©Reuters. Mainland Chinese tourists walk in front of the skyline of buildings in Tsim Sha Tsui, in Hong Kong, China, May 2, 2023. REUTERS/Tyrone Siu
SHANGHAI/SINGAPORE (Reuters) – China cut its monthly benchmark mortgage lending rate more than expected on Tuesday, as authorities step up efforts to stimulate credit demand and revive the property market.
The improvement in commercial banks’ net interest margins following recent cuts in deposit rates and the reduction in bank reserves earlier this month has paved the way for lenders to reduce borrowing costs to support the economy.
The five-year prime lending rate (LPR) was lowered by 25 basis points to 3.90% from 4.20% previously, while the one-year LPR remained unchanged at 3.45%.
In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They predicted a cut of 5 to 15 basis points.
It was the biggest cut to the LPR since China revamped its loan pricing mechanism in 2019.
“This is a significant cut, which shows that policymakers are serious about providing support and stimulus to the economy,” said Christopher Wong, currency strategist at OCBC in Singapore. “This should provide some support to risk proxy currencies, including the AUD, but whether it will be enough to keep the momentum sustained remains to be seen.”
fell to its lowest since Nov. 20, while real estate stocks soared.
Most new and outstanding loans in China are based on the one-year LPR rate, while the five-year rate influences the price of mortgages.
The last time China reduced the five-year LPR was in June 2023 by 10 basis points.
Market watchers said the rate cut was well expected, but the size of the reduction exceeded their expectations. The central bank-backed Financial News had reported on Sunday that the benchmark LPR could fall in the coming days, with more likely to reduce the five-year term.
“The lowering of the five-year LPR will help stabilize confidence, promote investment and consumption, and also help support the stable and healthy development of the real estate market,” the newspaper said on its official WeChat account.
Although the new benchmark mortgage rate will take effect immediately, existing mortgage holders will not benefit from any reduction in loan payments until next year, as the mortgage rate review occurs on an annual basis.
China has stepped up efforts to rescue its ailing real estate sector. Government-backed media reported last week that state banks had increased lending to residential projects under a “white list” mechanism aimed at injecting liquidity into the crisis-hit sector.
The LPR, which banks normally charge their best customers, is set by 20 designated commercial banks who submit proposed rates to the central bank every month.