China slashes 5-year mortgage rate as property crisis deepens

China has slashed its mortgage lending rate for the second time this year as the country’s central bank seeks to limit the fallout from a liquidity crisis in the property sector.

The five-year loan prime rate was lowered to 4.3 per cent from 4.45 per cent on Monday, exceeding the median forecast from economists polled by Bloomberg and equalling a rate cut in May that was the largest on record.

The reduction in the benchmark, which is based on rates offered by domestic lenders and published by the People’s Bank of China, will reduce borrowing costs on new mortgages nationwide and provide a boost to the country’s debt-laden real estate sector, which accounts for almost a third of annual economic output.

The one-year LPR, which is also based on domestic Chinese lending rates and primarily used to price corporate loans, was cut to 3.65 per cent from 3.7 per cent.

The larger-than-expected cut to the benchmark mortgage rate helped bolster the Hang Seng Mainland Properties index in Hong Kong, which rose as much as 2.5 per cent on Monday. But it did little to boost wider markets, with the benchmark CSI 300 index of Shanghai- and Shenzhen- listed stocks up just 0.4 per cent.

Analysts at Capital Economics said the cut to the five-year LPR would not affect most outstanding mortgage rates until the start of next year, but the move suggested the PBoC was “particularly concerned about problems in the housing market”.

Strategists warned that the rate cut was unlikely to address a crisis of confidence faced by Chinese developers, many of which are struggling to finish incomplete “pre-sold” homes for which down payments have already been received. The method of financing construction has become more common as authorities cracked down on excess leverage in the sector in recent years.

“So far, lower mortgage rates haven’t translated into higher property sales due to the lack of confidence in large developers and the presales model,” said David Chao, global market strategist at Invesco. “Policymakers may need to implement more non-traditional measures or even some kind of intervention in order to restore faith in the property market.”

Last week, Country Garden, the country’s largest real estate group by sales, estimated first-half profits fell as much as 70 per cent, in the latest sign that a financing crisis once limited to high-risk developers such as China Evergrande has spread to the rest of the industry.

Analysts said the central bank was likely to cut the five-year LPR at least one more time this year. “When the market sees progress in the construction of uncompleted projects, we may see an improvement in home buying sentiment and home prices should stabilise,” said Iris Yang, chief economist for Greater China at ING.