on Friday to pump more credit into the nation’s economy in the face of recent economic data indicating that the nation’s economy is slowing faster than the government has planned.
The People’s Bank of China (PBOC) cut benchmark interest rates by twenty-five basis points and lowered the reserve requirement ratio by a half-percentage point, after the country’s latest batch of economic data indicated this week that top-line GDP growth had fallen to 6.9 percent this year, and other indicators had also disappointed.
The decision announced on Friday was the sixth time since November of last year that the PBOC had cut interest rates, and the fourth time over the same period that it had cut bank reserve requirements.
Despite this sequence of monetary loosening, however, China’s real estate developers have grown increasingly wary of making new investments as many cities find themselves flooded in unsold housing started during the recent economic boom.
The resistance of China’s real estate industry to monetary stimulus underlines the challenges that the country faces due to years of over-investment in some sectors.
Pumping Up Credit to Revive Growth
PBOC Governor Zhou Xiaochuan has cut interest rates six times in the last year
This latest rate cut takes China’s benchmark rates down by 0.25 percentage points to 4.35 percent, and the one-year deposit rate will also fall to 1.5 percent from 1.75 percent. The reserve requirement ratio (RRR) for all banks was reduced to 17.5 percent, effectively releasing RMB560 billion ($90 billion) into the banking system (although many sees these funds replacing cash drained from China’s money supply by capital outflows in recent months).
While China’s leadership has previously stated its resolve to rein in asset bubbles and avoid credit risks, in the face of slower than expected growth this year, it has repeatedly moved to open up the money supply.
Despite the series of monetary measures, however, many if not most economists believe that the 6.9 percent GDP growth figure that China released on Monday may be overly optimistic, as export industries continue to struggle and other areas of the economy also fall short of targets.
In general, growth in investment in fixed assets slowed to 10.3 percent year-on-year over the first nine months of 2015 – below what many analysts had projected.
Cheap Money Hasn’t Brought More Real Estate Projects
With the real estate sector contributing an estimated 15 percent of China’s GDP, the government now seems eager for the country’s developers to begin building more projects.
After foreign markets grew leery of China developer bonds, and the stock market crashed, the government supported the industry by reopening the domestic bond industry, giving even heavily indebted developers such as Evergrande fresh access to cheap credit.
While many builders have now taken advantage of this new credit and lower interest rates to refinance some of their existing debt and lower their overall borrowing costs, this has not yet translated into investments into new projects.
The growth rate in investment by China’s real estate developers over the last year has been sliding roughly in parallel with the interest rate cuts, with investment growth slowing to just 2.6 percent over the first nine months of 2015, compared to the same period last year.
Consumers Not Swayed by Cheaper Credit
Developers are staying away from projects in smaller cities due to an overhang of unsold homes, and in first-tier cities where demand for housing is still healthy, new plots of land for projects are scarce and prohibitively expensive for most builders.
While rate cuts should also make new homes more affordable for consumers, and help sell off some of the existing home backlog, recent history shows that, while lower downpayment levels spur new sales, cutting (or raising) interest rates usually has limited impact on sales activity.
So, in the lower-tier cities, developers are battling oversupply problems caused by the last round of monetary easing in China during 2009-2010, while in the large cities skyrocketing costs have made new projects unaffordable for many.
Until these issues are resolved, cuts in interest rates or lower reserve ratios will do little to revive activity in the real estate sector.
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