LPR Rate: China Cuts Mortgage Rate to Address Deepening Real Estate Crisis

The People’s Bank of China announced on Monday that it would lower its five-year loan prime rate to 4.3% from 4.45%. It also cut its one-year loan prime rate from 3.7% to 3.65%.

China’s prime lending rate is the rate at which commercial banks lend to their best customers. The five-year rate usually serves as a reference for mortgages.

Some experts said Monday’s main takeaway was a larger-than-expected drop in the five-year prime rate on loans, pointing to heightened housing concerns.

“It’s about ownership,” Larry Hu, Macquarie’s chief China economist, wrote in a report. “Today’s cut is much needed as the real estate sector is currently the biggest drag on the economy.”

Problems in the real estate sector, which accounts for up to 30% of China’s GDP and was already suffering from a protracted cash crisis, are putting significant pressure on the world’s second-largest economy.

The crisis has ballooned since sprawling developer Evergrande defaulted on its debt last year. Property prices have been falling, as have new home sales.
Last week, Country Garden, China’s biggest developer by sales, underscored the drop by saying in a stock filing that it expected profit for the first half of this year to fall as much as 70% from a year earlier.
Angry homebuyers across the country have threatened to default on mortgages on unfinished homes, rattling markets and prompting businesses and authorities to take action to defuse the crisis. In China, real estate companies can sell houses before they are completed.
Asia's richest woman lost more than half her fortune in China's real estate crisis

Mo Bin, chairman of Country Garden, attributed the gloomy earnings forecast to a drop in property sales, “the difficult business environment in the real estate industry”, the continuing fallout from the Covid-19 pandemic, the reduction in profit margins on some projects and foreign exchange. losses.

More aid from the state is expected. Several analysts said on Monday they anticipated further cuts to the five-year prime rate later this year.

Officials have also announced other measures aimed at propping up the sector. They include arrangements for certain loans to be extended on projects that have faced delivery delays, and for authorities to “help provide guarantees for on-land bond financing from selected privately owned developers,” Goldman Sachs analysts noted in a report on Monday.

By doing so, policymakers hope to help ease developers’ cash flow problems and restore confidence in the industry as a whole, they wrote.

“However, homebuyers with existing mortgages will have to wait until early next year for [latest] change to affect them,” Sheana Yue, China economist at Capital Economics, said in a report.

“Furthermore, the current weakness in loan demand is partly structural, reflecting a loss of confidence in the real estate market and uncertainty caused by recurring disruptions to China’s Covid-zero strategy,” it added. “These are obstacles that monetary policy cannot easily solve.”

— Laura He contributed to this report.

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