HONG KONG/BEIJING (Reuters) – Property developers, among China’s most heavily leveraged companies, will get a negligible lift from the country’s first benchmark interest rate cut in two years as sales slip and banks pull back on lending to the sector.
After a long bull run, China’s property market, which makes up about 15 per cent of its economy and is the main driver of demand in some 40 industries from cement to steel, has grappled with soft prices and mounting inventories for at least six months.
That prompted China’s central bank to cut its benchmark lending rates by 40 basis points to 5.6 per cent on Nov 21, reversing in part its drive to cool a sector that many feared had become so bloated by speculative froth that it was crowding out other forms of investment.
But the lowering of the lending benchmark will bring only marginal relief to the sector’s biggest headaches – too much unsold stock and tight liquidity.
“The fundamental problem of China’s housing market is over-supply,” said Ding Zuyu, co-president of real estate services firm E-House China, and a few home buyers encouraged by the rate cut wouldn’t change that.
New home prices in China dropped for a seventh consecutive month in November from the previous month, a survey by the China Real Estate Index System (CREIS) showed.
The force of the cut will also be enfeebled because bank lending to the property sector is in decline, having dropped 23.3 per cent in the third quarter from the previous three months, Reuters calculations from central bank data showed.
“The impact on property will be limited because for developers, funding access is more critical than borrowing cost,” said Su Aik Lim, Fitch Ratings analyst.
“Even if interest cost falls, access to borrowing is poor, so weak developers still cannot avoid a liquidity crisis when their sales slow.”
Standard & Poor’s said this week liquidity was a key risk for some developers, while forecasting a 5 per cent fall in average selling prices in 2015.
Moody’s expects residential property sales to shrink between 0 and 5 per cent, too.
All of which will make banks yet more wary about lending to the weaker players, which leaves them ever more reliant on their ability to keep generating cash.