China’s largest cut to key mortgage rate a ‘step in the right direction’ to prop up economy ahead of ‘two sessions’
- Five-year loan prime rate (LPR), which commercial banks use as a benchmark to adjust their mortgage rates, was lowered from 4.2 to 3.95 per cent
- Analysts expect more rate cuts this year, with China having already rolled out various measures to shore up its ailing property sector
China’s largest cut of its key reference rate for mortgage loans could herald more actions to improve market sentiment, shore up the crisis-hit property market and boost the overall economy, analysts said, as policy loosening could be high on the agenda during the “two sessions” next month.
The People’s Bank of China (PBOC) on Tuesday lowered the five-year loan prime rate (LPR), which commercial banks use as a benchmark to adjust their mortgage rates, from 4.2 to 3.95 per cent, marking the largest rollback since the system was introduced in 2019.
Meanwhile, the one-year LPR – an indication of market lending rates – remained unchanged at 3.45 per cent.
The PBOC cut rate was more than the market expected, which may indicate that the policymakers recognise the urgency to take action quickly
“The LPR rate cut is another step in the right direction to address the deflation problem China faces,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, adding that more aggressive fiscal policy easing is needed to boost effectiveness.
“Interestingly, the PBOC cut rate was more than the market expected, which may indicate that the policymakers recognise the urgency to take action quickly,” he added, expecting more rate cuts this year.
China has already rolled out various measures to shore up its failing property sector.
An urban real estate financing coordination mechanism has been set up in more than 100 cities to strengthen coordination between local governments and housing departments and support the financing needs of real estate projects.
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Credit to real estate projects exceeding 160 billion yuan (US$22.2 billion) has been extended under the mechanisms, state broadcaster CCTV said on Tuesday.
China’s housing mortgage loans totalled 38.2 trillion yuan (US$5.3 trillion yuan) at the end of December, government data showed.
But despite cutting the five-year LPR to a record low, which will help reduce household burdens and boost new purchases, analysts at Capital Economics warned that the central bank has remained reluctant to embrace the sizeable and broad-based rate cuts needed to drive a strong acceleration in credit growth and economic activity.
“On its own, the latest cut will provide limited help in driving a revival in housing sales. Mortgage rates have already fallen close to 200 basis points since late 2021, yet housing sales have continued to decline,” they said.
“The main roadblock to a recovery is the lack of confidence in the ability of developers to deliver pre-sold homes.”
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Last year, the sales area of commercial residential housing stood at 1.12 billion square metres (12.06 billion sq ft), representing a decrease of 8.5 per cent from the previous year, with the residential sales area dropping by 8.2 per cent, according to the National Bureau of Statistics.
The sales revenue of commercial residential housing, meanwhile, fell by 6.5 per cent to 11.66 trillion yuan, with residential sales decreasing by 6 per cent.
“We expect at least one more rate cut this year, but for the PBOC to stop well short of the large and broad-based rate cuts needed to drive a rebound in private sector credit demand and economic growth,” it added.
Xu Tianchen, a senior China economist with the Economist Intelligence Unit, said the cut would help the overall property market.
Fiscal policy will likely take the lead
“However, it is the existing homes which are likely to benefit the most, while the off-plan property market will continue to struggle as financing troubles affect construction,” he said.
“We expect Beijing will keep up the proactive stance with more policy support likely to be in focus at the [National People’s Congress] meetings in early March,” the bank said, with the annual parliamentary meetings set to begin on March 5.
“Fiscal policy will likely take the lead, though accompanied by ongoing support from monetary policies, capital markets, property markets and targeted growth industries will help growth to achieve a solid pace of around 5 per cent.”
