China cuts borrowing rate more than expected to revive housing sector

Unfinished residential buildings are pictured at Evergrande Oasis, a housing complex developed by Evergrande Group, in Luoyang, China, on September 15, 2021.CARLOS GARCIA RAWLINS/Reuters

China cut its benchmark mortgage rate by an unexpectedly wide margin on Friday, its second cut this year, as Beijing seeks to revive a weakened housing sector to prop up the economy.

Senior officials promised additional measures to combat a slowdown in the world’s second-largest economy, hit by COVID-19 outbreaks that have prompted strict measures and mobility restrictions and caused huge disruptions to activity.

Many market participants believe Friday’s move was also a response to Chinese Premier Li Keqiang’s call to decisively step up policy tightening and allow the economy to return to normal quickly.

“Today’s cut in the five-year prime lending rate should help fuel a revival in home sales, which have gone from bad to worse recently,” Julian Evans-Pritchard of Capital Economics said in a note.

“But the lack of a one-year LPR cut suggests that the PBOC is trying to keep aiming for easing and that we shouldn’t expect large-scale stimulus like we saw in 2020.”

China, in a monthly fix, cut the five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest reduction since China renewed the interest rate mechanism in 2019 and more than five or 10 basic points proposed by the majority. in a Reuters poll. The one-year LPR was unchanged at 3.70%.

The country’s benchmark stock index, the Shanghai Composite Index, rose about 1% in early trading after Friday’s rate cut. The move failed to excite mainland Chinese-listed property stocks, which were flat, although Hong Kong-listed developers gained slightly.

Many private sector economists expect China’s economy to contract this quarter from a year earlier, compared with 4.8% growth in the first quarter. Indicators for credit loans, industrial production and retail sales showed that the strict COVID-related measures and mobility restrictions have taken a heavy toll.

A key drag on growth has been the real estate sector, which politicians are trying to reverse. Property and related industries such as construction account for more than a quarter of the economy.

China property sales in April fell at their fastest pace in around 16 years, while new home prices fell for the first month-on-month since December, hit by weak demand amid widespread lockdowns by COVID-19.

“Policymakers may have reached a consensus on whether to revive the real estate sector,” said Zhaopeng Xing, senior China strategist at ANZ, predicting further easing.

LIMITED SPACE FOR CUTS

The central bank has pledged to step up support for a slowing economy, but analysts say room to ease policy could be limited by concerns about capital outflows as the Federal Reserve raises interest rates. .

Capital Economics believes the lack of a one-year LPR cut suggests the central bank may be concerned about the potential effect on capital outflows and the yuan.

The LPR is a lending benchmark rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate. Both rates were lowered in January to support the economy.

Friday’s cut suggests “China’s economic growth was facing increasing resistance this year,” said Marco Sun, chief financial markets analyst at MUFG Bank.

Eighteen of 28 traders and analysts in a Reuters poll had forecast a cut in either rate, including 12 who expected a 5 basis point cut for each term.

A campaign by authorities to reduce high debt levels last year turned into a liquidity crisis among some major developers, resulting in bond defaults and shelved projects, rattling global financial markets.

Since the end of last year, Beijing has taken steps to help revive the real estate sector. These include making it easier for state and large developers to raise funds, relaxing rules on escrow accounts for presale funds, and allowing some local governments to lower mortgage rates and down payment rates.

This week, financial authorities lowered the floor on mortgage rates for some home buyers. But that move and Friday’s cut alone won’t ease financial strains on developers, many of whom are struggling to refinance debt.

Goldman Sachs estimates that the floor on the first-time mortgage rate would fall further to 4.25% from 4.4% previously.

Property stocks have rebounded recently, but the muted reaction to Friday’s cut suggests some investors think it may not be enough to revive the struggling sector.

Be smart with your money. Get the latest investment insights delivered directly to your inbox three times a week with the Globe Investor newsletter. sign up today.

Leave a Reply

Your email address will not be published.