China will reduce borrowing rates again with the aim of reviving 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 the economy.

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

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

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The Shanghai Composite Index, the country’s benchmark stock index, rose about 1% in early Friday’s rate cuts, but real estate stocks were flat.

China has fixed monthly and lowered its 5-year loan prime rate (LPR) by 15 basis points to 4.45%. This is the largest decline since China renewed its mechanism in 2019. The 1-year LPR remained unchanged at 3.70%.

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 sectors such as real estate and construction account for more than a quarter of the economy.

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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. Both prices were reduced in January to boost the economy.

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.”

“Reducing the five-year LPR was an attempt to accelerate the recovery of the real estate sector,” Sun said, saying authorities would cut interest rates for one year due to the recent sufficient liquidity conditions of the banking system. He added that he had withheld. 1 year LPR.

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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. They will make it easier for large state developers to raise money, relax rules on pre-sales funding escrow accounts, and allow some local governments to reduce mortgage rates and down payments. Was included.

This week, financial authorities allowed banks to lower 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.

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.

“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.

(Report by Winni Zhou and Andrew Galbraith, edited by Christopher Cushing and William Mallard)