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China has cut its main interest rate underpinning mortgage lending by the most on record as policymakers seek to mitigate the economic impact of severe anti-coronavirus restrictions and a property sector slowdown.
The five-year loan prime rate was lowered from 4.6 per cent to 4.45 per cent on Friday. The reduction in the rate, which is set by a committee of banks and published by the People’s Bank of China, will directly reduce the borrowing costs on outstanding mortgages across the country.
A cut was widely anticipated following data this week showing worsening economic conditions across the economy, but the 15 basis point reduction exceeded analyst expectations and was the most since the country’s rate system was reformed in 2019.
President Xi Jinping, who is this year bidding for an unprecedented third term in power, has intensified the country’s strategy of virus elimination even as the economy has slowed sharply and the real estate sector has fallen into a severe decline.
The zero-Covid approach limited case numbers significantly for much of the past two years, but over recent months has struggled to stamp out an outbreak of the highly infectious Omicron variant. The Omicron wave has led to the closure of Shanghai for nearly two months and full or partial lockdowns of hundreds of millions of people across the country.
Official data for April released on Monday provided the clearest evidence of a sharp decline in activity stemming from the wave of lockdowns, with retail sales in April falling 11 per cent year on year. Industrial production, a core driver of China’s rebound from the pandemic’s initial shock two years ago, fell 3 per cent — its first decline since early 2020.
The measures unveiled on Friday added to a pattern of gradual monetary easing in China, which was already grappling with a debt crisis in its economically critical real estate sector before the latest lockdowns were imposed.
Liquidity problems late last year sparked a wave of defaults from developers and a severe slowdown in the property market.
The five-year LPR rate is set by banks but is influenced by various PBoC measures. The rate was also cut in January, and the further reduction this week was widely viewed as part of an attempt to support the real estate industry, where sales by floor space plunged 42 per cent in April. Last weekend, the effective benchmark for mortgage lending to first-time buyers was also cut by 20 basis points.
The one-year LPR, which is instead mainly used to price corporate loans, remained unchanged at 3.7 per cent.
“This is a very targeted approach . . . basically highlighting their desire to support the real estate sector, which is clearly under stress,” said Becky Liu, Head of China Macro Strategy at Standard Chartered, who added that the PboC was guiding the rate lower.
“What has been announced or what has been done has not led to a stabilisation of the real estate sector,” she added.
Chaoping Zhu, global market strategist at JPMorgan Asset Management, noted that a recent decline in bank loans highlighted “a lack of confidence among both corporate and household sectors”.
The cut to China’s benchmark rate for mortgages delivered a boost to Chinese equities. Hong Kong’s Hang Seng index jumped 2 per cent and the CSI 300 of Shanghai- and Shenzhen-listed stocks rose 1.3 per cent, though both indices were still down by double-digits for the year.
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