Reserve ratio cut to boost lending to developers

The unexpectedly large cut in banks' required reserve ratio announced on Sunday will put more money into the market and ease developers' borrowing costs, giving a big boost to the flagging real estate sector, analysts said.

The one percentage point reduction to 18.5 percent by the People's Bank of China, the central bank, was twice the usual adjustment. Analysts estimated that it will allow banks to boost lending by unleashing about 1.2 trillion yuan ($194 billion).

Investors agreed, with shares of property developers rallying on Monday and the Shanghai Property Index rising 1.2 percent for the best performance among five industry groups, even as the Shanghai Composite Index dipped 1.64 percent.

China State Construction Engineering Corp jumped 9.1 percent to 9.85 yuan. Rongan Property Co, based in the second-tier city of Ningbo, Zhejiang province, rallied by the 10 percent daily limit to 26.93 yuan.

With the new liquidity, banks are likely to boost lending to homebuyers and developers, said Yang Hongxu, vice-president of the E-House China R&D Institute. Yang added that the banks have a "natural tendency" to lend more to "big clients" who borrow a large amount of outstanding debts. That tendency will likely reduce heavily leveraged developers' financing costs.

The central bank lowered the reserve ratio by 0.5 percentage point on Feb 4 and the benchmark interest rate by 0.25 percentage point on Feb 28.

Those moves combined to reduce the average corporate borrowing cost by 0.5 percentage point from the year-earlier level to 6.83 percent, according to central bank data.

Zhang Hongwei, chief analyst of Tospur Real Estate Consultancy, said that the reserve ratio cut will boost home sales by making it easier for banks to implement previous support policies, such as the PBOC's announcement on March 30 that it was cutting the minimum down payment for second-home buyers.

Zhang said that housing sales stayed flat in the first half of April despite these policies because banks had not implemented them at the local level. Before the ratio cut this weekend, banks were required to set aside 19.5 percent of their deposits as reserves, which hurt their lending ability.

With the lower reserve requirement, banks will be more willing to implement the 40 percent down payment ratio for second-home buyers who have outstanding mortgages.

Many in-house analysts at property agencies have urged potential buyers to snap up properties in first-tier cities at the lowest prices in some time. In Beijing, new home prices ended their eight-month decline in March and rose 0.3 percent over February. Pre-owned homes posted a larger gain of 0.5 percent.

Aside from first-tier cities, Zhang and Yang said prices in some second-tier cities with a less severe oversupply, such as Hefei (capital of Anhui province), Nanjing (capital of Jiangsu) and Nanchang (capital of Jiangxi), are set to rise in the coming months.

Zhang Dawei, chief analyst at Centaline Property, said: "Don't underestimate the Chinese government's determination to support the property market. Stabilizing the sector means stabilizing the overall economy."