China’s Central Bank Cuts Key Interest Rate to Support Property Sector

China's Economic

China’s central bank announced on Tuesday a cut to its 5-year loan prime rate, while leaving its 1-year rate unchanged, in an effort to alleviate pressures on the struggling property market.

The 5-year rate was reduced by 0.25 basis points to 3.95%, while the 1-year rate remained at 3.45%. This marks the first cut to the 5-year rate since May, with analysts noting it as the largest cut on record for that rate.

Following the weeklong Lunar New Year holiday break, state-owned banks unveiled plans for billions of dollars in loans to support developers grappling with challenges after a crackdown on excessive borrowing.

“While this move alone may not revive new home sales, coupled with efforts to provide increased credit support to developers, today’s cut should help to alleviate pressure on the property sector somewhat,” commented Julian Evans-Pritchard of Capital Economics.

The unexpected cut to the 5-year LPR could enhance affordability for buyers by lowering mortgage rates, according to Lynn Song of ING Economics.

China’s economy heavily relies on the property sector to drive growth and employment. However, following the crackdown on what the leadership deemed as risky borrowing levels in a housing bubble, numerous developers have defaulted on their debts, with many others struggling to recover.

Song noted that the People’s Bank of China has limited room for maneuvering, given the downward pressure on the Chinese yuan at a time when Western central banks have yet to begin cutting rates.

By choosing to cut only one of the two main rates, authorities signaled their intent to use a targeted approach to support the economy, said Louise Loo of Oxford Economics.

“The size of today’s move also reveals a genuine concern among Beijing policymakers that the ‘incremental’ slow-drip of policy easing implemented thus far has had little impact,” Loo added in a report.

Chinese markets showed a muted response, with the benchmark Shanghai Composite index rising 0.4% on Tuesday, while Hong Kong’s Hang Seng index fell 0.3%.

The 1-year rate serves as the benchmark for most personal and corporate loans.

Analysts pointed out that the issues in the property industry are not solely tied to interest rates but also reflect longer-term challenges.

Despite a decrease in mortgage rates, housing sales have continued to decline, noted Evans-Pritchard.

Market observers have urged Beijing to take stronger action to support the housing market and markets overall.

Stephen Innes of SPI Asset Management highlighted the importance of managing expectations, given the government’s apparent preference for incremental measures while prioritizing technological advancement and economic stability.

Regulators have also been working to boost confidence in China’s stock markets, which have struggled in recent years.

The China Securities Regulatory Commission stated that officials met over the weekend to discuss revitalizing the markets.

The CSRC reaffirmed its commitment to punishing market abuses like insider trading, excluding unqualified companies, and improving investment returns.

Its goal, the statement said, is to “effectively protect the legitimate rights and interests of investors, especially small and medium-sized investors, and maintain an open, fair and just market order.”

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About the author: Stephanie Bedard-Chateauneuf has over six years of experience writing financial content for various websites. Over the years, Stephanie has covered various industries, with a primary focus on tech stocks, consumer stocks, health stocks, and personal finance. This stock lover likes to invest for the long-term. Stephanie has an MBA in finance.