China Mortgage Rate Cuts Fall Short of ‘Game Changer’ Policy

China’s anticipated cut to rates on existing mortgages marks one of the most concrete actions yet to boost the beleaguered economy, though it likely won’t be enough on its own to shore up growth.

(Bloomberg) — China’s anticipated cut to rates on existing mortgages marks one of the most concrete actions yet to boost the beleaguered economy, though it likely won’t be enough on its own to shore up growth. 

That’s according to several economists after Bloomberg News reported Tuesday that the nation’s largest lenders are preparing to cut interest rates on existing mortgages and deposits. The state-directed measures mark the latest push by Beijing to spur consumer spending, juice the stock market and ease pressure on bank profit margins as the world’s second-largest economy loses steam. 

The mortgage rate reductions would impact most of the nation’s 38.6 trillion yuan ($5.3 trillion) worth of outstanding mortgages. That should support household purchasing power and lift the gross domestic product growth rate by 0.1 to 0.2 percentage points, according to Bloomberg Economics. They estimate the easing is equivalent to a cut in the policy interest rate of five-to-10 basis points. 

“This is an incremental policy step. Not a game changer, because people’s confidence is still low,” said Larry Hu, head of China economists at Macquarie Group Ltd. “I think we’re going to see property easing come through in the coming weeks. I just don’t know if it’s going to be strong enough.”

China’s onshore stock benchmark CSI 300 Index reversed all gains to dip 0.1% as of 1:56 p.m. on Wednesday local time, set to snap a two-day winning streak. Financial stocks led the losses amid concerns over lenders’ profit margins.

China’s economic recovery is struggling under the weight of deflationary pressures, waning exports and a persistent property crisis. Real estate giant Country Garden Holdings Co. is teetering on the brink of default and risks from the property turmoil are now spreading to the country’s $60 trillion financial system.

Even so, authorities have held off on massive stimulus as they’re wary of driving up debt. Economists now see GDP expanding 5.1% this year, roughly in line with a government target of about 5% set in March that was broadly seen as conservative. A further downturn may put even that goal at risk.

The mortgage rate reductions are expected to only affect loans on first homes. The cuts are unlikely to be massive because regulators may try to avoid creating too large of a gap between the rates on mortgages held by first-time homebuyers versus those held by people who own multiple properties, according to Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd.

“A big cut may prompt some to repay early loans on some properties they hold to make mortgages on the rest of homes they own eligible for the rate reduction,” Xing said. He doesn’t expect the magnitude of the cuts to be huge, given the need to reconcile the interests of developers, homebuyers and financial institutions. 

Economists said it’s unclear whether consumers would spend the savings they make from lower mortgage payments. Societe Generale SA estimates the cut to be equivalent to less than 0.2% of GDP in income support to households. 

“The question is still whether households are willing to spend or save this money,” said Michelle Lam, Greater China economist at Societe Generale. “Given still-weak house price momentum and continued distress affecting confidence, we may still not be able to see a property recovery soon.”

Major lenders are also poised to cut deposit rates later this week for the third time in a year, Bloomberg News reported. That measure should help reduce costs for the state-owned banks and protect their profit margins, allowing them to lower their lending rates over time. 

The banks are trying to strike a balance between heeding government directives to shore up economic support and remaining profitable. Earlier this month they kept a key interest rate that guides mortgages on hold, failing to follow the central bank’s rate cut a few days earlier.

“No wonder banks are thinking about cutting deposit rates,” said Lam, adding that the mortgage rate cuts “for sure will have impact on their interest margins.”

What Bloomberg Economics Says …

“The expected cuts to interest rates on existing mortgages may have a modest impact on their own, but are a useful supplement to looser monetary policy in boosting demand. Using our in-house SHOK model, we estimate the cuts are equivalent to the policy rate being reduced by 5-10 basis points. That would boost growth by another 0.1-0.2 percentage point.”

— David Qu and Chang Shu, economists

Read the full report here.

More policy action is likely forthcoming, though economists don’t expect huge moves. 

Analysts recently polled by Bloomberg see the People’s Bank of China trimming the rate on its one-year policy loans by another 10 basis points before the end of the fourth quarter, after cutting it twice in 2023 already. 

Expectations are also high for a reduction in the reserve requirement ratio, given recent liquidity tightening as local governments rush to use up this year’s quota of new special bonds, a key source of infrastructure investment financing.

“I don’t think it will be the end of the rate cut cycle,” said Kelvin Lam, a senior economist at Pantheon Macroeconomics Ltd., of the anticipated reductions to mortgage and deposit rates. “But one symbolic cut in mortgage rates won’t be able to shore up the softening housing market in China.”

The bigger problem is on the demand side, Lam said. If sentiment among prospective homebuyers “beset by deteriorating job prospects and poor economic outlook, buyers will just be sitting on the sideline waiting for the economy to stabilize before joining the bandwagon.”

–With assistance from Emma Dong.

(Updates with markets reaction in the fifth paragraph.)

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