China's Developers Breathe Easier, For Now

DECEMBER 1, 2011   THE WALL STREET JOURNAL

By TOM ORLIK

The wild card in China's real-estate sector—unpredictable government policy—just got wilder.

Wednesday's cut to the reserve requirement ratio for China's banks, which frees up more funds for them to lend, might have arrived in the nick of time for cash-strapped property developers. Squeezed between falling sales, tight financing and mounting debts, some had been forced to lower prices.

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Data from property consultancy SouFun published Thursday show average prices were down 0.28% month-to-month in November, the third monthly drop in a row. Many expect bigger price cuts to come. Two-thirds of developers surveyed recently by Standard Charted expected around a 10% drop in prices in the next six months.

A shift toward pro-growth monetary policy could change that outlook. Till now, the government has been cutting off funds for developers at both ends. Restrictions on house purchases cut revenue from sales. Controls on bank lending meant borrowing was tough. A looser monetary policy means one of those conditions will be eased.

Vice Premier Li Keqiang said last week that controls on the real-estate sector will remain in place, suggesting the government will make an effort to prevent extra funds from flowing into property. But there is little that can be done to prevent cash flowing to wherever the returns are highest—right now, that means hard-up developers.

The markets certainly see the reserve requirement cut as a positive for the sector. Shares in China's developers surged Thursday. Guangzhou-based Evergrande Real Estate Group rose 16%, one of many developers that outpaced a 5.6% gain in Hong Kong's Hang Seng Index.

A burst of liquidity won't address the fundamental problem of excess supply or bubble-high prices in China's property sector. Indeed, it will probably make them worse. But for now, investors are betting that a shift back toward easy money will postpone the day when those chickens come home to roost.