April 21, 2024
Economy

China makes largest cut to key mortgage rate, first reduction since June a ‘step in the right direction’ to prop up economy


The LPR rate cut is another step in the right direction to address the deflation problem China faces

Zhang Zhiwei

The move is set to further lower household burdens and also boost home purchases.

China’s housing mortgage loans totalled 38.2 trillion yuan (US$5.3 trillion yuan) at the end of December, government data showed.

Meanwhile, the one-year LPR – an indication of market lending rates – remained unchanged at 3.45 per cent.

“The LPR rate cut is another step in the right direction to address the deflation problem China faces,” said Zhang Zhiwei, president and chief economist at Pinpoint Asset Management, adding that more aggressive fiscal policy easing is needed to boost effectiveness.

“I think there will be more rate cuts to come this year in China. As the [US Federal Reserve] enters the rate cut cycle, it will mitigate the constraint that the PBOC faces. Interestingly, the PBOC cut rate was more than the market expected, which may indicate that the policymakers recognise the urgency to take action quickly.”

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China has already rolled out various measures to shore up its failing property sector.

An urban real estate financing coordination mechanism has been set up in more than 100 cities to strengthen coordination between local governments and housing departments and support the financing needs of real estate projects.

Credit to real estate projects exceeding 160 billion yuan (US$22.2 billion) has been extended under the mechanisms, state broadcaster CCTV said on Tuesday.

But despite cutting the five-year LPR to a record low, the central bank has remained reluctant to embrace the sizeable and broad-based rate cuts needed to drive a strong acceleration in credit growth and therefore economic activity, analysts at Capital Economics said.

The main roadblock to a recovery is the lack of confidence in the ability of developers to deliver pre-sold homes

Capital Economics

“On its own, the latest cut will provide limited help in driving a revival in housing sales. Mortgage rates have already fallen close to 200 basis points since late 2021, yet housing sales have continued to decline,” they said.

“The main roadblock to a recovery is the lack of confidence in the ability of developers to deliver pre-sold homes.

“As such, efforts to easing financing strains among developers are arguably more important.

“We expect at least one more rate cut this year, but for the PBOC to stop well short of the large and broad-based rate cuts needed to drive a rebound in private sector credit demand and economic growth.”

08:36

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The bank remains concerned about the impact that across-the-board rate cuts could have on the yuan, which has been under renewed pressure from the rising US bond yields, while improving the allocation of existing credit seems to be more urgent than engineering faster growth in new credit, Capital Economics added.

Last year, the sales area of commercial residential housing stood at 1.12 billion square metres (12.06 billion sq ft), representing a decrease of 8.5 per cent from the previous year, with the residential sales area dropping by 8.2 per cent, according to the National Bureau of Statistics.

The sales revenue of commercial residential housing, meanwhile, fell by 6.5 per cent to 11.66 trillion yuan, with residential sales decreasing by 6 per cent.

The cut would help the property market as a whole, as housing demand is returning with cheaper mortgage rates and falling home prices, said Xu Tianchen, senior China economist with the Economist Intelligence Unit.

“However, it is the existing homes which are likely to benefit the most, while the off-plan property market will continue to struggle as financing troubles affect construction,” he said.



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