China Implements New Measures to Revive the Property Markets

China cut the benchmark mortgage reference rate more than expected at a monthly fixing on Feb 20, as authorities increased efforts to stimulate credit demand and revive the property market. Commercial banks' improving net interest margins, combined with recent deposit rate cuts and a reduction in bank reserves earlier this month, have paved the way for lenders to lower borrowing costs to support the economy. The five-year loan prime rate (LPR) fell by 25 basis points to 3.90 percent from 4.20 percent previously, while the one-year LPR remained unchanged at 3.45 percent.

In a Reuters poll of 27 market watchers conducted this week, 25 expected a reduction to the five-year LPR. They projected a cut of five to 15 basis points. Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

China last trimmed the five-year LPR in June 2023 by 10 basis points. Market watchers said the rate cut was well expected, but the size of the reduction exceeded their expectations. The central bank-backed Financial News had reported on Sunday that the benchmark LPR could fall in coming days, with the five-year tenor more likely to be reduced.

"Lowering five-year LPR will help stabilise confidence, promote investment and consumption, and also help support the stable and healthy development of the real estate market," the newspaper said on its official WeChat account.

While the new mortgage reference rate is effective immediately, existing mortgage holders will not see any reduction in loan repayments until next year, as mortgage rate repricing occurs on a yearly basis.

China has increased its efforts to rescue the struggling property sector. Last week, government-backed media reported that state banks increased lending to residential projects under the "white list" mechanism, which aims to inject liquidity into the crisis-hit sector. The LPR, which banks typically charge their best customers, is determined by 20 designated commercial banks that submit proposed rates to the central bank each month.