Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious OutperformanceFind Stocks Now

China slashes mortgage reference rates to revive property market

Published 02/19/2024, 08:33 PM
Updated 02/20/2024, 03:50 AM
© Reuters. Mainland Chinese tourists walk in front of the skyline of buildings at Tsim Sha Tsui, in Hong Kong, China May 2, 2023. REUTERS/Tyrone Siu

SHANGHAI/SINGAPORE (Reuters) -China announced its biggest ever reduction in the benchmark mortgage rate on Tuesday, as authorities sought to prop up the struggling property market and broader economy.

The 25-basis point cut to the five-year loan prime rate (LPR) was the largest since the reference rate was introduced in 2019 and far more than analysts had expected.

"This is the biggest signal. In other words, the largest interest rate cut cycle in history has begun," said Yan Yuejin, analyst at E-House China Research and Development Institution. The cut will directly impact the real estate sector by lowering mortgage costs, he said.

The five-year loan prime rate (LPR) was lowered by 25 basis points to 3.95% from 4.20% previously, while the one-year LPR was left unchanged at 3.45%.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They projected a cut of five to 15 basis points.

The deeper-than-expected cut also suggests Beijing is no longer as concerned about the negative effects of lower lending rates on the currency or banks as they were last year.

A central bank-backed newspaper said on Tuesday that the benchmark mortgage rate cut would not create a negative impact on banks' net interest margins.

At the same time, diminished spillover effects from other major economies, particularly the United States where the Federal Reserve is now expected to cut rates, allowed Beijing to provide more monetary policy support.

3rd party Ad. Not an offer or recommendation by See disclosure here or remove ads .

Still, authorities are likely to remain wary of pressure on the yuan from lower domestic rates.

The Chinese currency fell to its lowest since Nov. 20 after the LPR announcement but has since trimmed losses.

Sources told Reuters that China's major state-owned banks stepped in to the market selling dollars for yuan, in an attempt to arrest weakness.

In stock markets, while the property and banking sectors made gains, the rates decision failed to shore up broader investor confidence.

China last trimmed the five-year LPR in June 2023 by 10 basis points.

Beijing has stepped up efforts to rescue the ailing property sector, but the measures have come in fits and starts, weighing heavily on a sector that drives a quarter of the economy and on the stock market. New home prices saw their worst declines in nine years in 2023, while the stock market is languishing after hitting five-year lows.

Government-backed media last week reported that state banks have boosted lending to residential projects under the "white list" mechanism aimed at injecting liquidity into the crisis-hit sector.

Most analysts and investors are waiting for more measures to boost consumption and put a floor under property prices, their hopes higher after authorities replaced the chairman of the market regulator just before the Lunar New Year break.

"I think this move is more signal than substance," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong. "Most people aren't buying houses because mortgage costs are too high, they're worried about developers going bankrupt and house prices falling."

3rd party Ad. Not an offer or recommendation by See disclosure here or remove ads .

"But it does signal a determination to support the housing market. We need to see if this is followed up with more cash injections into lenders, housing projects and developers."

More easing could be coming. Recent deposit rate cuts and the reduction to bank reserves are giving commercial banks space to reduce borrowing costs to support the economy.

While the new mortgage reference rate comes into effect immediately, existing mortgage holders will not benefit from any reduction in loan repayments until next year, as mortgage rate repricing is on a yearly basis.

The LPR, which banks normally charge their best clients, is set by 20 designated commercial banks who submit proposed rates to the central bank every month.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.