China’s Decision Not to Cut Key Interest Rate Hampers Real Estate Confidence, Sours Economic Prospects

China’s decision to not cut its five-year loan prime rate (LPR), a key interest rate that affects mortgages, has surprised investors and raised concerns about the troubled real estate sector. The People’s Bank of China (PBOC) maintained the LPR at 4.2%, while reducing the one-year LPR by 10 basis points to 3.45%. Economists had predicted a cut of at least 15 basis points for the five-year rate. The lack of action on the five-year rate is seen as underwhelming and insufficient to revive confidence in the real estate sector and stimulate credit demand. The LPR serves as a benchmark for household and corporate lending, and a reduction in the rate would have lowered borrowing costs. The news led to a decline in Hong Kong stocks, mainland China stocks, and the Chinese yuan. Concerns about China’s economy persist, with a crisis in the property sector, deflation, weaker exports, and high unemployment among younger people. UBS has downgraded its economic forecast for China, citing a prolonged property downturn and weakening global demand. The PBOC has been striving to support the economy, previously cutting LPR rates in June. However, economic indicators have shown a slowdown, with consumer spending, factory production, and investment all declining in July compared to the previous year. The troubled state of the real estate market, coupled with concerns about debt in the sector, has fueled worries of a broader crisis. Analysts argue that larger rate cuts or regulatory measures are needed to restore confidence and revive demand in the housing market. However, the effectiveness of the PBOC’s monetary policy in the current environment is limited, and additional measures may be necessary to stabilize growth.