China’s banks slash key interest rates to boost ailing economy

Chinese banks have slashed key interest rates for long-term loans by a record amount, lowering mortgage costs and potentially aiding to offset sluggish lending demand caused by a property fall and Covid lockdowns.

According to a statement issued by the People’s Bank of China on Friday, the five-year loan prime rate, a reference for residential mortgages, was reduced from 4.6% to 4.45%. This was the biggest decrease since the rate was restructured in 2019.

Also Read | Is China’s zero COVID strategy failing?

The reduction is a crucial step toward increasing lending demand, according to Bloomberg, as consumer and company confidence has been harmed by Covid lockdowns and a property sector crisis marked by a spate of developer bankruptcies and declining house prices. The reduced rate will be applied to new mortgages straightaway while existing mortgages will not be repriced until at least next year.

Also Read | Sensex, Nifty up over 2% on china interest rate cut

The one-year loan prime rate, which serves as the de facto benchmark lending rate, remained constant at 3.7%.

“The cut in the five year LPR rate reflects the focus on supporting the property sector, in line with the recent relaxation measures,” according to Frances Cheung, rates strategist at Oversea-Chinese Banking Corp in Singapore.

Also Read | Canada bans China’s Huawei, ZTE from 5G networks citing ‘hostile actors’

“The rates market is unlikely to take the unchanged one year LPR as a disappointment,” as the money market has been functioning smoothly and a cut probably wasn’t needed, she said.

The LPRs are based on interest rates offered by 18 banks to their best clients and were recently trimmed in January in response to a reduction in the PBOC’s policy loan rates. While the central bank held interest rates constant on May 16, banks’ financing costs have fallen in recent weeks, allowing them to decrease rates.

Also Read | Sri Lanka falls into default for the first time ever, seeks restructure of debts

The decision is the latest to help the struggling housing market, coming after the PBOC slashed the floor rate on new mortgages to 20 basis points below the five-year LPR on Sunday. When combined with Friday’s cut, the lowest feasible rate that banks may offer to homebuyers is 4.25%.

Also Read | Why wealth inequality feeds into a poverty loop

Following the announcement, the Indian stock market recovered the preceding day’s losses and was about 2.5% up at the midday session on May 20.