China is planning a phased reduction of interest rates on USD 5.3 trillion worth of mortgages to ease financial pressure on households and bolster the economy. Regulators propose cutting mortgage rates by around 80 basis points in two stages, starting soon and continuing into next year. The move aims to stabilise the housing market while protecting banks, which are already facing profit margin declines. Analysts predict the cuts could boost consumer spending, with households potentially saving up to 300 billion yuan annually. However, banks, especially state-run lenders, may experience further margin contraction due to the rate reductions.
China is exploring a phased reduction of interest rates on up to USD 5.3 trillion in mortgages, a move aimed at reducing borrowing costs for millions of families while balancing the profit margins of its banking system. Financial regulators have proposed cutting existing mortgage rates by around 80 basis points, with an accelerated refinancing timeline as part of the plan. According to sources, the first cut could happen in the coming weeks, followed by another at the start of next year. The plan, pending approval from top officials, is likely to cover both first and second homes.
Chinese regulators are navigating a delicate balance as they work to stabilise the faltering property market and the broader economy, all while safeguarding the country's vast USD 66 trillion financial system. Cutting rates too aggressively could further strain banks, which have already seen their profit margins shrink to a record low of 1.54%, well below the 1.8% threshold considered necessary for maintaining healthy profitability. Earlier reports indicated that authorities might allow homeowners to renegotiate mortgage terms with their lenders before January, the typical timeframe for mortgage repricing.
Homeowners may also refinance their mortgages with a different bank for the first time since the global financial crisis. Analysts from China International Capital Corp. and Jefferies Financial Group have predicted that homeowners in some cities may see their mortgage rates fall by as much as 100 basis points. Concerns about China's economic health have intensified following weak earnings reports from major consumer companies and downgraded growth forecasts from global banks, signalling that the country may struggle to achieve its official growth target of 5% for the year.
The downturn in the real estate market has significantly impacted household wealth and consumer spending, compounding the economic challenges. According to Larry Hu, head of China economics at Macquarie Group Ltd., lowering mortgage rates will shift wealth from banks to households, ultimately boosting consumption. He estimates that refinancing all outstanding mortgages could save households approximately 300 billion yuan (USD 42 billion) annually in interest payments, representing 0.6% of China's retail sales or 0.2% of its GDP.
For banks, however, Citigroup Inc. estimates that the expected cuts could cause an average eight basis point contraction in profit margins next year, with earnings potentially declining by 6.4%. State-run banks, which hold a larger share of mortgages, are particularly vulnerable to this impact. As of the end of 2023, the average interest rate on existing mortgages stood at 4.27%, compared to a record low of 3.45% on newly issued loans. Implementing the cuts in phases may cushion the financial blow for banks, already grappling with reduced earnings as they extend low-interest loans to consumers and corporations at the government's behest.
This proposal also seeks to address the disparity between rates for new homeowners and existing homeowners, which has led to an increase in early mortgage repayments. However, regulators restrict banks from allowing borrowers to prepay mortgages using cheaper consumer loans, complicating the situation further.
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