China boosts housing market and renminbi support

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Chinese authorities stepped up measures to support the renminbi and boost the country’s housing market in an effort to restore confidence in the world’s second-largest economy.

The People’s Bank of China said on Friday it would cut the amount of foreign currency that financial institutions are required to hold in reserve, signalling its resolve to support the renminbi, which has dropped more than 5 per cent against the dollar this year.

Beijing and Shanghai also lowered minimum mortgage interest rates for first-time homebuyers. The moves in China’s two largest cities followed similar cuts this week in Guangzhou and Shenzhen, and came after authorities on Thursday announced cuts to both rates and downpayment ratios for mortgages.

Policymakers have picked up the pace of new measures to support China’s currency and economy, particularly in property, which accounts for more than a quarter of economic activity in the country.

But questions over the outlook of cash-strapped developers have subdued demand for Chinese securities and prompted investment banks to downgrade their forecasts for the renminbi’s dollar exchange rate.

The PBoC said it would lower its foreign exchange reserve requirement for banks from 6 per cent to 4 per cent, with effect from September 15, “in order to improve the capacity of financial institutions to use foreign exchange funds”. The renminbi rose as much as 0.2 per cent to Rmb7.2431 against the dollar following the move.

The reserve requirement cut boosts the amount of dollars available in the local market and means commercial banks can afford to cut the interest rates they offer on dollar deposits. That is intended to make it less attractive to convert renminbi into dollars, which has been contributing to pressure on the Chinese currency.

Becky Liu, head of China macro strategy at Standard Chartered, estimated the cut would only unleash about $16bn of US dollar liquidity. She said the move’s impact was primarily in signalling the central bank’s resolve to support the renminbi.

Sean Callow, senior currency strategist at Westpac, said: “It’s a very difficult battle for Chinese authorities to restore confidence in the currency given the combination of a resilient dollar and weak domestic data from the property sector.”

Analysts said the moves by regulators on Thursday to reduce the minimum downpayment requirement for first and second-home purchases and to cut interest rates for existing mortgages were significant.

John Lam, head of China and Hong Kong property research at UBS, said it could help anchor price expectations in the biggest cities.

“A national policy easing like this may help restore homebuyers’ expectation on property price, especially [in] tier 1 cities,” he said in a research note.

Nomura said the measures could provide a “brief respite” to housing markets but the impact could be “shortlived” as other restrictions on home transactions and land supply remained in place in large cities.

Other factors, including falling exports, geopolitics and weak confidence, would also continue to weigh on the economy and consumer sentiment.

“In our view, though these easing measures are very welcomed, they are definitely not enough to turn things fully around,” Nomura said. “Beijing may have to introduce more aggressive property easing measures to deliver a real recovery.”