China makes biggest cut in key mortgage rate, first cut since June 'a step in right direction' to boost economy

The LPR rate cut is another step in the right direction to address the deflationary problem facing China

Zhang Shiwei

The move is set to further reduce housing burdens and boost home buying.

China's home mortgage loans totaled 38.2 trillion yuan (US$5.3 trillion yuan) at the end of December, according to government data.

Meanwhile, one-year LPR — an indication of market lending rates — remained unchanged at 3.45 percent.

„The LPR rate cut is another step in the right direction to address the deflationary problem facing China,” said Zhang Shiwei, president and chief economist at Pinpoint Asset Management.

“I think there will be more rate cuts in China this year. as [US Federal Reserve] Entering a rate cut cycle will ease the hurdle facing the PBOC. Interestingly, the PBOC cut rate was higher than the market expected, which may indicate that policymakers recognize the urgency to act quickly.

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China has already taken various steps to improve its failing property sector.

The Urban Real Estate Financing Coordination Mechanism has been set up to strengthen coordination between local governments and housing sectors in more than 100 cities and support the financing needs of real estate projects.

Loans for more than 160 billion yuan (US$22.2 billion) of real estate projects have been extended under these mechanisms, state broadcaster CCTV reported on Tuesday.

But despite cutting the five-year LPR to record lows, the central bank remains reluctant to embrace the substantial and broad-based rate cuts required by a strong acceleration in credit growth and economic activity, analysts at Capital Economics said.

Lack of confidence among developers to deliver pre-sold houses is a major obstacle to recovery.

Capital economy

„The latest cut will provide limited help in sparking a revival in home sales. Mortgage rates have already fallen close to 200 basis points since late 2021, although home sales continue to slow,” they said.

“The main obstacle to recovery is lack of confidence by developers to deliver improved housing.

„Therefore, efforts to ease the financial crunch among developers are arguably more important.

„We expect at least one more rate cut this year, but the PBOC needs to hold off on the large and broad-based rate cuts needed to support a revival in private sector credit demand and economic growth.”

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The bank is concerned about the impact of rate cuts on the yuan, which is under renewed pressure from rising US bond yields, while improving existing credit allocations is more urgent than engineering faster growth. A new credit, capital economy was added.

Last year, commercial residential sales area was 1.12 billion square meters (12.06 billion square feet), down 8.5 percent from the previous year, while residential sales area fell 8.2 percent, National said. Statistical Office.

Meanwhile, commercial residential housing sales revenue fell 6.5 percent to 11.66 trillion yuan, while residential sales fell 6 percent.

The cut will help the overall property market as housing demand returns with cheaper mortgage rates and falling home prices, said Xu Tianchen, senior China economist at the Economist Intelligence Unit.

„However, existing homes are likely to benefit the most, and while the uncertain property market will continue to struggle, financing issues will affect construction,” he said.

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