Business

China slashes key mortgage rate in bid to head off downturn

Five-year loan prime rate is cut from 4.2% to 3.95% as sales of new homes continue to fall

People walk on an overpass in Beijing: China has made the biggest cut in its benchmark five-year loan prime rate since it was introduced in 2019. Photograph: Shutterstock

Denis Staunton
Tue Feb 20 2024 - 12:51

China has made its biggest ever cut to a key mortgage reference rate as it seeks to stabilise the troubled property market and support the broader economy. Banks cut the five-year loan prime rate (LPR) which determines most mortgage rates, from 4.2 per cent to 3.95 per cent.

The 25 basis point cut was deeper than most market analysts expected and is the biggest reduction since the benchmark rate was introduced in 2019. The one-year LPR, which influences the price of new and outstanding loans, was left unchanged at 3.95 per cent.

The move is the latest signal from the Chinese authorities that they are becoming more assertive in supporting the economy in the face of deflationary pressures. Yet it failed to impress investors and had little discernible impact on trading in Chinese equities, bonds or in the value of the currency.

China’s securities regulator this week promised to consider all suggestions from market participants, including criticism of its own actions, as it seeks to strengthen the country’s stock market. Shares in mainland China and Hong Kong have lost about a third of their value since their peak in 2021 and the head of the China Securities Regulatory Commission was sacked just before the Lunar New Year holiday earlier this month.

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The new chairman Wu Qing held two days of seminars over the weekend with representatives from listed companies, retail and institutional investors, accounting and legal firms and foreign institutions. The commission said after the meetings that it would take seriously all opinions and suggestions “including criticism” and address them immediately if feasible.

“The capital market has wide implications, and the more complex and severe the situation is, the more open we should be to heed advice and pool wisdom,” it said in a statement.

Premier Li Qiang this week told officials to “do more things that are conductive to boosting confidence and expectations” and to ensure that policies were “consistent and stable”. He said that government departments should focus on solving practical problems faced by companies and individuals as they sought to win public trust.

The weeklong Lunar New Year holiday, which ended on Saturday, saw tourism revenues rise by almost 50 per cent compared to last year, surpassing 2019 levels for the first time since the start of the coronavirus pandemic. Spending on domestic tourism rose by 47.3 per cent to RMB632.7 billion (€81.4 billion) as the number of domestic trips during the holiday increased by 34.3 per cent compared to 2023.

In the property market, the number of sales of existing homes increased during the holiday but daily average sales of new homes fell by more than a quarter compared to a year ago. The southern province of Hainan this week became the latest to ease lending rules, cutting the minimum down payment on new homes from 25 per cent to 20 per cent.

Beijing and Shanghai reduced the minimum down payment on new homes in December and broadened the criteria for qualifying for lower mortgage rates. But sales of new homes continue to struggle, falling by more than 8 per cent last year, as prospective buyers fear that debt-laden developers are unable to complete new homes, most of which are paid for in advance.

Denis Staunton

Denis Staunton

Denis Staunton is China Correspondent of The Irish Times

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