China announced its largest-ever cut in mortgage interest rates on Tuesday, as authorities sought to support the struggling real estate market and the economy overall. The 25-basis-point reduction in the benchmark interest rate for five-year loans was the largest and much more than analysts had expected. Most new and outstanding loans in China are based on the one-year loan interest rate, while the five-year rate affects the pricing of mortgage loans. In a Reuters survey of 27 market watchers this week, 25 expected a cut in the five-year loan interest rate, predicting a reduction of five to 15 basis points.
The deeper-than-expected cut also suggests that Beijing is no longer concerned about the negative effects of lower lending rates on the currency or banks as it was last year. A central bank-backed newspaper stated on Tuesday that the cut in the mortgage interest rate would not have a negative impact on banks’ net interest margins. However, authorities are likely to remain cautious about yuan pressure due to the decline in local interest rates. Reuters sources said that state-owned major banks in China entered the market to sell dollars for yuan, attempting to halt the weakness.
In the stock markets, while the real estate and banking sectors gained, the interest rate decision failed to boost investor confidence more broadly. Beijing intensified its efforts to rescue the struggling real estate sector, but the measures came intermittently, significantly affecting the sector that drives a quarter of the economy and the stock market. New home prices experienced their worst decline in nine years in 2023, while the stock market suffered after reaching its lowest levels in five years.
Government-backed media reported last week that government banks strengthened lending for housing projects under the “white list” mechanism aimed at injecting liquidity into the crisis-affected sector. Most analysts and investors await more measures to boost consumption and set a minimum for property prices. Their hopes rise after authorities changed the head of the market regulation authority before the Lunar New Year holiday. While the new benchmark for mortgage rates takes effect immediately, current mortgage holders will not benefit from any reduction in loan repayment installments until next year, as the mortgage rate is repriced annually.
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Shady Fouad is a technical analyst at LDN Company
Shady's strategic vision in the currency markets is reinforced by more than fifteen years of trading experience, which enables him to blend economic and technical analyzes with high efficiency, and find the best investment ideas for traders.
