China made its biggest-ever cut to mortgage rates on Tuesday as authorities seek to support its struggling real estate sector, even as the response from stock markets was weak.
The People’s Bank of China said the country’s lenders will cut the five-year prime lending rate (LPR) by 25 basis points to 3.95%, a bigger cut than expected and the first since June last year . The one-year LPR was maintained at 3.45%.
Lowering borrowing costs is “a logical inevitability”, said Wei Yao, an economist at Societe Generale, as Beijing struggles to support an economy hit by a collapsing property market that has hit consumer confidence amid slow growth and a deflationary environment.
“This rate is especially important for the real estate sector as it is the benchmark rate for family mortgages and long-term business loans,” Yao added. “Clearly, the PBoC wants to target its easing at the property market, which continued to weaken towards the end of the year.”
The easing of monetary policy is the latest in a series of measures taken by the Chinese government to lift investor sentiment after the Shanghai Composite Index CN:SHCOMP hit a five-year low in early February.
Beijing has said in recent weeks it would support the stock market by encouraging government-linked funds to buy shares, and on Feb. 7 it replaced the head of securities regulators with a veteran seen as more market-friendly.
However, the response to Tuesday’s rate cut news was muted, with the Shanghai Composite Index rising 0.4% and Hong Kong’s Hang Seng HK:HSI rising 0.5%.
Stephen Innes, managing partner at SPI Asset Management, said Beijing’s latest move shows the government is stepping up efforts to stabilize the stock market and strengthen economic recovery amid current challenges, but that more needs to be done.
“To be sure, Beijing has put together a bailout package aimed at buying shares, signaling a proactive approach to dealing with market turmoil. The breadth of the measures is encouraging, but will likely lead to another chorus of calls for much greater fiscal and monetary stimulus,” Innes said.