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China's latest rate cut likely to help prop up demand in property market

The People's Bank of China's latest cut to its benchmark mortgage interest rate could help prop up demand in the country's property market, according to experts.

The Chinese central bank on Feb. 20 reduced its five-year Loan Prime Rate (LPR) to 3.95% from 4.20% and left the one-year LPR unchanged at 3.45%, according to a news release. It was the first reduction in the five-year LPR since May 2023. The LPR is determined by the PBOC based on considerations from 18 designated commercial banks and is used as a benchmark for lending rates in the world's second-largest economy.

"Such a cut, as part of supportive package to the property market, will likely [stimulate] the demand side which, together with the recent relaxation [in] policies, could help to facilitate a more healthy supply and demand cycle," said Bruce Pang, chief economist and head of research for Greater China at Jones Lang LaSalle.

The rate cut was somewhat expected after Financial News, a publication backed by the PBOC, said on Feb. 18 that "lowering the five-year LPR will help to stabilize confidence, promote investment and consumption, and also help support the stable and healthy development of the real estate market."

While China's GDP growth of 5.2% in 2023 was above the official target, the economy has been faced with sluggish consumption, slow business activities and a housing market downturn. Starting in late 2023, authorities gradually relaxed restrictions on purchasing houses even in tier 1 cities such as Beijing and Shanghai as parts of efforts to aid the country's real estate market. By early February, for instance, thousands of development projects became eligible for bank financing under the government's so-called "whitelist" financing program.

Larger than expected

The 25-basis-point rate cut was "somewhat larger than expected," but the accumulative reduction from 2019 remains largely in line with the one-year LPR, Pang said, adding that there is still more room for lower interest rates in China once the US Fed starts cutting rates.

The cut "is likely aimed at supporting the recovery of the property market and could improve the affordability for buyers by lowering the mortgage rates," Lynn Song, chief economist for Greater China at ING, said in a Feb. 20 note. The PBOC is likely to remain on a dovish tilt in the coming months amid low inflation and tepid economic momentum, Song said.

China's Real Estate Climate Index, compiled by the National Bureau of Statistics, fell to an eight-year low of 93.36 in December 2023 after seeing a slight rebound in the prior month. The index measures aggregate business activity in land sales and real estate. Readings above 100 indicate economic growth, while readings below 100 show a slowdown in the market.

"We still see room for one more cut to the key one-year LPR in near term, and a further reserve ratio requirement cut is possible as well," Song said. "If global central banks do begin rate cuts later in the year, that will likely free up more room for the PBOC to ease policy further."