China cuts mortgage reference rate more than expected to revive property market

By Thomson Reuters Feb 19, 2024 | 7:33 PM

SHANGHAI/SINGAPORE (Reuters) -China cut the benchmark reference rate for mortgages at a monthly fixing on Tuesday by more than expected, as authorities ramped up efforts to stimulate credit demand and revive the property market.

Commercial banks’ improving net interest margins following recent deposit rate cuts and the reduction to bank reserves earlier this month has paved the way for lenders to reduce borrowing costs to support the economy.

The five-year loan prime rate (LPR) was lowered by 25 basis points to 3.90% from 4.20% previously, while the one-year LPR was left unchanged at 3.45%.

In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They projected a cut of five to 15 basis points.

It was the largest cut to the LPR since China revamped its loan pricing mechanism in 2019.

“It is a significant cut, showing policymakers are serious in providing stimulus support to the economy,” said Christopher Wong, currency strategist at OCBC in Singapore. “This should provide some support to risk-proxy currencies, including AUD but it remains to be seen if it is sufficient to keep momentum sustained.”

China’s yuan fell to its lowest since Nov. 20 while property stocks shot up.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

China last trimmed the five-year LPR in June 2023 by 10 basis points.

Market watchers said the rate cut was well expected, but the size of the reduction exceeded their expectations. The central bank-backed Financial News had reported on Sunday that the benchmark LPR could fall in coming days, with the five-year tenor more likely to be reduced.

“Lowering five-year LPR will help stabilise confidence, promote investment and consumption, and also help support the stable and healthy development of the real estate market,” the newspaper said on its official WeChat account.

While the new mortgage reference rate comes into effect immediately, existing mortgage holders will not benefit from any reduction in loan repayments until next year, as mortgage rate repricing is on a yearly basis.

China has stepped up efforts to rescue the ailing property sector. Government-backed media last week reported that state banks have boosted lending to residential projects under the “white list” mechanism aimed at injecting liquidity into the crisis-hit sector.

The LPR, which banks normally charge their best clients, is set by 20 designated commercial banks who submit proposed rates to the central bank every month.

(Reporting by Winni Zhou and Tom Westbrook. Additional reporting by Rae Wee. Editing by Sam Holmes.)