PBOC Cuts Interest Rates to Spark Sagging Real Estate Sector

In a surprise move late on Friday, China’s central bank cut interest rates for the first time in more than two years, and the move appears largely aimed at spurring real estate sales.

The People’s Bank of China’s (PBOC) announcement that it would cut the country’s benchmark one-year loan rate by 0.4 percentage points to 5.6 percent and reduce the benchmark one-year deposit rate to 2.75 percent caught most analysts off guard as the central bank had repeatedly said that China needed to refrain from broad-based stimulus measures to keep lending under control and prevent asset bubbles.

However, the move is consistent with repeated recent efforts by the bank to encourage greater mortgage lending, and the larger 40 basis point cut in the one-year lending rate, compared to only a 25 basis point cut in deposit rates, indicates that home loans are the target of this latest move.

Targetted Measures Not Getting It Done

Prior to rolling out this rate cut, the PBOC had said that selective easing would be adequate to support growth, and had also argued that slower growth was not a major cause for concern.

During 2014 China’s housing market, which forms the largest part of a real estate sector estimated to account for 15 percent or more of GDP, has suffered through more than six months of falling prices. Statistics released earlier this month indicate that new home sales were down 9.9 percent during the first 10 months of 2014, compared to the same period last year.

With the country struggling to meet the central government’s target of 7.5 percent growth for the year, the central bank has introduced a number of measures, many of which targetted the property markets, to encourage lending.

Since September the PBOC had injected an estimated RMB 769.5 billion ($126 billion) into the money supply, while also expanding the availability of mortgage financing and reintroducing discounted mortgages for more buyers.

The central bank also began encouraging banks to securitise and sell mortage debt, a practice which had previously been banned for several years.

However, with home sales still tepid, many consumers were still finding mortgages too high to consider jumping back into the market.

Real Estate Stocks Surge on Rate Cut News

While this rate is unlikely to make a fundamental change in China’s real estate market, the sign that the government is taking steps to rekindle growth has already been encouraging to investors.

In trading in the US that took place after the PBOC’s announcement, NYSE-listed Xinyuan Real Estate was up five percent on the day to $2.60 per share from $2.47 per share. Real estate website Soufun was up 13.8 percent and property agency E-House rose 10.8 percent, with both companies trading on the NASDAQ.

While the cut in interest rates should make it more profitable for banks to lend, it may be too soon to expect this translate into large numbers of new mortgages. The cost of borrowing in China remains high compared to many markets, and the recent slowdown has only made banks more concerned about risks and reluctant to lend.

More Easing on the Way Soon

With this surprise rate cut signalling a change in the government’s approach to handling the current economic slowdown, there is already speculation that there may be several further rounds of rate cuts in the coming year, if the economy continues to falter.

Before that happens, however, it appears that PBOC may be taking a stealthy approach to tweaking banks’ loan-to-deposit ratios.

In a change that may take effect on January 1st, a government official familiar with policy discussions said that banks will soon be able to increase the pool of deposits on their books by counting savings held for non-deposit-taking finance companies together with other deposits on their balance sheets, according to an account in Bloomberg.

With Chinese banks limited to loaning out a maximum of 75 percent of their deposits, the proposed change in policy would make another RMB 7 trillion suddenly count as bank deposits.

With 2014 nearly over, the country’s performance versus its year-long GDP target of 7.5 percent growth will likely determine the amount of easing that China sees next year as it struggles to keep its economy chugging along without further exacerbating asset bubbles.