China lowers five-year loan rate to boost property market recovery

China lowers five-year loan rate to boost property market recovery

China’s central bank announced on Tuesday that it has reduced the five-year loan prime rate (LPR), which affects most mortgage loans, for the first time since June 2023, in a move to support the recovery of the country’s sluggish property market.

A staff member counts Chinese Yuan at a bank’s personal finance business service area in Haian, East China’s Jiangsu province, Sept 15, 2023

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The People’s Bank of China (PBOC) said in a statement that the five-year LPR was cut by 25 basis points to 3.95%, while the one-year LPR, which serves as a benchmark for most corporate and household loans, was kept unchanged at 3.45%.

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The decision came after the PBOC lowered the reserve requirement ratio (RRR) for banks by 50 basis points earlier this month, releasing 1 trillion yuan ($139.8 billion) of long-term liquidity into the banking system and urging banks to lend more to high-quality real estate developers.

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The cut in the five-year LPR was larger than expected, as a Reuters poll of economists had predicted a reduction of between five to 15 basis points. The move signaled that the PBOC is willing to ease its monetary policy stance to stimulate the economy, which has been hit by the Covid-19 pandemic, the U.S.-China trade war, and the debt crisis of property giant Evergrande.

The PBOC said that the adjustment of the LPR was based on the market demand and supply of funds, and that it would continue to implement a prudent monetary policy and maintain reasonable and sufficient liquidity.

The reduction of the five-year LPR is expected to lower the borrowing costs for home buyers and property developers, and help revive the demand and supply of housing, which has been dampened by the government’s tightening measures to curb speculation and leverage in the sector.

According to the National Bureau of Statistics, China’s property investment grew by 6.8% year-on-year in 2023, the slowest pace since 2015, while home sales by floor area fell by 8.6%, the first annual decline since 2014.

The PBOC’s move was welcomed by some analysts, who said that it would help stabilize the property market and prevent a sharp downturn that could pose systemic risks to the financial system and the economy.

However, some experts also warned that the cut in the five-year LPR could fuel more speculation and debt in the property sector, and that the PBOC should balance its monetary easing with its regulatory tightening to prevent a rebound of housing prices and a deterioration of credit quality.

The deal is subject to the approval of the shareholders of both companies and the regulators, including the Federal Reserve and the Department of Justice. The companies said they have received “constructive feedback” from the regulators and are confident that the deal will be approved.

Source : CNBC

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