J.P.Morgan Weigh In On Today’s LPR Fixings

In the wake of today’s LPR fixings J.P.Morgan think “there are two important reasons behind today’s unusual policy move. First, the policy aims to provide some cushion against weak housing market activities. 70-city new home prices fell into contractionary territory in April, the first time in nearly 6.5 years. Housing activity collapsed in April (the weakest moment on record, based on JPM housing activity index), and many private developers may be at the tipping point of triggering more defaults if there is no recovery in housing demand and improvement in funding conditions. Hence, it is one of a series of measures (e.g. , city-level housing policy adjustments observed recently) to help stabilize the housing market. Second, this could provide meaningful support to free up more disposable income for consumption as the recent Omicron outbreak has hurt the labor market pretty hard. Premier Li has recently emphasized on the importance of stabilizing the labor market and creating new jobs, as well as promoting consumption. The government is also considering a fiscal subsidy to promote auto sales in rural areas, likely introduced in June.”

• “The reduction in the 5-year LPR is a welcome policy move, but it is not a magic bullet, in our view. In order to prevent a meltdown in the housing market, first it will require removal of individual mobility restrictions and normalization of business activity. The incremental housing measures in recent months have mainly focused on the demand side, including reduction in mortgage rates, lower down-payment ratios and relaxation of home purchase restrictions at city levels. Additional measures along the same line could include tax reduction (e.g. , stamp duty tax and business tax on first-home purchase). Nonetheless, many private developers have continued to face funding stress, which will require closer attention from policymakers, in our view. In addition, there is room to promote the affordable rental market or public housing market more aggressively this year, to partially offset the weakness (not only cyclical but also structural) in the commodity housing segment.”