J.P. Morgan On Potential Mortgage Refinancing Reforms

The US banks weighs in potential mortgage refinancing reforms in China. IT notes this is more likely to support consumption rather than the housing market outlook.

J.P. Morgan: "Housing policy: news about the introduction of mortgage refinancing. Bloomberg reported this week that the Chinese government is considering allowing homeowners to refinance to lower borrowing costs for millions of families. While the news remains to be verified, if materializing, it represents another step to reduce mortgage costs after the central bank guided banks for a rare rate cut on outstanding mortgages last year. Different from last year’s one-off rate cut (an average interest rate cut of 73bps for 60% of outstanding mortgages) allowing for refinancing can introduce a mechanism in favor of mortgage borrowers, so that they can take advantage of lower interest rates and more favorable mortgage policies to shop for better refinancing terms.

If the news materializes, how will it affect the macro outlook? First of all, allowing for mortgage refinancing is less about housing stabilization, as it mainly benefits existing mortgage borrowers but has little direct impact on new home demand. It is more importantly a measure to support consumption by increasing disposable income of beneficiary households. Our banking analysts suggest that the maximum rate cuts could be 75bps, if it applies for all outstanding mortgage (38.19 trillion yuan), annual savings from mortgage repayments could be as high as 289 billion yuan , equivalent to 0.58% of total retail sales in 2023. In practice, the impact could be much smaller for the following reasons: 1) Not all mortgages would be re-financed, and the rate cut could be smaller; 2) the beneficiary households may choose to save rather than spend all savings from lower mortgage repayments, especially if income and employment expectations are weak; 3) the positive impact on consumption can be offset by credit tightening from banks. In the absence of liability cost (e.g. deposit rate cuts), banks will face NIM compression pressure, and weaker profit growth will limit banks’ ability to raise new capital to support steady loan growth. Hence, credit slowdown tends to get worse, which is negative for the economy; 4) if banks are able to lower liability cost (e.g. cutting deposit rate) to maintain stable NIM, then the benefit for mortgage borrowers will be paid by losses among depositors, hence the net impact on consumption tends to be small.

Policy re-direction to support consumption and services. The more interesting reading from the above news on mortgage refinancing is that it may signal some form of policy re-direction, to increase support for consumption and service activities. As mentioned above, allowing for mortgage refinancing is more of a measure to support consumption rather than to support housing activity. There is also other evidence of such policy re-direction. In early August, the State Council issued guidance to promote service consumption, covering various service consumption activities including an implicit relaxation on educational tutorial policy. Last week, a big hit Chinese game (Black Myth: Wukong) received very positive coverage from official media, in sharp contrast to the generally negative attitude towards the gaming industry in recent years."