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China has made a record cut to its mortgage-related lending rate as policymakers roll out more targeted support for the country’s struggling real estate sector.
The People’s Bank of China announced on Tuesday that the benchmark five-year prime lending rate, which affects households’ borrowing costs, has been lowered from 4.2% to 3.95%. The 0.25 percentage point cut represented the largest reduction in the key rate since it was introduced in 2019 and exceeded analysts’ expectations of a 0.1 percentage point cut.
The one-year LPR, linked to business loans, remained stable at 3.45%.
The LPR cut, set by a group of large Chinese banks, signaled policymakers’ concerns about the failure to recover property purchases, an obstacle to faltering economic growth that has also been dragged down by weak consumer confidence, businesses and investors.
Beijing stopped rolling out broad stimulus last year, implementing a series of smaller measures – such as easing restrictions on home purchases and cutting borrowing costs – in a bid to support the debt-hit real estate sector, which in previously accounted for almost a third of economic income. growth.
“A cut to the five-year LPR is part of the policy package aimed at boosting the demand side of the real estate market,” said Yang Chang, policy analyst at Chinese brokerage firm Zhongtai Securities. “Together with other recent incentives, it reflects the political intent to activate the housing market and strengthen sentiment.”
Tuesday’s record LPR cut will increase pressure on Chinese banks to offer cheaper mortgages and suggests policymakers are sticking to a targeted easing strategy, analysts said. But while the move could incentivize first-time buyers, it will offer no imminent relief to existing homeowners, whose mortgages are revalued every January, they added.
“[The cut] is likely aimed at supporting the housing market recovery and could improve affordability for buyers by lowering mortgage rates,” said Lynn Song, ING’s chief economist for Greater China. “However, the cut could add further pressure to Chinese banks’ margins.”
Chinese authorities late last year renewed pressure on state banks to increase lending to private real estate developers and projects, but lenders have been reluctant to follow up, citing a lack of suitable projects.
Concerns are also growing about the banking sector’s profitability, which fell to historic lows in the third quarter of 2023 as lenders piled up bad debt on troubled developers and highly indebted local governments.
The LPR cut signals a possible change in how Chinese policymakers will guide banks’ interest rates in the future, some analysts said, after no changes were made to the medium-term lending facility, which manages the bank’s liquidity. banking sector. The two rates have been closely correlated in recent years.
The central bank kept the one-year MMF rate unchanged at 2.5% on Sunday, 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 cut the one-year LPR by 0.1 percentage points, keeping the five-year LPR stable. The five-year LPR was last reduced in June.
“Whether there will be cuts to the LPR now depends on banks’ ability to reduce funding costs,” said Ming Ming, an analyst at Citic Securities. “Big Chinese banks have cut deposit rates four times since 2022, which allows them to make further LPR cuts and sacrifice profits for the real economy.”
ING’s Song said the PBoC is likely to maintain a dovish stance in the coming months, with consumer price growth flat or in negative territory every month starting from July.
He predicted room in the near term for a further cut to the one-year LPR and the banking sector’s reserve ratio, which policymakers have reduced by 1% from the start of 2023.
Stock markets in Hong Kong and China were silent in response to the rate cut.
Hong Kong’s Hang Seng Index fell 0.6% before paring losses to 0.3%. The CSI 300 index of stocks listed in Shanghai and Shenzhen fell 0.7% before gaining 0.3%.
The Hang Seng Mainland Properties Index fell 1% before recovering as much as 0.3%.