China Cuts Mortgage Rate by Most on Record Amid Covid Lockdowns and Property Sector Slowdown

Strategic Insights -

As China intensifies its zero-Covid strategy, the country's efforts to support its struggling property sector have taken a decisive turn. The People's Bank of China (PBoC) made a record-breaking cut to its main mortgage interest rate, lowering the five-year loan prime rate (LPR) from 4.6 per cent to 4.45 per cent. This unexpected reduction, exceeding market expectations, will significantly reduce borrowing costs on outstanding mortgages. The move has been interpreted as a strong signal of support for the property sector, which has been severely impacted by the recent outbreak of the Omicron variant and subsequent lockdowns.

Key Takeaways:

  • The People's Bank of China (PBoC) cut the five-year loan prime rate (LPR) by 15 basis points to 4.45 per cent, the most since the rate system was reformed in 2019.
  • The reduction will cut borrowing costs on outstanding mortgages, providing relief to property developers and individuals.
  • The move is seen as a targeted approach to support the real estate sector, which has been struggling with a debt crisis and a severe slowdown in sales.
  • Official data in April showed a sharp decline in activity due to lockdowns, with retail sales falling 11 per cent year on year and industrial output declining 3 per cent.
  • The five-year LPR was cut in January, and the recent reduction is part of a broader pattern of gradual monetary easing in China.
  • The PBoC's decision is seen as a bid to stabilize the real estate sector, which has been struggling despite previous measures to support it.

Statistics:

  • 15 basis point reduction in the five-year loan prime rate (LPR)
  • 11 per cent year-on-year decline in retail sales in April
  • 3 per cent first decline in industrial output since early 2020
  • 42 per cent plunge in sales by floor space in April
  • 20 basis point cut in the effective benchmark for mortgage lending to first-time buyers last weekend
  • 3.7 per cent unchanged one-year LPR, mainly used to price corporate loans
  • 2 per cent increase in Hong Kong's Hang Seng index
  • 1.3 per cent rise in the CSI 300 of Shanghai and Shenzhen-listed stocks

Sources:

  • "China cuts mortgage interest rate by most on record" by Hudson Lockett and Thomas Hale, [The Financial Times](https://www.ft.com/content/b24a48ec-4151-4281-a2f1-c1a9ed27036b)
  • "China's PBoC cuts loan prime rate to 4.45% as it seeks to ease real estate sector" by Hudson Lockett and Thomas Hale, [The Financial Times](https://www.ft.com/content/4e9d9e79-8f15-46b1-a4a3-c7dd8d01b1f2)