The five-year loan prime rate (LPR), which is the benchmark for mortgage loans, was lowered from 4.6% to 4.45%. A decision that should support the real estate sector.
The Chinese Central Bank lowered on Friday, May 20, for the second time this year, a benchmark interest rate for mortgage loans, a measure intended to support the economy and a struggling real estate sector. The five-year loan prime rate (LPR), which is the benchmark for mortgages, was lowered from 4.6% to 4.45%, the central bank said. According to the financial information agency Bloomberg, this is the largest reduction in this rate to date. The five-year LPR had experienced a first decline in January. The measure should reduce borrowing costs in the market.
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Real estate and construction weigh more than a quarter of China’s GDP. They played a key role in the post-pandemic recovery in 2020. But the setbacks of heavyweight Evergrande, strangled by abysmal debt, weakened an entire sector, once the engine of the Chinese economy. “It will stimulate the real estate and land market, which is essential for local government finances”, of which a large part of the income is drawn from the stone, underlines the analyst Chaoping Zhu, of the investment bank JP Morgan. This decision “lays the foundations for a recovery in housing demand”says analyst Julian Evans-Pritchard of Capital Economics.
To reduce the indebtedness of the real estate sector, Beijing has tightened since 2020 the conditions of access to credit for developers. Result: many groups have found themselves short of cash since last year, including the number one sector Evergrande. The poor financial health of this mastodon has indirectly penalized its competitors, with buyers increasingly hesitant to invest in real estate. In recent months, sales and prices of real estate have been falling in many cities.
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The current health situation, which leads to travel restrictions, even confinements, and weighs on the purchasing power of the Chinese, is also increasing the pressure on the sector. Sunac, one of the main promoters in China, announced in early May that it was in default, less than six months after Evergrande. Sunac is the biggest Chinese promoter to default this year.
The one-year LPR, which is the benchmark for the most advantageous rates that banks can offer to businesses and households, remains unchanged at 3.7%. It had been lowered in January.
The Central Bank’s decision comes as China faces its biggest outbreak since the outbreak of Covid-19. The zero Covid strategy, defended tooth and nail by the authorities, is increasingly contested by the general public and especially the business community, who are alarmed at the threats that confinements pose to activity. China on Monday unveiled its worst economic performance in two years, with consumption at its lowest and unemployment close to an all-time high. Chinese Premier Li Keqiang on Wednesday pleaded for measures “emergency” to support the national economy.