China cuts key interest rate to revive property sector

Chinese workers take a break outside a construction site wall depicting the skyline of the Chinese capital at the Central Business District in Beijing, Tuesday, June 26, 2018.
Chinese workers take a break outside a construction site wall depicting the skyline of the Chinese capital at the Central Business District in Beijing, Tuesday, June 26, 2018. Copyright Andy Wong/Copyright 2018 The AP. All rights reserved.
By Doloresz Katanich with AP
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The world's second-biggest economy is launching a new effort to boost a sector which provides 25% of the country's GDP.

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China has cut its mortgage-linked five-year loan prime rate (LPR), the country's central bank has announced. It is the first time it has done so since May 2023. 

The five-year rate was lowered by 0.25 basis points to 3.95% while the one-year rate remains at 3.45%. Analysts said it was the largest cut on record for that rate.

The surprise cut to the five-year LPR could improve affordability for buyers by lowering mortgage rates.

China's economy, the world's second-largest after the US, depends heavily on the property sector to drive growth and provide employment. Since a crackdown on what the country's leadership viewed as dangerous levels of borrowing in a housing bubble, dozens of developers have defaulted on their debts and many others are struggling to recover.

And it may shake the global economy too. "The end of China's housing boom means the end of the world's main growth engine," Dhaval Joshi, chief strategist at forex company BCA Research, told Euronews Business earlier when discussing the global economic outlook for 2024.

Is the rate cut enough to help the property sector?

Since markets reopened on Monday, after a weeklong Lunar New Year holiday break, state-owned banks have announced a flurry of plans for billions of dollars' worth of loans to support developers struggling after the excessive borrowing crackdown.

"On its own, it will not revive new home sales. But, coupled with efforts to provide increased credit support to developers, today's cut should help to reduce pressure on the property sector somewhat," said Julian Evans-Pritchard at economics firm Capital Economics.

By cutting only one of the two main rates, the authorities were signalling their determination to use a targeted approach to supporting the economy, said Louise Loo of Oxford Economics.

"The size of today's move also reveals — in our view — a genuine concern among Beijing policymakers that the 'incremental' slow-drip of policy easing implemented thus far has had little impact," Loo said in a report.

There was a muted reaction in Chinese markets, with the benchmark Shanghai Composite index gaining 0.4% on Tuesday.

The one-year rate is the benchmark for most personal and corporate loans.

Analysts noted that the problems in the property industry do not hinge mainly on interest rates but reflect longer-term problems.

Even though mortgage rates have fallen, housing sales have continued to decline, Evans-Pritchard noted.

Market watchers have said investors are eager to see stronger action by Beijing to support the housing market and markets.

Managing expectations is a large part of that, Stephen Innes of SPI Asset Management said in a report, given that the government appears more likely to stick to piecemeal measures as it prioritises developing advanced technologies and keeping the economy stable.

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