Chinese cities ease mortgage rules in bid to revive property sector

© Reuters. FILE PHOTO: A screen showing the Hang Seng stock index is seen outside Exchange Square, in Hong Kong, China, August 18, 2023. REUTERS/Tyrone Siu/File Photo

By Ziyi Tang, Liangping Gao and Clare Jim

BEIJING/HONG KONG (Reuters) -Two of China's biggest cities eased mortgage curbs and the country's top banks flagged mounting risks from the deepening property sector turmoil on Wednesday, as Beijing ramps up efforts to shore up the sputtering economy.

Guangzhou, China's fifth biggest city, and the tech hub of Shenzhen said that mortgage curbs would be eased, allowing home buyers to enjoy preferential loans for first-home purchases regardless of their previous credit record.

The moves comes after Chinese authorities called on cities to broaden the definition of first-home mortgage as part of a string of other measures to revive the troubled property market, which accounts for roughly a quarter of the economy.

In other support measures, some Chinese state-owned banks are also expected to lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, in the first such cut since the global financial crisis.

Beijing hopes the reduction in mortgage payments will help revive consumer demand for property.

Those measures are, however, adding to concerns about the impact on Chinese banks.

Two of China's biggest banks - Industrial and Commercial Bank of China Ltd (ICBC) and Bank of China (BoC) - reported sluggish profit growth and shrinking profit margins for the first half.

In a sign of mounting challenges for lenders from the deepening property crisis, BoC's Chief Risk Officer Liu Jiandong said the bank's mortgage asset quality was facing pressure, but there was no material deterioration.

China's mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks' total loan books.

The Chinese property sector has lurched from one crisis to another since 2021, and contagion fears deepened this month after liquidity stress in leading developer Country Garden became public.

Just how cash-strapped Country Garden is will be the focus when China's largest private property developer reports its first-half results on Wednesday.

SUPPORT MEASURES

The expected reduction in existing mortgage rates is one of several support measures Beijing has announced in recent weeks, as concerns mount about the health of the world's second-largest economy.

Some analysts and home buyers were not convinced about how effective the steps would be in reviving buyer demand, as consumer confidence has been badly hit by economic woes that pushed the youth unemployment rate to a record high in June.

Property agents said there were few people shopping in the secondary market, and commercial mortgage rates are still much higher than the rates offered by the housing provident fund, a savings program by governments for housing purchases.

Homeowner Jackson Wang said he is going to move his mortgage with a top Chinese bank to the provident housing fund, which would lower his interest rate to 3.2% from the current 4.8%. He pays more than 5,000 yuan per month for a flat in the eastern city of Linyi.

"I have already bought a home at a high price and been paying a high mortgage, so I'm hoping for a rate cut," Wang, 38, said.

"I'm too disappointed in China real estate. I will not be attracted by the sector again unless home prices are reduced, a lot."

Raymond Cheng, Hong Kong-based head of China research at CGS-CIMB Securities Ltd, said the easing in mortgage rules came too late and any boost to home sales may not be significant given very weak home buyer sentiment.

"The impact could be much bigger on developers' sales if regulators implemented the policy six to nine months ago," he said.

BANKS' MARGIN

The mortgage rate cuts will add to margin pressure on banks already battling headwinds such as lower lending rates, pressure from the government to prop up the economy, as well as bad debts related to developers and local government financing vehicles.

BoC said that some local government financing vehicles (LGFV) -- which play a key role in the country's infrastructure development -- have defaulted, but the business is operating steadily.

"For Bank of China the current overall business with local government financing platforms remains stable, and the total amount of credit granted is relatively moderate among peers," BoC's Liu said.

"Therefore, the asset quality has declined slightly compared with the beginning of the year but it is still under control."

Big state-owned banks have recently been rolling over loans to LGFVs - which have an estimated $9.1 trillion in debt - or lent more to them.

Vivian Xue, director of APAC Financial Institution at Fitch Ratings, said revenue pressure on the banking sector was expected to persist into 2024, due to narrowing margins and tepid retail loan demand.

To soften the effect, the sources told Reuters that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points.