PBOC Eases Lending as Real Estate Investment Plummets

China’s central bank moved sharply to increase the money supply yesterday just days after new data showed investment in the country’s real estate market dropping quickly, and overall GDP growth falling to its lowest level in six years.

The People’s Bank of China (PBOC) lowered the reserve requirement ratio – a control set on how much cash banks must keep on hand – by a full percentage point effective today. The dramatic reduction in the restriction is the largest since 2008 and the second time the bank has reduced the ratio this year.

Moving Back to Stimulus Mode

The move by the PBOC is the latest measure taken to combat China’s deepening slowdown and growing investor gloom, and came just four days after a marked decrease in the pace of real estate investment was revealed.

Year on year growth in investment in property projects fell to just 8.5 percent for the period from January to March of this year, down sharply from the 10.4 percent growth recorded in January to February, and just a fraction of the nearly 20 percent annual growth that the industry was enjoying at the beginning of 2014.

Although China has been attempting to shift away from its overdependence on investment, and reduce the role of the property sector in the economy, too quick of a decline in a sector that accounts for more than 15 percent of GDP is not welcomed by the leadership as they struggle to reach this year’s growth target of seven percent.

The new figures on real estate investment, which were published by the National Bureau of Statistics last week, were accompanied by a 19.8 percent annual drop in the amount of new floor space under construction during the first quarter, and a 15.8 percent fall in the amount developers spent to purchase new project sites.

More Stimulus on the Way

Although Sunday’s reduction in the reserve requirement frees up around RMB 1.2 trillion ($194 billion) for banks to lend, more stimulus is likely on the way.

With the statistics bureau also announcing last week that the country’s economy achieved only seven percent annual growth in the first quarter, many analysts expect further cuts in interest rates this quarter, and at least one more reduction in the reserve requirement.