China cuts 5-year mortgage rates as property crisis worsens

China has cut its mortgage rates for the second time this year as the country’s central bank tries to mitigate the effects of a liquidity crisis in the real estate sector.

The prime rate for five-year loans was cut to 4.3 percent from 4.45 percent on Monday, which is higher than the average economist forecast polled by Bloomberg and equal to a May rate cut, the largest ever.

The cut in the benchmark, which is based on rates offered by domestic lenders and published by the People’s Bank of China, will lower borrowing costs for new mortgages across the country and boost the country’s debt-laden real estate sector. , which accounts for nearly a third of annual economic output.

The one-year LPR, which is also based on domestic Chinese lending rates and mainly used to price corporate loans, was lowered from 3.7 percent to 3.65 percent.

The higher-than-expected cut in mortgage rates helped strengthen Hong Kong’s Hang Seng Mainland Properties index, which rose 1.4 percent on Monday. But it did little to boost broader markets, as the benchmark CSI 300 index of Shanghai and Shenzhen-listed stocks rose just 0.7 percent.

Analysts at Capital Economics said the five-year LPR cut wouldn’t affect most outstanding mortgage rates until early next year, but the move suggested the PBoC was “particularly concerned about housing market problems”.

Strategists warned that the rate cut is unlikely to resolve a crisis of confidence facing Chinese developers, many of whom are struggling to finish incomplete “presold” homes for which down payments have already been received. The construction financing method has become increasingly common as authorities have tackled over-indebtedness in the sector in recent years.

“Until now, lower mortgage rates have not translated into higher real estate sales due to the lack of confidence in major developers and the presales model,” said David Chao, global market strategist at Invesco. “Policymakers may need to take more non-traditional measures or even some form of intervention to restore confidence in the real estate market.”

Last week, the estimated first-half profit of Country Garden, the country’s largest real estate group by revenue, fell 70 percent, in the latest sign that a funding crisis once limited to high-risk developers like China Evergrande has spread to the rest of the country. industry.

Analysts said the central bank is likely to cut the LPR at least one more time in five years this year. “If the market sees progress in the construction of unfinished projects, we may see an improvement in housing sentiment and house prices should stabilize,” said Iris Yang, chief economist for Greater China at ING.