China’s Largest-Ever Mortgage Rate Cut May Not Matter

Buildings under construction near the People's Bank of China office building in Chongqing, China, on Sept. 29, 2007. China Photos/Getty Images

News Analysis

On Feb. 20, the People’s Bank of China cut the country’s benchmark five-year loan prime rate for the first time since June 2023 as authorities moved to support the country’s faltering housing market and economy. Despite the biggest cut in history, experts have said that its effect on the housing market will be limited.

“We believe the impact on mortgages will be marginal as local governments have already been reducing mortgage rates,“ a reaction note from Everbright Securites states. ”Local governments have the flexibility to set their own mortgage rates if property price growth is negative for three consecutive months.”

In a surprise move, China’s central bank slashed the five-year loan prime rate (LPR) to 3.95 percent from 4.2 percent, reflecting market players’ past calls for more measures to prop up property demand. The rate had been lowered by 10 basis points in June 2023.

The central bank was also widely expected to cut its one-year loan prime rate from 3.45 percent to ease corporate borrowing costs, but it remained unchanged.

The mortgage rate cut of 25 basis points is the largest since the policy rate quote was introduced in August 2019.

One-quarter of the 27 market watchers polled by Reuters this week anticipated a cut to the five-year LPR. Five to 15 basis points was the anticipated cut.

The five-year rate affects mortgage pricing, and the one-year rate is the basis for most new and ongoing loans in China.

“Today’s 25 (basis point) cut to the five-year LPR is clearly aimed at supporting the housing market,” analysts from Capital Economics said in a note, according to a CNN report.

“On its own, it will not revive new home sales. But coupled with efforts to provide increased credit support to developers, today’s cut should help to reduce pressure on the property sector somewhat.”

According to Everbright, local-level average mortgage rates in Tier 2-4 cities are already below 4 percent.

Banks have recently seen a notable decline in funding costs after a cut in deposit rates, the minimum return in profit—called the required rate of return (RRR) that a bank seeks—and a cut in re-lending and rediscount rates for agriculture and small businesses.

The Everbright note cited that the interest rates of one-year Triple A-rated commercial deposits and five-year financial bonds dropped by 33 basis points and 30 basis points, respectively, from November 2023 levels and are also contributing factors for today’s cut.

“The 25 [basis point] cut, though historic, is minor compared with medium-term lending rates in previous years or benchmark interest rates several years ago,” the note added.

Insincere Efforts

Ever since a liquidity crisis in the real estate sector triggered by a government clampdown on developers’ borrowing in 2021, the real estate meltdown has been a drag on China’s economy.

Beijing reported 5.2 percent growth last year, but experts have questioned that number, arguing that there was a much lower growth rate. At the same time, the International Monetary Fund recently projected that China’s growth would fall to 4.6 percent by 2024. Some predict still lower growth, at about 3 percent this year.

Consequently, investment and real estate sales have been steadily declining since then, indicating the beginning of a protracted depression. Among the many prominent developers that have gone bankrupt is Evergrande, the country’s former No. 2 homebuilder, which was forced to liquidate last month.

Other developers, including Sunac, Greenland, and Country Garden—which defaulted on $11 billion worth of offshore bonds late last year, are facing similar crises.

Unpaid construction workers, buyers of unfinished homes, and investors suffering financial losses have all taken to the streets in protests caused by the crisis. China’s enormous shadow banking industry is also feeling the effects, with one company, Zhongrong Trust, declaring serious insolvency last year due to non-repayment of debt.

The real estate market contributes up to 30 percent of China’s GDP, and although Beijing has stepped up its efforts to rescue the sector, many argue that measures have been half-hearted.

“Beijing’s objective is to engineer a controlled decline for the real estate sector, not to revive the sector,” Paris-based asset manager Amundi Investment Institute said in a January report.

The measures taken by Beijing so far include reduced interest rates and reduced down payments on property, encouraging banks to extend maturing loans to developers, and relaxed limitations on property purchases in Chinese cities.

But investors and analysts are holding off on making any decisions until more steps boost consumption and stabilize housing prices, reports suggest.

Still, although the new reference rate might be implemented immediately, existing mortgage holders will not see a drop in loan repayments until next year, according to experts, because mortgage rate repricing happens once a year.

Twenty selected commercial banks submit recommended rates to the central bank monthly to determine the LPR, which is what banks usually charge their best clientele.

Foreign Investors’ Exodus

Disinflation, low consumer confidence, and rapid capital flight are among the litany of other woes ailing China’s economy.

Foreign investors have been particularly disenchanted with Beijing’s rescue efforts and are pulling out, betting on emerging markets such as India and Indonesia.

According to estimates in December 2023 by the Institute of International Finance, a U.S.-based association for the global financial services industry, Chinese stocks and bonds could see an outflow of $65 billion in 2024 from foreign investors. Elevated geopolitical risk and a change of investor sentiment would hold back foreign investors’ interests in Chinese stocks and bonds next year, the institute said.