Will rate cuts boost China's property sector?

China's interest cut has triggered split views on whether it will boost the sluggish property market, as some believe it will cut funding costs, while others see the opposite.

The People's Bank of China (PBOC) on Nov. 21 decided to cut its benchmark one-year lending rate by 40 basis points to 5.6 percent and lowered the one-year deposit rate by 25 basis points to 2.75 percent. Other benchmark deposit and lending rates will be lowered accordingly.

The interest rate cut, the first by the PBOC since July 2012, is credit positive for property developers, because it will likely cut developers' borrowing costs and support property sales, said a Moody's report.

The rate cut is expected to spur residential property sales in the next few months in conjunction with the PBOC's mortgage-policy relaxation on Sept. 30, it said.

On Sept. 30, the PBOC announced measures to loosen lending rules for mortgages. The rule easing expanded the pool of eligible homebuyers and increased the loan ceiling by categorizing second homebuyers who had no outstanding home loans as first-time buyers.

The Chinese property market suffered a remarkable downturn in 2014, with weak market sentiment and confidence, sluggish sales, falling prices, and elevated and rising inventory, all weighing on the industry's outlook and consumers' confidence.

The report believes the interest rate cut will reduce borrowing costs for developers with high levels of bank loans, the costs of which are usually linked to the floating PBOC rate. Home buyers' expectation that borrowing costs will decline may encourage them to purchase homes, which will boost sales volumes for developers.

Others believe it will neither improve the financial profiles of Chinese homebuilders nor stimulate housing sales in any meaningful way.

The funding challenge faced by smaller homebuilders is one of access, rather than cost. Smaller homebuilders have poor access to domestic bank loans, which is the main reason they resort to other funding channels, including shadow banking, a Fitch report said.

A marginal lowering of the benchmark rate will not meaningfully alter their predicament. For larger homebuilders, who continue to have good access to domestic banks, interest costs in general account for only around 5 percent of home prices, meaning the rate cut will have a negligible impact on their profitability, it said.

The cut may stimulate the mortgage market, but a decline in mortgage loan rates may also encourage further speculative demand in cities with tight supply, while having limited impact on end-user demand in cities that face excess housing supply.

The move will not stimulate first-time homebuyers' demand as they tend to be strapped for cash for down payments, and reductions in housing loan rates have no effect in enticing them to buy, the Fitch report said.

Until uncompetitive developers quit the market and the sector's consolidation is complete, negative sentiment will persist. Any effort to stimulate the market with sustained monetary policy may be counterproductive as the demand that is created may be primarily speculative, it said.

Another Fitch report forecast sales in 2014 will fall by around 10 percent. Therefore, sector consolidation and restructuring will continue in the next 12 months, which will force out the smaller and weaker developers. In this condition, housing price appreciation will be limited.