On 4 February, the People's Bank of China (PBOC) cut banks' reserve requirement ratio (RRR) by 50 basis points to 19.5% amid growing concerns over China economy - following on from a couple of rounds of targeted RRR cuts in 2014. The move, effective on 5 February, will lower the amount of deposits that each lender is required to hold as reserves, while lenders to rural and small business will get further reductions. This is the first across-the-board cut since May 2012.
The latest RRR cut was triggered by weak economic data over the past few months. While the PBOC’s interest rate cut last November was a move in theory to lower financing costs, the RRR cut will lower financing costs more directly by releasing extra liquidity into the system.
What will the impact be for real estate?
Though the primary target of this cut is to help drive economic growth, the property sector - and in particular the residential sector - will benefit from improving liquidity and market sentiment. As a result of the increasingly accommodative policy since Q3 2014 we have seen a significant pickup in residential transaction volumes, in particular in major cities where demand is more diverse and rather resilient. According to Soufun, property prices in January 2015 saw their first positive growth in the last eight months. The benign policy environment will further underpin the gradual recovery of the residential property market in coming quarters.
Improving liquidity and lower interest rates - both as a result of the November rate cuts, and further expected cuts in coming months - are good signs for property investors in China. Investor interests continue to focus on Tier 1 cities where demand and supply is more balanced. Concerns over deteriorating liquidity, which have haunted the real estate industry since early 2013, should gradually alleviate thanks to improving market sentiment and more accommodative monetary policy environment.
Chinese government: room to maneuver
Despite the latest cut, China’s RRR is still close to a historic high, while the PBOC’s 1 - year official benchmark interest rate is one of the highest among all major economies at 5.6%. We believe that the Chinese government still has ample headroom to maneuver to avoid a hard landing.
CBRE believes that the accommodative monetary policy and stabilizing economic outlook will support business expansion and retail sales, which underpin the demand for office and retail. That said, the spike of supply in the near term will hinder the rental growth potential of office and retail properties.
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