Amid concerns over China's property sector and economic slowdown, Chinese banks are making strategic moves to cut interest rates on existing mortgages. These rate reductions, ranging from 10 to 25 basis points, are designed to ease the pressure on homeowners and stimulate spending. However, experts warn that these measures could further squeeze banks' net interest margins (NIM) and profitability. While it's an attempt to address mortgage prepayments, this move poses challenges to the banking sector's financial health. Banks are also contemplating reductions in interest rates on fixed-term deposits to strike a balance between maintaining NIM and offering more affordable mortgages.
In Beijing, a few state-owned Chinese banks are planning to reduce interest rates on current home loans, according to three individuals acquainted with the situation. This action is part of Beijing's broader strategy to rejuvenate the struggling real estate market and support the sluggish economy. The extent of the rate reduction will vary based on client categories and city locations, marking the first such adjustment in China since the global financial crisis.
In certain instances, the decrease might reach up to 20 basis points, as mentioned by anonymous sources who couldn't be identified due to a lack of authorization to communicate with the media. This reduction in current mortgage rates is part of a broader array of measures Beijing has unveiled in recent weeks, spanning property, economic, and market support initiatives. These actions are being taken as concerns escalate regarding the well-being of the world's second-largest economy.
Since 2021, the property sector, constituting around 25% of the economy, has faced a series of crises. Concerns about a potential ripple effect heightened this month following liquidity problems at major developer Country Garden. Following an announcement by the People's Bank of China (PBOC) earlier this month, it was widely anticipated that Chinese banks would reduce interest rates on current home loans as the central bank indicated its guidance for commercial banks to take such action.
The central bank's proposal to decrease rates, prompted by a surge in early mortgage debt repayments, aims to reduce interest expenses for homebuyers and stimulate spending in an economy that's slowing down.
China has been reducing new mortgage rates since the previous year to stimulate activity in its stagnant real estate market. However, the primary outcome thus far has been a rush of households paying off their current mortgages ahead of schedule, putting pressure on banks' profits. This move to lower current mortgage rates is anticipated to further impact the banking sector's net interest margin (NIM), a critical measure of profitability, which reached a historic low by the end of the previous quarter.
Chinese banks have been battling headwinds such as lower lending rates and pressure from the government to prop up the economy, as well as bad debt related to property developers and local government financing vehicles (LGFV). China's mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks' total loan books.Zhu Qibing, chief macro analyst at BOC International China, estimates the weighted average rate of new mortgages is 4.11%, while the average rate on all existing mortgages is at least 100 basis points higher.
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