China cuts mortgage-linked lending rate by record amount to aid property market

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China has made a record cut to a mortgage-linked loan rate as policymakers roll out more targeted support to the country’s ailing property sector.

The People’s Bank of China announced on Tuesday that the benchmark five-year loan prime rate, which affects borrowing costs for households, was lowered from 4.2 per cent to 3.95 per cent. The 0.25 percentage point cut was the largest reduction of the benchmark rate since it was introduced in 2019 and exceeded analysts’ expectations of a 0.1 percentage point cut.

The one-year LPR, which is tied to business loans, remained steady at 3.45 per cent.

The cut to the LPR, which is set by a group of big Chinese banks, indicated policymakers’ concerns that home purchases had not rebounded, a hurdle for faltering economic growth that has also been dragged lower by weak consumer, business and investor sentiment.

Beijing stopped short of unleashing sweeping stimulus last year, implementing a series of smaller measures — such as loosening restrictions on home purchases and cutting loan costs — in an effort to support the debt-stricken property sector, which previously accounted for almost a third of economic growth.

“A cut to the five-year LPR is part of the policy package to boost the demand side of the real estate market,” said Yang Chang, policy analyst with Chinese brokerage Zhongtai Securities. “Along with other recent incentives, it reflects the policy intention to activate the real estate market and boost sentiment.”

The record LPR cut on Tuesday will add pressure on Chinese banks to offer cheaper mortgages and suggests that policymakers are sticking to a targeted easing strategy, analysts said. But while the move could incentivise new buyers, it will offer no imminent relief to existing homeowners, whose mortgages are repriced annually in January, they added.

“[The cut] is likely aimed at supporting the recovery of the property market and could improve affordability for buyers by lowering the mortgage rates,” said Lynn Song, ING chief economist for greater China. “However, the cut could add further pressure to Chinese bank margins.”

Chinese authorities late last year renewed pressure on state banks to increase lending to private property developers and projects, but lenders have been reluctant to follow through, citing a lack of suitable projects.

Concerns are also mounting about the banking sector’s profitability, which sank to record lows in the the third quarter of 2023 as lenders accrued bad debts to troubled developers and highly indebted local governments.

The LPR cut indicates a possible change in how Chinese policymakers will guide interest rates of banks going forward, some analysts said, after no changes were made to the medium-term lending facility, which manages banking sector liquidity. The two rates have been closely related over the past few years.

The central bank on Sunday kept the one-year MLF rate unchanged at 2.5 per cent, the lowest level since the rate was introduced in 2014.

In August, the PBoC cut the MLF by 0.15 percentage points and then a week later reduced the one-year LPR by 0.1 percentage point, while keeping the five-year LPR steady. The five-year LPR was last reduced in June.

“Whether there will be cuts in LPR now depends on whether banks can lower their funding costs,” said Ming Ming, analyst with Citic Securities. “China’s big banks have cut deposit rates four times since 2022, which allows them to make further cuts in the LPR and sacrifice profits for the real economy.”

ING’s Song said the PBoC was likely to maintain a dovish stance in the coming months, with consumer price growth flat or in negative territory every month since July.

He projected room in the near term for one more cut to the one-year LPR and the banking sector reserve ratio requirement, which policymakers have reduced by 1 per cent since the beginning of 2023.

Stock markets in Hong Kong and China were muted in response to the rate cut.

Hong Kong’s Hang Seng index fell as much as 0.6 per cent before paring losses to be up 0.3 per cent. The CSI 300 index of Shanghai- and Shenzhen-listed stocks fell as much as 0.7 per cent before gaining to be up 0.3 per cent.

The Hang Seng Mainland Properties index fell as much as 1 per cent and then climbed to be up 0.3 per cent.

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