Chinese government seeks to stabilize housing market with lower lending and rates



Chinese banks lowered their benchmark lending rates while authorities stepped up support for the property market with additional lending, a government-led attempt to ease the worsening housing crisis and bolster borrowing demand. .

The five-year prime lending rate, a benchmark for mortgages, was cut 15 basis points to 4.3% after being cut by the same amount in May. The prime rate on one-year loans was cut to 3.65% from 3.7%, the first cut since January, and less than the 10 basis point cut expected by economists.

The rate cuts were the latest in a series of actions designed to help the real estate sector, days after the PBOC and two other ministries announced that special loans would be offered through political banks to ensure that blocked real estate projects are delivered to buyers. Last week, the central bank surprised by cutting its one-year lending rate by 10 basis points, another sign of increasing support.

The real estate crisis is exacerbating a severe slowdown in the world’s second largest economy. As consumer and business confidence already grapple with the threat of repeated coronavirus lockdowns, hundreds of thousands of homebuyers go on mortgage strike and more households save and avoid mortgages. debt – factors that further complicate the recovery.

“We have already reached the point where the central government really needs to step in,” Hyde Chen, head of strategy and asset management for Haitong International, said in an interview with Bloomberg TV, with the housing market contributing about 20 at 30 percent. cent of the gross domestic product, it has become an “elephant in the room”.

“They really need to provide a safety net, to provide the reassurance that a home buyer can say, ‘OK, the house I bought can be delivered. The price probably has some upside before I really need to go back,” he added.

Chinese stocks rose after Monday’s rate announcement, with the benchmark CSI 300 climbing 0.8% at the lunch break to lead the gains in Asian equities. A gauge of property developers jumped 1.6%.

While lower borrowing costs may help boost loan demand, it is unlikely to reverse the sharp decline in confidence.

The weighted average interest rate on newly originated mortgages already plunged in June to 4.62%, the lowest level since 2017. minimum mortgage rates is set. 20 basis points below the rate.

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The difference in magnitude between each loan’s prime rate cut on Monday suggests a desire to stimulate demand for real estate and mortgages while keeping short-term borrowing costs relatively stable. Banks need to preserve profits as their average net interest margin has narrowed this year due to looser monetary policy and weak borrowing demand.

Banks are full of cash, but unwilling or struggling to fund projects. Credit demand weakened sharply in July, prompting some economists to warn of a “liquidity trap” in China, where low interest rates are failing to stimulate lending in the economy.


What Bloomberg economists say…

“Monetary easing alone may not be enough to revive demand, which has been shattered by the housing crisis and Covid Zero restrictions. Restoring business and consumer confidence will likely require a larger policy shift.
— Eric Zhu, Economist

The PBOC, meanwhile, is also tasked with guiding monetary policy and ensuring the economic recovery is on track while keeping an eye on inflation, which accelerated in July to its highest level in two years.

“A more cautious reduction in the LPR year on year can avoid further inflationary pressure,” given that liquidity in the economy is still abundant, said Bruce Pang, chief economist and head of research for Greater China. at Jones Lang LaSalle Inc.

He added that the PBOC could take additional steps, including reducing the amount of cash banks must hold in reserve to replace maturing policy loans and reduce banks’ funding costs.

Recent policy actions “are clearly more aggressive than before,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “The authorities are aware of the accumulation of stress [in the property sector] imposes a fairly high macroeconomic risk, so they must act quickly and aggressively to address these issues. »

LPRs are based on the interest rates that 18 banks offer their best customers and are quoted as a spread over the central bank’s rate on its one-year loans, known as the medium-term loan facility. .

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