China Cuts Mortgage-Linked Loan Rate to Boost Ailing Property Sector
China’s central bank, the People’s Bank of China, has made a significant cut to a mortgage-linked loan rate in an effort to provide targeted support to the country’s struggling property sector. The benchmark five-year loan prime rate (LPR), which affects borrowing costs for households, was lowered from 4.2% to 3.95%, marking the largest reduction since its introduction in 2019. This cut exceeded analysts’ expectations of a 0.1% reduction and indicates policymakers’ concerns about the slow rebound of home purchases, which has been hindering economic growth.
The one-year LPR, which is tied to business loans, remained steady at 3.45%. The decision to cut the LPR, set by a group of major Chinese banks, reflects policymakers’ intention to stimulate the real estate market and boost sentiment. It is part of a broader policy package that includes other recent incentives aimed at activating the real estate market and increasing demand.
While the record LPR cut may incentivize new buyers by lowering mortgage rates, it offers no immediate relief to existing homeowners whose mortgages are repriced annually in January. The move puts pressure on Chinese banks to offer cheaper mortgages and suggests that policymakers are sticking to a targeted easing strategy. However, analysts warn that this could add further pressure on Chinese bank margins.
Chinese authorities have been urging state banks to increase lending to private property developers and projects, but lenders have been hesitant due to a lack of suitable projects. The banking sector’s profitability is also a concern, as it reached record lows in the third quarter of 2023 due to bad debts from troubled developers and highly indebted local governments.
The LPR cut may signal a change in how Chinese policymakers guide interest rates for banks in the future. Analysts note that no changes were made to the medium-term lending facility (MLF), which manages banking sector liquidity. The two rates have been closely related in recent years. The central bank kept the one-year MLF rate unchanged at 2.5%, the lowest level since its introduction in 2014.
Looking ahead, analysts predict that the PBoC will maintain a dovish stance in the coming months, with consumer price growth remaining flat or negative since July. There may be room for one more cut to the one-year LPR and the banking sector reserve ratio requirement, which policymakers have already reduced by 1% since the beginning of 2023.
The stock markets in Hong Kong and China had a muted response to the rate cut. The Hang Seng index initially fell but later recovered to be up 0.3%, while the CSI 300 index of Shanghai- and Shenzhen-listed stocks also experienced a similar trend. The Hang Seng Mainland Properties index fell briefly before climbing to be up 0.3%.
Overall, the record cut to the mortgage-linked loan rate in China demonstrates policymakers’ efforts to revive the ailing property sector and boost economic growth. While it may encourage new buyers, existing homeowners will not see immediate relief. The decision puts pressure on banks to offer cheaper mortgages but also raises concerns about their profitability. Chinese authorities are expected to continue implementing measures to support the real estate market, and further cuts to interest rates and reserve ratios may be on the horizon.