People’s Bank of China has slashed the benchmark interest rate for mortgages from 4.45% to 4.3% to resolve the worsening property crisis.
China’s central bank on Monday announced that it would cut its five-year loan prime rate. 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.
Trouble in the property sector accounts for as much as 30% of China’s GDP and was 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. Prices of properties in China have been falling just as sales of new homes have been falling.
Last week, China’s biggest developer by sales, Country Garden, described 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.
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.
More help from the state is expected. Several analysts said Monday that they anticipated further cuts to the five-year loan prime rate later this year.
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.
“What’s more, the current weakness in loan demand is partly structural, reflecting a loss of confidence in the housing market and the uncertainty caused by recurrent disruptions from China’s zero Covid strategies,” she added. “These are drags that can’t be easily solved by monetary policy.”