China lowers key interest rate as home sales slump

The People’s Bank of China cut its five-year prime rate (LPR) by 15 basis points to 4.45%, the second cut this year and the largest on record. Most analysts expected a decline of five basis points.

The Chinese LPR is the rate at which commercial banks lend to their best customers. It is used as a reference for other loans and the five-year maturity is generally used as a reference for mortgage loans.

Sales of new homes fell 47% in April from a year earlier, according to the National Bureau of Statistics earlier this week, while prices in 70 cities fell for an eighth consecutive month.

“[Friday’s move] reports that the management has … decided to save [the property sector] as soon as possible,” said Zhaopeng Xing, senior strategist for China at ANZ Research. “It also suggests that China is pushing hard to meet its 5.5% growth target.” for 2022, he said.

China’s economy could contract in the second quarter as Covid lockdowns wreak havoc on activity. Consumer spending and factory output both fell sharply last month, while unemployment hit its highest level since the first coronavirus outbreak in early 2020.

The real estate sector, which accounts for up to 30% of China’s GDP, is also experiencing a deepening crisis.

Evergrande – one of the biggest developers in the country – is undergoing a huge restructuring after defaulting on its huge debts late last year. Analysts have long feared that Evergrande’s collapse could have repercussions for the real estate sector.

Property sales have slowed since last year as tight credit policies and a weaker economy dampened demand. This year’s Covid lockdowns have hit the industry again.

“The Omicron wave and the draconian shutdowns in some 40 cities have significantly limited Chinese household mobility, employment, income and confidence,” Nomura analysts said.

“Beijing wants to save property markets, which have seen the worst contraction in many years,” they added.

China’s central bank announced further measures this week to help the market. The PBOC said last Sunday it would cut the mortgage rate for first-time home buyers.

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