Key rate cut gives market major boost

Reduction in LPR from 4.6% to 4.45% will help to stabilize housing sector

The latest reduction of a key benchmark lending rate in China on Friday significantly boosted market confidence, delivering a strong signal that the nation is determined to fully leverage multiple tools to safeguard economic stability, experts said.

The reduction in the over-five-year loan prime rate, a key reference for home mortgages, was greater than market expectations and the biggest on record, and will help reduce financial burdens on the real economy, stabilize the housing market and drive up growth in consumption and investment, they said.

China's over-five-year loan prime rate, a market-based benchmark lending rate also known as the LPR, dropped to 4.45 percent in May, down from 4.6 percent in April, the National Interbank Funding Center said on Friday.

The 15-basis-point drop was the biggest record and the second this year following one in January. Meanwhile, the one-year LPR came in at 3.7 percent on Friday, remaining unchanged for the fourth consecutive month, the center said.

"The rate decrease showed that the country is beefing up financial support to alleviate difficulties in the real economy and bolster demand during the current critical period of time to stabilize the economy," said Wen Bin, chief researcher at China Minsheng Bank.

The reduction in the over-five-year LPR, on which many lenders base their mortgage rates, will help reduce home purchase costs and household debt burdens, boost consumption and unleash reasonable housing demand, Wen said.

The move will also markedly help lower the medium to long-term financing costs of enterprises, bolster their demand for longer-term loans and restore their optimism, he said.

The rate decrease was greeted by China's stock market on Friday, with the benchmark Shanghai Composite Index going up 1.6 percent to close at 3146.57 points, its highest level in a month.

Market confidence recovered on the rate cut not only because of its inherent effects but due to its implication that policymakers have made concrete headway in rolling out new measures to shore up an economy, which is recovering from a recent COVID-19 surge, experts said.

Underlining the room for policy maneuvers in the face of new challenges, Premier Li Keqiang, at a symposium on Wednesday in Kunming, Yunnan province, called for efforts to come up with more measures before the end of this month to return the economy to a normal track.

Given that the Chinese government has the fiscal and monetary policy space to support growth, Kristalina Georgieva, managing director of the International Monetary Fund, told Reuters on Thursday that she was "actually not too worried" about China's economy.

In addition to lowering mortgage rates and other measures to stabilize the real estate sector, more infrastructure spending and tax cuts to boost consumption could also be announced which would help China's economy recoup its momentum in the coming months, said Maximilian Wieland, an economist at Vanguard Investment Strategy Group.

Yan Yuejin, director of the Shanghai-based E-house China Research and Development Institution, said mortgage rates for first-time homebuyers could drop from 4.6 percent to 4.25 percent thanks to Friday's rate cut and the new regulation that sets the floor of mortgage rates for first-time homebuyers 20 basis points below the LPR.

This could save 207 yuan ($31) in monthly payments for a first-time homebuyer who takes out a 30-year mortgage with a principal of 1 million yuan, Yan said, mitigating the debt pressure on homebuyers and helping to stabilize the financial conditions of real estate enterprises.

Cheng Qiang, chief macroeconomic analyst at CITIC Securities, said the LPR reduction is unlikely to magnify the depreciation pressure of the yuan against the US dollar as the rate cut influences lending rates but does not directly push down the yields of China's government bonds.

The exchange rate of the onshore yuan against the dollar strengthened by more than 900 basis points from Thursday's close to 6.67 as of Friday afternoon.