China relaxes grip on mortgage rates and Shanghai jumps to cut, showing challenges in curbing speculation

China’s central bank rolled out new interest rate reforms this week, granting banks greater autonomy in setting mortgage rates as part of an effort to implement a more market-oriented lending system.

The relaxation, however, immediately resulted in something that Beijing did not want to see - Shanghai took the opportunity to cut the city’s interest rate floor below the minimum rates recommended by the central bank.

Beijing and local governments have pushed out a number of regulations to rein in rapidly rising house prices that have made ownership unaffordable for China’s middle class. The central government has made clear that it will not relax restrictions any time soon to boost economic growth, which is slowing amid a trade war with the United States. 

Shanghai’s move to set the floor mortgage rate at 4.65 per cent, some 20 basis points below the People’s Bank of China’s (PBOC) recommended floor of 4.85 per cent, has underlined the challenges faced by the Chinese monetary authority in blocking cheap funds flowing into the property sector and inflating housing prices.

It has also stirred debate over whether China can reconcile its conflicting goal of raising interest rates to deter property speculators, while cutting costs for borrowers such as single homeowners, workshops and pig farms.