China’s efforts to invigorate its sluggish property market received a boost as the country’s lenders opted to reduce the benchmark five-year loan prime rate, marking the first such move since June.
While the Chinese central bank maintained the one-year loan prime rate — which serves as the reference for most household and corporate loans in China — at 3.45%, it announced a 25 basis points reduction in the benchmark five-year loan rate to 3.95%, according to a statement released Tuesday by the People’s Bank of China.
The magnitude of the cut in the five-year rate for the February monthly fix surpassed expectations, with economists in a Reuters poll anticipating a reduction ranging from five to 15 basis points. This adjustment stands as the first since June, when it was last trimmed by 10 basis points.
William Ma, Chief Investment Officer at GROW Investment Group, remarked on the implications of the rate cut for prospective homebuyers, highlighting the significant decrease in funding costs for purchasing homes and securing mortgages. Ma emphasized that while the market reaction requires further observation, the move signals the health of Chinese banks, instilling confidence among market participants.
China’s loan prime rates are determined monthly, with 20 designated commercial lenders submitting their proposed rates to the People’s Bank of China. These rates typically align with the medium-term policy rate, which remained unchanged for February as announced on Sunday.
In addition to the rate adjustment, China recently reduced the reserve ratio requirements for banks by 50 basis points effective from February 5, injecting 1 trillion yuan ($139.8 billion) in long-term capital. The move was accompanied by a directive urging banks to extend support for loans to high-quality real estate developers.
The property market in China faced a downturn following Beijing’s crackdown on developers’ heavy reliance on debt for growth in 2020. This crackdown led to the bankruptcy of some of the country’s largest real estate developers, dampening consumer spending and economic growth in the world’s second-largest economy.
