Relaxed credit makes little impact on housing

The 50-basis-point cut in the reserve requirement ratio for commercial banks by the People's Bank of China on Friday, which is taken as a move to ease credit restrictions, will unlikely produce much of an impact on the country's struggling housing market. The central bank's cut in the amount that banks must hold in reserve will bring the ratio to 20.5 percent for large banks and 17 percent for small and medium-sized ones. Estimates said that about 400 billion yuan ($64 billion) of liquidity capital could be released following the reduction. Amid a drastic decline in the country's funds outstanding for foreign exchange and domestic commercial banks being plagued by lending insufficiency, the market has been anticipating such a move since the central bank's last cut that took effect on Dec 5, the first reserve reduction in three years. Expectations remained particularly high around the country's Lunar New Year on Jan 22. The later-than-expected announcement by the monetary authorities reflects its cautious manner in pushing for monetary policy adjustments. The message that the reserve cut will transmit to the market, along with the 400 billion yuan capital to be released, will produce certain effects on the domestic market, but we should not overestimate its effects on the real estate market as some analysts have predicted. Despite being regarded as a sign of the country's relaxation of its years-long restrictions on bank lending, the latest reserve cut is more a kind of slight monetary policy adjustments to adapt China's economy to domestic and global changes. It will not cause fundamental changes to the backbone of the country's tightening monetary policy. Some market analysts believe that part of the released liquidity will likely flow to the housing market and will help ease the ongoing funding shortage that has hit many developers. This, they believe, will possibly change the trend of the country's persistent regulation of the housing market. The reserve reduction will not mean the government's intention of relaxing its monetary policy on the housing market. Currently, the differentiated credit policy, whose core is putting a ban on third-home purchases by local residents and second-home purchases by non-local residents on mortgage loans, has made the biggest contribution to a lingering slump in the domestic housing market. Without essential changes to such a policy, there is no possibility for the latest reserve cut to refuel a new round of property speculation or tempt more potential homebuyers into swarming into the housing market. It is expected that without the participation of speculators whose speculation costs and risks have drastically increased following the adoption of the differentiated credit policy, the ensuing downward adjustments to domestic housing prices will remain inevitable whatever macroeconomic and monetary policy changes are adopted. At a time when expectations continue running high for a downturn housing tendency, most potential and self-accommodating homebuyers will likely bet on the decline of prices and not enter the market. This also reveals that the relaxation of the country's credit policy is not expected to produce considerable impact on the housing market. Some local governments that have become dependent on land sales and property developers for fiscal revenues have longed for relaxation of the country's tightened monetary policy so potential homebuyers can enter the market to break a lingering stall in home sales. For many potential homebuyers, the biggest problem, however, is not whether the country's credit policy will be relaxed, but their under-capacity to buy still expensive homes and whether housing prices will fall within their payment capacity. It is expected that the majority of potential homebuyers can enter the market only after housing prices decline to a reaonable level, which will really help the struggling housing market pull out of a lingering dilemma. For indebted and funds-thirsty property developers, the latest reserve cut will also not change their under-funding predicament. In recent years, the funds composition of developers has undergone some essential changes with bank loans only holding a small portion. For example, in 2011, developers nationwide gained a total of 8.3 trillion yuan for property development, of which only 1.25 trillion yuan came from bank loans, about one-seventh of the total funds. Besides, the strict monitoring and restrictions put in place by the authorities over some high-risk investment projects also make it more difficult for developers to gain access to banking loans. Under these circumstances, even a relaxed credit control is unlikely to cause the flow of too much funds to the housing market following the latest reserve cut. Only when self-accommodating housing demands instead of speculation dominates the country's housing market, a new and sustainable boom could boost the struggling sector. The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.