China has cut debt again to revive the housing sector

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SHANGHAI – China on Friday slashed its benchmark reference rate for mortgages by an unexpectedly wide margin, the second cut this year as Beijing seeks to revive the ailing housing sector to boost the economy.

Senior officials have vowed to take further action to combat the recession in the world’s second-largest economy, plagued by the COVID-19 outbreak that has led to stricter measures and mobility restrictions that have severely disrupted economic activity.

Many market participants believe Friday’s move is in response to Premier Li Keqiang’s call for decisive policy adjustments and a quick recovery of the economy.

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The country’s benchmark stock index, the Shanghai Composite Index, rose about 1% in trading at the start of Friday’s rate cut, but property shares were flat.

China, in a monthly fixing, cut its five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest decline since China restructured the process in 2019. One-year LPR was unchanged at 3.70%

Many private-sector economists expect the Chinese economy to shrink this quarter from a year earlier, compared to 4.8% growth in the first quarter. Indicators of credit debt, industrial production and retail sales show that covid-related measures and mobility restrictions have taken a heavy toll.

One of the mainstays of growth has been the property sector, which policymakers want to turn around. Property and related sectors account for more than a quarter of the construction economy.

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LPR is a loan reference rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use five-year LPR for mortgage rates, while most other loans are based on one-year rates. Both rates were cut in January to boost the economy.

Marco Sun, chief financial market analyst at MUFG Bank, said Friday’s cuts indicate that “China’s economic growth has faced increasing resistance this year.”

“The five-year lowering of LPR was an attempt to accelerate the recovery of the real estate sector,” Sun said, adding that authorities had been reluctant to cut rates for a year due to the recent significant liquidity situation in the banking system. One year LPR.

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A Reuters poll of 28 traders and eighteen analysts predicted a decline in both rates, including 12 who expected a 5-basis-point cut for each tenor.

A campaign by the authorities to reduce high debt levels turned into a liquidity crisis among some major developers last year, with bond defaulters and shelved projects shaking global financial markets.

Since the end of last year, Beijing has taken steps to help revive the property sector. These include making it easier for large and state-owned developers to raise funds, relaxing escrow account rules for pre-sale funds, and allowing some local governments to reduce mortgage rates and low-payment ratios.

This week, financial authorities allowed banks to lower interest rates on their mortgage loans for some home buyers. But that measure and Friday’s cut alone will not ease the funding pressure for developers, many of whom are struggling to refinance their loans.

Property shares have recently rebounded, but the muted response to Friday’s cut suggests some investors feel it is not enough to revive the struggling sector.

“Policymakers may have reached a consensus on whether to revive the property sector,” said Jing Zhaopeng, a senior China strategist at ANZ, who predicted further easing measures.

(Reporting by Winnie the Pooh and Andrew Galbraith; Editing by Christopher Cushing and William Mallard)