China has announced drastic action in an attempt to revive the property market.
The People’s Bank of China announced it was slashing the mortgage-linked lending rate, as authorities sought to prop up the struggling property market and broader economy.
The 25-basis point cut to the five-year loan prime rate was the largest since the reference rate was introduced in 2019 and far more than analysts had expected.
The five-year loan prime rate (LPR) was lowered by 25 basis points to 3.95 per cent from 4.20 per cent previously, while the one-year LPR CNYLPR1Y=CFXS rate was left unchanged at 3.45 per cent.
The People's Bank of China made the announcement earlier today
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Analyst at E-House China Research and Development Institution Yan Yuejin said: "This is the biggest signal. In other words, the largest interest rate cut cycle in history has begun."
He added that the cut will directly impact the real estate sector by lowering mortgage costs. It has been reported that China's major state-owned banks stepped in to the market selling dollars for yuan, in an attempt to arrest weakness.
Beijing has stepped up efforts to rescue the ailing property sector, but the measures have come in fits and starts, weighing heavily on a sector that drives a quarter of the economy and on the stock market.
New home prices saw their worst declines in nine years in 2023, while the stock market .SSEC is languishing after hitting five-year lows.
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There have been concerns from global economists about China's economy
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Asia-Pacific investment strategist at Legal and General Investment Management in Hong Kong Ben Bennett said: "I think this move is more signal than substance.
"Most people aren't buying houses because mortgage costs are too high, they're worried about developers going bankrupt and house prices falling."
"But it does signal a determination to support the housing market. We need to see if this is followed up with more cash injections into lenders, housing projects and developers."
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.
The People's Bank of China in Beijing
Reuters
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.
Global market strategist at Invesco David Chao said: "This is the largest rate cut to the 5 year LPR that we have seen."
