China has cut its debt rate more than expected 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 decline 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 and huge disruptions to activity.

Many market participants believe Friday’s move was in response to Chinese Premier Li Keqiang’s call for decisive policy adjustments and for the economy to return to normal quickly.

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Julian Evans-Pritchard of Capital Economics said in a note: “Today’s five-year lowering of the loan prime rate should help revive housing sales, which have recently gone from bad to worse.

“But the lack of a reduction in the one-year LPR indicates that the PBOC is trying to simplify targets and we should not expect the kind of large-scale stimulus we saw in 2020.”

In monthly fixing, China cut its five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest reduction since China restructured its interest rate system in 2019 and more than the five or 10 basis points offered by most. According to a Reuters poll. One-year LPR was unchanged at 3.70%.

The country’s benchmark stock index, the Shanghai Composite Index, rose nearly 1% in trading at the start of the rate cut on Friday. The move failed to stimulate the mainland-listed property shares, which were flat, although Hong Kong-listed developers saw a slight increase.

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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 industries such as construction account for more than a quarter of the economy.

In April, Chinese property sales fell at their fastest pace in nearly 16 years, while new home prices fell for the first time in months since December, hit by a massive COVID-19 lockdown amid weak demand.

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

Limited room for cutting

The central bank has promised to boost support for the slowing economy, but analysts say raising the Federal Reserve’s interest rates could limit policy easing by worrying about capital outflows.

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

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 support the economy.

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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.”

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 the rules for escrow accounts for pre-sale funds and allowing some local governments to reduce mortgage rates and low-payment ratios.

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This week, financial authorities cut the mortgage rate floor 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.

Goldman Sachs estimates that the floor of the first-house mortgage rate will be further reduced from the previous 4.4% to 4.25%.

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. (Reporting by Winnie Zhou, Andrew Galbraith and Kevin Yao, Editing by William Mallard and Sam Holmes)