China slashes mortgage rate to tackle deepening property crisis

China’s central bank is cutting its benchmark interest rate for mortgages yet again as it tries to stem a worsening property crisis.

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

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

Analysts said the reductions were widely anticipated, particularly since China had cut other interest rates last week as data showed the economy losing steam in July due to renewed Covid lockdowns and a deepening property downturn.

Some experts said the main takeaway on Monday was the bigger-than-expected drop in the five-year loan prime rate, which pointed to heightened concerns over housing.

“It’s all about property,” Larry Hu, chief China economist for Macquarie, wrote in a report. “Today’s cut is much needed, as the property sector is currently the biggest drag to the economy.”

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Trouble in the property sector — which accounts for as much as 30% of China’s GDP and is already suffering from a prolonged cash crunch — is exerting significant pressure on the world’s second biggest economy.

The crisis has snowballed since sprawling developer Evergrande defaulted on its debt last year. Property prices have been falling, as have sales of new homes.

Last week, Country Garden, China’s biggest developer by sales, underscored the slump by saying in a stock exchange filing that it expected profits for the first half of this year to plunge by as much as 70% compared to a year ago.

Angry homebuyers across the country have threatened to stop paying their mortgages on unfinished homes, jolting markets and prompting businesses and authorities to take action to defuse the crisis. In China, real estate firms are allowed to sell homes before completing them.

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Mo Bin, Country Garden’s president, attributed the dismal earnings forecast to a drop in property sales, “the tough business environment in the real estate industry,” continued fallout from the Covid-19 pandemic, narrowing profit margins on some projects, and foreign exchange losses.

Officials have also announced other measures aimed at shoring up the sector. They include arrangements for certain loans to be extended on projects that have faced delays in deliveries, and for authorities to “help provide guarantees to onshore bond financing of selected private property developers,” Goldman Sachs analysts noted in a report Monday.

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

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