China cuts key rate more than expected to revive housing sector

The PBOC earlier reduced the floor on the rate for new mortgages in an attempt to spur demand for new loans. PHOTO: REUTERS

BEIJING  (REUTERS) - China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday (May 20), its second reduction this year as Beijing seeks to revive the country's ailing housing sector to prop up the economy.

Senior officials have pledged further measures to fight a slowdown in the world’s second-biggest economy, hit by Covid-19 outbreaks that prompted stringent measures and mobility restrictions and causing huge disruptions to activity.

Many market participants believe that Friday’s move was also a response to Chinese Premier Li Keqiang’s call to decisively step up policy adjustments and let the economy return to normal quickly.

“Today’s reduction to the five-year loan prime rate (LPR) should help drive a revival in housing sales, which have gone from bad to worse recently,” Mr Julian Evans-Pritchard at Capital Economics said in a note.

“But the lack of any reduction to the one-year LPR suggests that the People’s Bank of China is trying to keep easing targeted and that we should not expect large-scale stimulus of the kind that we saw in 2020.”

China, in a monthly fixing, lowered the five-year LPR by 15 basis points to 4.45 per cent, the biggest reduction since China revamped the interest rate mechanism in 2019 and more than the five or 10 basis points tipped by most in a Reuters poll. The one-year LPR was unchanged at 3.7 per cent.

The country’s benchmark stock index, Shanghai Composite Index, rose roughly 1 per cent in early trading on the rate cut on Friday. The move failed to excite mainland-listed property shares, which were flat, suggesting some investors think it may not be enough to revive the struggling sector.

Many private sector economists expect China’s economy to shrink this quarter from a year earlier, compared with the first quarter’s 4.8 per cent growth. Indicators from credit lending, industrial output and retail sales showed that Covid-19-related stringent measures and mobility restrictions have taken a heavy toll.

A key drag on growth has been the property sector, which policymakers are seeking to turn around. Property and related industries such as construction account for more than a quarter of the economy.

China’s property sales in April fell at their fastest pace in around 16 years, while new home prices declined for the first time month on month since December, hurt by weak demand amid wide Covid-19 lockdowns.

“Policymakers might have reached a consensus on whether to revive the property sector,” said ANZ senior China strategist Xing Zhaopeng, predicting further easing measures.

The central bank has pledged to step up support for the slowing economy, but analysts say the room to ease policy could be limited by worries about capital outflows as the Federal Reserve raises interest rates.

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

The LPR is a lending reference rate set monthly by 18 banks and announced by the PBOC. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate. Both rates were lowered in January to support the economy.

Friday’s cut suggested that “China’s economic growth was facing increasing resistance this year”, said Mr Marco Sun, chief financial market analyst at MUFG Bank.

This week, the financial authorities cut the floor of mortgage rates for some home buyers. But that measure and Friday’s cut alone will not ease the financing stresses for developers, many of whom are struggling to refinance debt.

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