Interest Rates Lowered in China to Stimulate Property Sector

Today, China unexpectedly lowered the reference price of mortgage loans, intensifying efforts to stimulate credit demand and revive the real estate market.

The recent reductions in deposit interest rates and mandatory reserves for commercial banks have led to an increase in net profits, paving the way for lenders to reduce borrowing costs to support the economy.

The main interest rate on loans for five years was lowered by 25 basis points to 3.95% from 4.20%, while the interest rate on one-year loans remained unchanged at 3.45%.

In a survey conducted by Reuters this week, 25 out of 27 market analysts expected a cut in interest rates on loans for five years. They predicted a reduction of between five to 15 basis points.

This is the largest reduction in loan interest rates since China implemented its loan pricing mechanism in 2019.

The yuan fell to its lowest level since November 20th, while real estate stocks rose.

Most new and existing loans in China are based on the one-year loan interest rate, while the five-year rate affects mortgage pricing.

The last time China cut the interest rate on five-year loans was in June 2023, by 10 basis points.

Market observers reported that the decrease in interest rates was anticipated, but the extent of the reduction exceeded their expectations.

The Financial News, backed by the Chinese central bank, stated on its official WeChat account that “lowering interest rates on loans for five years will help stabilize confidence, boost investment and consumption, and support steady and healthy development in the real estate market.”

While the new benchmark interest rate for mortgages takes effect immediately, current mortgage holders will not benefit from any reduction in loan repayment installments until next year, as the mortgages are repriced on an annual basis.

China has intensified its efforts to rescue the troubled real estate sector. Government-backed media outlets reported last week that government banks have increased lending for housing projects under the “white list” mechanism aimed at injecting liquidity into the crisis-hit sector.

20 commercial banks determine the main interest rate by submitting proposed rates to the central bank every month. (Reuters)