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China makes biggest-ever cut to key mortgage rate to bolster housing market

By Laura He, CNN

Hong Kong (CNN) — China’s central bank has cut its key mortgage reference rate by a record amount, as it ramps up efforts to stem a prolonged property crisis.

The People’s Bank of China (PBOC) announced Tuesday that it would cut its five-year loan prime rate (LPR) from 4.2% to 3.95%, while keeping the one-year LPR unchanged at 3.45%.

The 25 basis point cut to the five-year LPR is the biggest reduction the central bank has made since it revamped its LPR system in 2019. That August, the central bank announced that the LPR would become the new reference rates for lending by Chinese banks.

The latest cut was also the first reduction to the five-year LPR since June 2023.

The LPR is the rate at which commercial banks lend to their best customers. The five-year rate usually serves as a reference for mortgages.

“Today’s 25 (basis point) cut to the five-year LPR is clearly aimed at supporting the housing market,” analysts from Capital Economics said in a note on Tuesday.

“On its own, it will not revive new home sales. But coupled with efforts to provide increased credit support to developers, today’s cut should help to reduce pressure on the property sector somewhat,” they said.

China’s economy has been hobbled by a real estate downturn since 2021, when a government crackdown on developers’ borrowing triggered a liquidity crisis in the sector.

The property market has since entered a prolonged slump, marked by an ongoing decline in both investment in and sales of property. Dozens of major developers have defaulted on their debt, with Evergrande, once the country’s second largest homebuilder, ordered to liquidate last month.

The crisis has triggered widespread protests by unpaid construction workers, buyers of unfinished homes and frustrated investors facing financial losses. It has also spilled over to the country’s massive shadow banking industry, with Zhongrong Trust declaring itself severely insolvent last year after failing to repay its debt.

Beijing has scrambled to revive the property sector, which accounts for as much as 30% of China’s gross domestic product.

Measures unveiled include slashing interest rates, reducing the size of down payments, encouraging banks to extend maturing loans to developers and loosening restrictions on home purchases in Chinese cities.

Capital flight

China’s economy faces a litany of other problems, including deflation, low confidence and accelerated capital flight.

The country’s direct investment liabilities, a measure of foreign direct investment, reached $33 billion in 2023, according to data released by the State Administration of Foreign Exchange on Sunday.

The gauge, which measures direct investments by foreign-owned entities in China, was down 82% from 2022 and stands at its lowest level since 1993.

While an uncertain economic outlook and rising geopolitical tensions are partly to blame for the exodus, foreign companies and investors have also grown wary of increasing political risks in China, including the possibility of raids and detentions.

The country’s stock markets have suffered a prolonged slump since their recent peaks in 2021, with more than $6 trillion in market value having been wiped out from the Shanghai, Shenzhen and Hong Kong markets.

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