China has implemented a significant reduction in its benchmark mortgage reference rate to stimulate economic activity and rejuvenate the property market. The five-year loan prime rate (LPR) was cut by 25 basis points, signalling policymakers' commitment to providing stimulus support. While impacting financial markets and boosting property stocks, the move aims to stabilise confidence, promote investment, and support real estate market development. Despite challenges, China remains focused on fostering stability and growth in the sector.
In an effort to stimulate credit demand and rejuvenate the property market, the benchmark reference rate for mortgages in China was cut. The reduction in the five-year loan prime rate (LPR) by 25 basis points to 3.95% from the previous 4.20% was larger than anticipated. The move came as authorities intensified efforts to strengthen economic activity by reducing borrowing costs.
Meanwhile, the one-year LPR remained unchanged at 3.45%. The decision to lower the LPR was seen as significant by market analysts, signalling policymakers' commitment to providing stimulus support to the economy.
A Reuters poll of 27 market watchers revealed that 25 anticipated a reduction in the five-year LPR, with expectations ranging from 5 to 15 basis points. This cut marked the largest adjustment to the LPR since China overhauled its loan pricing mechanism in 2019.
The move was met with a response in the financial markets, with the yuan declining to its lowest level since November 20, while property stocks experienced a surge. The reduction in the five-year LPR is particularly impactful as it influences the pricing of mortgages, which are a significant component of both new and outstanding loans in China.
While market analysts had anticipated a rate cut, the magnitude of the reduction exceeded their expectations. The central bank-backed Financial News had hinted at the possibility of a decrease in the benchmark LPR, with a focus on the five-year tenor.
According to reports, lowering the five-year LPR is aimed at stabilising confidence, promoting investment and consumption, and supporting the stable development of the real estate market. However, existing mortgage holders will not immediately benefit from the rate reduction, as mortgage rate repricing occurs on an annual basis.
China's efforts to support the property sector have intensified, with state banks reportedly increasing lending to residential projects under the "white list" mechanism. This initiative aims to inject liquidity into the crisis-hit sector and mitigate the challenges faced by developers.
The LPR, determined by 20 designated commercial banks, plays a crucial role in influencing borrowing costs in China. While the new mortgage reference rate takes effect immediately, its impact on loan repayments for existing mortgage holders will be realised in the following year.
In summary, China's decision to cut the benchmark reference rate for mortgages reflects ongoing efforts to stimulate economic activity and support the property market. Despite challenges, policymakers remain committed to implementing measures aimed at fostering stability and growth in the real estate sector.
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