China lowers borrowing rates more than expected to revive the housing sector

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Shanghai — China unexpectedly drastically lowered its mortgage benchmark base rate on Friday. This is the second cut this year as Beijing is trying to revive the sick housing sector to support its economy.

High-ranking government officials have promised further steps to combat the world’s second-largest economic slowdown. This led to the outbreak of COVID-19, which prompted strict measures and movement restrictions and caused great disruption to activities.

Many market participants believe that Friday’s move is also in response to China’s call for Prime Minister Li Keqiang to resolutely strengthen policy adjustments and bring the economy back to normal quickly.

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“Today’s five-year mortgage reduction should help drive the recent revival of home sales,” said Julian Evans Pritchard of Capital Economics.

“But the fact that the one-year LPR has not been shortened suggests that the PBOC is trying to continue to relax its goals and should not expect the massive stimulus seen in 2020. doing.”

China fixed monthly and lowered its 5-year loan prime rate (LPR) by 15 basis points to 4.45%. This is the biggest cut since China renewed its interest rate mechanism in 2019, with most people exceeding 5 or 10 basis points. In a Reuters poll. The one-year LPR remained unchanged at 3.70%.

The Shanghai Composite Index, the country’s benchmark stock index, rose about 1% in early trading due to a rate cut on Friday. The move failed to excite mainland-listed real estate stocks, which had been flat, although Hong Kong-listed developers rose slightly.

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Many private economists expect China’s economy to shrink from the same period last year, compared to 4.8% growth in the first quarter. Indicators of credit lending, industrial production and retail sales show that strict COVID-related measures and movement restrictions have had a major impact.

The main impediment to growth is the real estate sector, where policy makers are looking for a turnaround. Related industries such as real estate and construction make up more than a quarter of the economy.

China’s real estate sales fell at the fastest pace in about 16 years in April, but new home prices fell month-on-month for the first time since December.

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“Policymakers may have reached an agreement on whether to revive the real estate sector,” said Xing Zhaopeng, senior Chinese strategist at ANZ, anticipating further mitigation measures.

Limited room for cuts

Central banks have promised to step up support for the slowdown, but analysts say fears of capital outflows could limit policy relaxation as the Federal Reserve raises interest rates. I am saying.

Capital Economics believes that the lack of a year’s LPR cut suggests that central banks may be concerned about capital outflows and potential impacts on the yuan.

LPR is a loan reference rate set monthly by 18 banks and published by the People’s Bank of China. Banks use a five-year LPR to determine the price of a mortgage, but most other loans are based on a one-year interest rate. To support the economy, both prices were reduced in January.

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Marco San, chief financial market analyst at MUFG Bank, suggests that Friday’s cut “China’s economic growth was facing more and more resistance this year.”

In a Reuters poll, 18 out of 28 traders and analysts predicted a decline in either rate, 12 of whom expected a 5 basis point reduction each period.

Authorities’ campaigns to reduce high debt levels shook the global financial markets last year, creating a liquidity crisis among some major developers, resulting in bond defaults and shelved projects.

Since the end of last year, Beijing has taken steps to support the revival of the real estate sector. This will make it easier for large state developers to raise funds, relax rules on pre-sales funding escrow accounts, and allow some local governments to reduce mortgage rates and down payments. Is included.

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This week, financial authorities have lowered the lower limit on mortgage rates for some homebuyers. But that measure and Friday’s cuts alone cannot ease the stress of developer funding. Many developers are having a hard time refinancing their debt.

Goldman Sachs estimates that the lower limit for first-home mortgage rates will be further lowered from the previous 4.4% to 4.25%.

Real estate stocks have recently rebounded, suggesting that the modest reaction to Friday’s cut suggests that some investors believe it may not be enough to revive the struggling sector. There is. (Report by Winni Zhou, Andrew Galbraith, Kevin Yao, edited by William Mallard and Sam Holmes)