China cuts borrowing rate more than expected to revive housing sector

SHANGHAI, May 20 (Reuters) – China cut its benchmark mortgage rate by a surprisingly wide margin on Friday, its second cut this year as Beijing seeks to revive the ailing housing sector to support the economy. .

Senior officials have promised new measures to tackle the slowdown in the world’s second-largest economy, hit by COVID-19 outbreaks that have led to stringent measures and mobility restrictions and caused huge disruptions to business.

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

“Today’s reduction in the five-year prime rate should help revive home sales, which have gone from bad to worse recently,” Julian Evans-Pritchard of Capital Economics said in a note.

“But the absence of any one-year LPR reduction suggests that the PBOC is trying to maintain targeted easing and that we should not expect a full-scale stimulus of the kind we saw in 2020.”

China, in a monthly fix, cut the five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest cut since China revamped the interest rate mechanism in 2019 and more than the five or 10 basis points slanted by most in a Reuters poll. The one-year LPR remained unchanged at 3.70%.

The country’s benchmark stock index, Shanghai Composite Index (.SSEC), rose about 1% in early trading after Friday’s rate cut. The move failed to spur mainland-listed property stocks, which were flat, although Hong Kong-listed developers edged higher.

Many private sector economists expect China’s economy to contract this quarter from a year earlier, down from 4.8% growth in the first quarter. Indicators for credit loans, industrial production and retail sales showed that strict COVID-related measures and mobility restrictions have taken their toll. Read more

One of the biggest drags on growth has been the real estate sector, which policymakers are looking to turn around. Real estate 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 about 16 years, while new home prices fell for the first month-on-month since December, hurt by weak demand amid broad COVID-19 lockdowns.

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

LIMITED SPACE FOR CUTS

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

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

The LPR is a benchmark lending rate set monthly by 18 banks and announced by the People’s Bank of China. 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 decline suggests that “China’s economic growth was facing increasing resistance this year,” said Marco Sun, chief financial markets analyst at MUFG Bank.

Eighteen of 28 traders and analysts in a Reuters poll had forecast a cut in either rate, including 12 who expected a 5 basis point cut for each tenor. Read more

A campaign by the authorities to reduce high debt levels turned into a liquidity crunch last year among some big developers, leading to bond defaults and abandoned projects, rattling global financial markets.

Since late last year, Beijing has taken steps to help revive the property sector. These include making fundraising easier for large developers and public developers, relaxing rules on escrow accounts for presale funds, and allowing some local governments to reduce mortgage rates and debt ratios. ‘deposit.

This week, financial authorities lowered the floor on mortgage rates for some homebuyers. But this measure and Friday’s cut alone will not ease funding constraints for developers, many of whom are struggling to refinance debt. Read more .

Goldman Sachs estimates that the mortgage rate floor for the first home would be lowered further to 4.25% from 4.4% previously.

Property stocks have rebounded recently, but Friday’s muted reaction to the drop suggests some investors believe that may not be enough to revive the struggling sector.

(Reporting by Winni Zhou, Andrew Galbraith and Kevin Yao, Editing by William Mallard and Sam Holmes)

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