China’s Central Bank Cuts Interest Rates to Tame Bursting Housing Bubble

BY Realty+

China’s central bank slashed its key lending rates in a bid to help its ailing economy and deepening real estate crisis. The People’s Bank of China (PBoC) trimmed its five-year loan prime rate (LPR)—the benchmark for mortgages—by 15 basis points to 4.3%. 

The central bank already cut the five-year LPR by the same amount in May—the biggest reduction since 2019. On Monday, the PBoC additionally trimmed the one-year LPR by five basis points to 3.65%. 

China’s property crisis has worsened in recent months, as hundreds of thousands of homebuyers began protesting and refusing to pay their mortgages owing to stalled and delayed housing projects. 

The mass mortgage boycotts mean that crumbling consumer confidence could hamper any real estate recovery, “which will eventually ripple through the domestic economy,” credit rating agency Fitch said in an August report. Real estate and related industries account for 25% of the nation’s GDP. 

Trimming interest rates is an attempt to lower interest payments on developers’ outstanding loans, and to decrease the price of new loans. The government will also provide special loans to help its debt-laden property developers complete paused housing projects, Chinese state media Xinhua reported on Friday, citing a joint statement from China’s central bank and finance and housing ministries. The size of the lending program is nearly $30 billion, according to a Bloomberg report. 

It could cost up to 6% of China’s GDP to shore up property developers’ balance sheets, Neil Shearing, group chief economist at Capital Economics, said. China’s economy overall slowed last month, owing to weak housing sentiment and continued COVID-19 disruptions, with retail sales, fixed asset investment, and home prices and sales all falling, according to data released last week by the country’s statistics bureau. 

Property sales plunged 29% year on year, and new housing starts were down 45%. Investment bank Goldman Sachs then downgraded China’s full-year GDP growth to 3.0% from 3.3%. Beijing is wary of a huge bailout for property developers in case it shifts the whole burden of responsibility onto the central government. It wants local governments to step up.

Tags : China central bank economy real estate crisis People’s Bank of China homebuyers consumer mortgage interest rates GDP Neil Shearing Group Chief Economist Capital Economics