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China implements its most significant reduction in the benchmark mortgage rate in history

China has enacted its most substantial decrease in the benchmark mortgage rate ever, aiming to breathe life into the struggling real estate market and spur economic expansion.

The 25-basis point drop in the five-year loan prime rate (LPR) represents a significant intervention by authorities, signaling a decisive step to tackle the hurdles faced by the property sector.

Yan Yuejin, an analyst at E-House China Research and Development Institution, characterized the rate cut as a critical juncture, remarking, “This is the most significant signal. Essentially, the most extensive interest rate reduction cycle in history has commenced.”

He stressed that the reduction would directly impact the real estate domain by slashing mortgage expenses, potentially rekindling demand.

The modification to the five-year LPR, decreased to 3.95 percent from 4.20 percent, underscores China’s resolve to address issues in the property market.

However, the one-year LPR remains steady at 3.45 percent, with the majority of new and outstanding loans in China linked to this rate.

In contrast, the five-year rate notably influences mortgage pricing, thereby impacting consumer borrowing expenditures.

The deeper-than-anticipated rate cut indicates a shift in Beijing’s strategy, suggesting reduced apprehensions regarding the potential adverse repercussions of lower lending rates on the currency or banking system.

Despite sustained vigilance regarding the stability of the yuan, authorities seem more focused on boosting economic vitality and tackling challenges in the real estate sector.

Efforts to stabilize the property market have yielded mixed outcomes, with significant drops observed in new home prices in 2023.

Moreover, the stock market has come under strain, reflecting broader concerns regarding the economy’s well-being.

Government-backed initiatives aimed at infusing liquidity into the property domain have been launched, but sustained actions are anticipated to instill confidence.

Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management, noted that while the rate cut signals a dedication to bolstering the housing market, its immediate impact might be restricted.

He stressed the significance of subsequent measures aimed at infusing funds into lenders, housing ventures, and developers.

Further relaxation measures could be on the horizon, with recent deposit rate reductions and decreases in bank reserves affording commercial banks the flexibility to lower borrowing expenses.

However, existing mortgage holders may not promptly reap the benefits of the rate reduction, as mortgage rate adjustments typically occur on an annual basis.


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