Room for mortgage rate cuts seen

If housing demand proves weak, benchmark LPR, now at 4.3%, may fall

China's benchmark for mortgage interest rates, which has stayed unchanged at 4.3 percent for six consecutive months, may fall if the recovery in housing demand proves inadequate, potentially leading to supportive measures like lower rates, experts said on Monday.

They commented as the over-five-year loan prime rate — a key benchmark on which lenders base their mortgage rates — remained unchanged for a sixth straight month on Monday.

The one-year LPR was also unchanged at 3.65 percent on Monday, according to the People's Bank of China, the country's central bank.

Experts said the LPRs were held steady as an acceleration in credit expansion and a revival in economic activity have reduced the need for fresh monetary stimulus in the short term.

Nevertheless, a slight reduction in the over-five-year LPR may still be possible later this year, if the stabilization of the real state sector, a key element of China's economic rebound, proves inadequate and sparks more policy support, they said.

"It has become less necessary to launch a near-term cut in interest rates or the reserve requirement ratio as the financing demand of corporates increased while the property market recovered," said Wen Bin, chief economist at China Minsheng Bank.

Driven by borrowing from the corporate sector, new yuan-denominated loans increased by 922.7 billion yuan ($134.5 billion) year-on-year to 4.9 trillion yuan in January, PBOC data showed.

Also in January, 36 out of the country's 70 large and medium-sized cities reported a month-on-month rise in new home prices, up by 21 compared with December, according to the National Bureau of Statistics.

"But policy will not easily exit from an accommodative stance in the early stage of economic recovery," Wen said.

If the weakness in the credit demand of households persists while the recovery in the property sector lacks momentum, interest rate cuts might still be possible policy options, Wen said.

He said measures to reduce the interest burden brought by outstanding mortgages are needed to mitigate early mortgage repayments, improve the balance sheet of households and promote the recovery in consumption and the housing market.

Despite buoyed lending to businesses, new yuan loans to households dropped from 843 billion yuan a year ago to 257.2 billion yuan in January, pointing to consumer confidence that is yet to fully recover, according to the PBOC.

The central bank has vowed a series of measures on Wednesday to further strengthen financial support for domestic demand and industrial systems, including putting into place differentiated credit policies for the housing market based on local conditions.

Experts said intensified uncertainties regarding the US Federal Reserve's interest rate hikes also provide reasons for China to consider rate cuts later this year instead of making near-term actions.

After the United States reported higher-than-expected employment and inflation readings for January, financial markets have been pricing in the risk that the Fed's rate hikes may turn out to be more aggressive than previously expected.

Yin Ruizhe, a fixed-income analyst at China Merchants Securities, said in a research note that monetary policy divergence between China and the US may narrow in the second half of the year, making the external environment more favorable for China to reduce interest rates.