China seeks to ease household pressure, free up spending power by pushing banks to lower mortgage rates

Authorities say they will continue to ‘support the stable and healthy growth of the property market’ amid China’s overall economic slowdown
Consumers are increasingly cautious with spending on homes, cars and household appliances while under pressure to make monthly mortgage payments

China's economic recovery

Luna Sunin Beijing

Published: 9:00pm, 2 Aug 2023

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China’s central bank will guide commercial banks to lower mortgage rates for existing borrowers, as well as reduce the down payment ratio on properties, in a move seen as vital to ease the financial burden of households and release consumer spending power amid a floundering real estate market that is eroding the economy.

The pledges came as part of the central bank’s priorities for the second half of the year, which include addressing financial risks, increasing the attractiveness of the yuan for foreign investors and further supporting the real estate market to shore up an economy which disappointed the market in the second quarter.

Authorities will continue to “support the stable and healthy growth of the property market,” and extend aid to ensure timely deliveries of pre-sold homes, said the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange during their midyear work conference on Tuesday.

Real estate accounts for the largest source of both household wealth and liabilities, with monthly mortgage payments taking up a large portion of household income.

Amid uncertainties in the labour market and the broader economic outlook, consumers with mortgages are increasingly cautious with spending on homes, cars and household appliances.

Real estate investment dropped by 7.9 per cent in the first six months of the year, while weak demand is further reducing property prices.

China has also continued to face capital outflow pressures as foreign investors have dumped large amounts of stocks and assets due to the economic slowdown and a weak yuan.

The central bank has vowed to simplify procedures for foreign investors to invest in the Chinese market, while helping overseas investors to increase their holdings of yuan assets and promoting the internationalisation of the currency.

[We will] closely monitor cross-border capital fluctuations, strengthen macroprudential management, and maintain the yuan exchange rate

People’s Bank of China

“[We will] closely monitor cross-border capital fluctuations, strengthen macroprudential management, and maintain the yuan exchange rate at a basically stable level around a reasonable and balanced equilibrium,” the PBOC said.

China has been counting on consumption to revive the economy, while the market is closely watching a potential shift in property market policy, which could pause the overriding principle of “houses are for living in, not for speculation”. The policy has long been cited in major government meetings over the past six years.

In 2008, when property demand fell in the face of the global financial crisis, China offered universal mortgages with discounts of up to 30 per cent.

Further reduction in borrowing cost is needed to help lower corporates’ and households’ interest payment burdens

Goldman Sachs

“Due to low inflation, real rates drifted higher despite the recent policy interest rate cuts, creating room for more cuts to nominal interest rates. Further reduction in borrowing cost is needed to help lower corporates’ and households’ interest payment burdens,” Goldman Sachs said on Wednesday.

“[However], monetary policy easing is more impactful when accompanied by demand-side stimulus such as faster fiscal expenditures and more property policy easing, which would still be needed to support overall economic growth.

“The PBOC will likely expand structural policy tools such as the relending programme, as well to boost overall credit quantity and direct more funding to policy focus areas.”

The investment bank said it expects a 25 basis point cut to the reserve requirement ratio (RRR) – the amount that banks set aside for deposits – in the third quarter and a 10 basis point policy interest rate cut in the fourth quarter to “increase interbank liquidity and lower funding costs for the real economy”.

China’s central bank cut the RRR by 25 basis points in March, while it also cut its policy interest in June amid a host of moves to lower the financial burden on households and also help stabilise the cooling property sector.

In addition, Chinese households’ inability to refinance mortgages with high interest rates is resulting in higher savings to pay off their mortgages faster, according to Houze Song, a researcher with Paulson Institute.

“Our estimate indicates that during the first half, Chinese households repaid some 2.5 trillion yuan (US$349 billion) of mortgages ahead of schedule,” he said.

“As Beijing continues to prohibit households from refinancing their mortgages, the trend of early mortgage repayment will continue.”