China has acted to stimulate its slowing economy, cutting sharply the level of cash commercial banks must park with the central bank in a strong signal of intent to boost flagging growth.
The People’s Bank of China moved to free up cash to lend to business by cutting its so-called the reserve requirement ratio by 1 percentage point just days after data revealed the country’s economy expanded its slowest pace for six years in the first quarter.
The PBoC has only once before reduced the reserve requirement ratio by as much and that was during the depths of the financial crisis in November 2008.
“This clearly signals that China has entered into an aggressive monetary easing cycle, to counter the economic slowdown and the rising deflation risk,” said economists at bank ANZ. “This surprising move suggests the authorities are frustrated by the stubbornly high real interest rates facing the Chinese enterprises.”
The required reserve ratio, known as the RRR, specifies the portion of a commercial bank’s deposits that must be held on reserve at China’s central bank, wher it is unavailable for loans and other investments.
China has already cut benchmark interest rates twice and lowered the RRR once since November. The size of the latest reduction to 18.5 per cent exceeds analyst expectations for a 50 basis point cut sometime this month, after first-quarter growth slipped to 7 per cent, held back by a slowdown in construction and manufacturing.
That was the weakest quarterly expansion since early 2009. The Chinese government had previously announced a growth target of “around 7 per cent” for 2015.
China’s booming growth in recent years forced the PBOC to keep bank reserves high to help manage capital inflows. But now, slower growth has reduced the amount of foreign money flowing in while Chinese banks’ net foreign exchange purchases recorded their largest-ever decline in December and January.
“With the fall-off in capital inflows the central bank needs to cut reserve requirements fairly substantially just to keep monetary policy neutral,” said Andrew Batson of Gavekal Dragonomics, which forecasts that China will cut RRR by 200 basis points or more this year.
The move to lower the RRR on Sunday came a day after official data showed average new home prices fell year on year for a seventh consecutive month in March.
However, the dro narrowed from February after a number of cities introduced measures to encourage purchases. In Shanghai, home prices were flat, while prices in Beijing and Shenzhen rose.
The slower pace of decline in property prices suggests loosening measures adopted over the past year are starting to feed through.
New home prices fell in 49 of the 70 cities tracked by the statistics bureau, compared with 66 cities last month. Average prices fell by 6.1 per cent in March compared with a year ago, according to an FT analysis of official figures, but only by 0.2 per cent compared with a month earlier. In February, prices dropped 0.4 per cent from the month before.
Real estate supports about 40 industries, from cement and construction to furniture and other consumer goods. It accounts for about 15 per cent of Chinese economic activity.
A normal uptick in home buying during the spring played a role, but property agents also reported they were busier than usual.
“The rate of sales has been higher in the past month than it has for the past two or three years. Some apartments that have been on the market for over a year have suddenly sold,” said Wan Jie, a real estate agent in Beijing.
Late last month, authorities reduced minimum down payments for buyers of second homes and also cut to two years the length of time a seller had to have owned the home in order to avoid paying a business tax. The moves come as Chinese authorities become increasingly concerned at the rate at which the country’s broader economic growth is slowing.
The relaxing of restrictions winds back constraints put in place by former premier Wen Jiabao, whose curbs on bank lending and property purchases were designed to stop a politically unpopular rise in high-end housing prices.
Those policies helped feed the growth of China’s shadow banking sector, as desperate property developers turned to unregulated high-interest loans, and marked the incursion of state-owned developers into a sector that had previously been dominated by private entrepreneurs. (www.chinainout.com)
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