China cuts debt ratio more than expected to revive housing sector

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China slashed its benchmark benchmark mortgage rate by a suddenly significant gap on Friday, its second cut this year as Beijing seeks to revive the ailing housing sector to revive the economy. Senior officials have promised new measures to tackle a lull in the world’s second-largest economy, hit by COVID-19 outbreaks that have prompted tough measures and mobility restrictions and huge disruptions to the activity.

“Today’s reduction in the five-year prime rate should help revive home sales, which have gone from bad to worse recently,” Julian Evans-Pritchard of Capital Economics said in a note.

Many market participants believe Friday’s move was also a response to Chinese Premier Li Keqiang’s call to decisively step up policy adjustments and let the economy quickly return to normal.

“But the absence of any one-year LPR reduction suggests that the PBOC is trying to maintain targeted easing and that we should not expect a full-scale stimulus of the kind we saw in 2020.”

The country’s benchmark stock index, the Shanghai Composite Index, rose about 1% in early trading after Friday’s rate cut. The move failed to spur mainland-listed property stocks, which were flat, although Hong Kong-listed developers edged higher.

China, in a monthly fix, cut the five-year loan prime rate (LPR) by 15 basis points to 4.45%, the biggest cut since China revamped the interest rate mechanism in 2019 and more than the five or 10 basis points slanted by most in a Reuters poll. The one-year LPR remained unchanged at 3.70%.

Many private sector economists expect China’s economy to contract this quarter from a year earlier, down from 4.8% growth in the first quarter. Indicators for credit loans, industrial production and retail sales showed that strict COVID-related measures and mobility restrictions have taken their toll.

One of the biggest drags on growth has been the real estate sector, which policymakers are looking to turn around. Real estate and related industries such as construction make up more than a quarter of the economy.

China’s property sales in April fell at their fastest pace in about 16 years, while new home prices fell for the first month-on-month since December, hurt by weak demand amid broad COVID-19 lockdowns. “Policymakers may have reached a consensus on whether to revive the real estate sector,” said Xing Zhaopeng, senior China strategist at ANZ, predicting further easing measures.

LIMITED ROOM FOR CUTS The central bank has pledged to step up its support for the slowing economy, but analysts say room to ease policy could be limited by concerns over capital outflows, as the Federal Reserve raises interest rates.

Capital Economics believes that the lack of a one-year LPR reduction suggests that the central bank may be concerned about the potential impact on capital outflows and the yuan. The LPR is a benchmark lending rate set monthly by 18 banks and announced by the People’s Bank of China. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate. Both rates were lowered in January to support the economy.

Friday’s decline suggests that “China’s economic growth was facing increasing resistance this year,” said Marco Sun, chief financial markets analyst at MUFG Bank. Eighteen of 28 traders and analysts in a Reuters poll had forecast a cut in either rate, including 12 who expected a 5 basis point cut for each tenor.

A campaign by the authorities to reduce high debt levels turned into a liquidity crunch last year among some big developers, leading to bond defaults and abandoned projects, rattling global financial markets. Since late last year, Beijing has taken steps to help revive the real estate sector. These include making fundraising easier for large developers and public developers, relaxing rules on escrow accounts for presale funds, and allowing some local governments to reduce mortgage rates and debt ratios. ‘deposit.

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  • China cuts debt ratio more than expected to revive housing sector
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John A. Bogar