China slashes mortgage rate to boost housing market and foreign investment

China slashes mortgage rate to boost housing market and foreign investment

China’s central bank announced on Tuesday that it has cut its five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest reduction since the rate was introduced in 2019. The LPR is the rate at which commercial banks lend to their most creditworthy customers and it serves as the benchmark rate for mortgages and other loans.

The People's Bank of China in Beijing cut the five-year loan prime rate on Tuesday. Kyodo/Reuters

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The move is aimed at reviving China’s sluggish housing market, which has been hit by a series of regulatory measures to curb speculation and debt risks. Housing sales fell by 16.3% year-on-year in January, the steepest decline since 2015, according to official data. A weak housing market could drag down China’s economic growth, which slowed to 4.9% in the fourth quarter of 2023, the lowest level since the pandemic.

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The rate cut is also expected to attract more foreign investment into China’s real estate sector, which has been suffering from a liquidity crunch and a wave of defaults by some of the country’s largest developers. China’s foreign direct investment (FDI) dropped by 6.2% year-on-year in 2023, the first annual decline since 2009, as investors were deterred by the country’s regulatory crackdown on various industries and geopolitical tensions with the United States and other countries.

By lowering the cost of borrowing, China hopes to stimulate demand for housing and encourage more foreign capital inflows, especially from long-term institutional investors such as pension funds and insurance companies. China has recently relaxed some of its restrictions on foreign ownership and investment in its real estate market, as part of its efforts to open up its economy and financial system.

“The rate cut signals that authorities are more concerned about the downside risks to the economy and the financial stability than the inflationary pressures,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a research note on Tuesday. He added that the rate cut could also pave the way for further monetary easing in the coming months, as China faces a challenging outlook amid the Omicron variant, a power crunch, and a slowing global recovery.

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“The deal also poses massive antitrust concerns, given the vertical integration of Capital One’s credit card lending with Discover’s credit card network,” said Jesse Van Tol, president and CEO of the National Community Reinvestment Coalition, in a statement. “We urge the Department of Justice and the Federal Reserve to closely examine this deal and its implications for consumers and the financial system.”

Source : CNN Business

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