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Amid slowing consumer demand and rising prices, the Chinese government on May 20 cut its main mortgage rate to tide over the economic slowdown from the Covid-19 pandemic as well as the property slowdown. China’s interest rate cut of the key borrowing rate is the biggest move since the country’s rate system was reformed in 2019.
The five-year loan prime rate (LPR) was cut to 4.45% from 4.6%, a reduction that will impact the borrowing costs on existing mortgages across the country. Bloomberg earlier reported that economists were expecting the central bank to cut the LPR by 10 basis points, and the 15-point cut comes as a surprise.
ING in a note said that the rate cut is not designed to help property developers ease their financing needs and is instead targeted at individuals to get a mortgage at a lower interest rate. “This could increase sales of residential property, which will help property developers to increase their cash flows from sales and allow them to repay debt. As such, the leverage ratio of indebted property developers should go down,” ING said.
While the 5-year LPR saw a cut, the People’s Bank of China left the benchmark 1-year LPR unchanged, which ING believes is to keep the interbank rate stable.
China’s economic slowdown adding pressure
China’s zero-Covid policy and lockdowns are weighing on the economy with a fall in consumer sentiment, whereas the property slowdown has seen a string of developer defaults and declining home prices. Official data showed that retail sales of consumer goods in China fell 11.1% in April, whereas home sales have dropped 42% year-on-year in April, the biggest monthly fall since the pandemic began.
“Aside from weakness in consumption, industrial production and investment activities, the sharp decline in bank loans reveals a more fundamental challenge – a lack of confidence among both corporate and household sectors,” said Shanghai-based Chaoping Zhu, Executive Director Global Market Strategist at JP Morgan Asset Management.
“With this latest LPR cut, the funding costs could decline even further, allowing debtors to save costs. More importantly, lower LPR may help boost the demand in property and land market, which is critical to support local government financing.”
Friday’s rate cut is part of a string of measures China has taken to shore up its economy, however, economists say the efforts fall short of the large monetary easing policy the central bank deployed after the pandemic. JP Morgan’s Zhu says a stronger fiscal stimulus is expected in the form of direct subsidies or cash payout to consumers to stabilize domestic demand and employment.
“But the lack of any reduction to the one-year LPR suggests that the PBOC is trying to keep easing targeted and that we shouldn’t expect large-scale stimulus of the kind that we saw in 2020,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note.
Asian investors cheered the China central bank decision, with the Hang Seng Index closing 2.96% higher, while Hang Seng Tech index was up 4.74% at the end of the day. On Friday, the Shanghai Composite index ended 1.6% higher, Japan’s Nikkei 225 rose 1.27%, India’s Nifty50 closed 2.89% higher, and Australia’s ASX 200 was up 1.15%.
