MNI PBOC WATCH: Lower Rates Seen For Existing Mortgage Holders

The People’s Bank of China is likely to guide lenders to lower mortgage rates for existing customers to boost the housing market and consumption, while the five-year loan prime rate could be reduced to shore up the property market, economists told MNI.

The LPR, based on the People’s Bank of China’s medium-term lending facility (MLF) rate and quotes submitted by 18 banks, remained at 3.55% for the one-year maturity and 4.2% for the over-five-year maturity on Thursday, according to the PBOC’s website, in line with expectations after the central bank cut policy rates in June. (See MNI BRIEF: China’s July Loan Prime Rate Unchanged)

Further cuts to policy rates remain unattractive while the U.S. Federal Reserve continues to hike, said Zong Liang, chief researcher at the Bank of China. However, authorities could use other measures to ensure real interest rates are lowered to accommodative levels, such as reducing mortgage rates, cutting the reserve requirement ratio and providing structural facilities aimed at key sectors, Zong added. (See MNI PBOC WATCH: LPR To Remain Unchanged, H2 RRR Cut Possible).

Pointing to the latest circular issued by the State Council on supporting the private sector, boosting market confidence should be prioritised following a weak Q2, he continued. (See MNI: Weak Credit Demand Limits PBOC Easing, Fiscal Move Needed)

EXISTING MORGAGE RATE

The price of new mortgages has dropped below those for outstanding loans after several rounds of LPR cuts, leading mortgagees rapidly to repay their debts. According to Citic Securities, the new mortgage rate stands at an average 4.14% compared to 4.6%-4.9% for outstanding mortgages.

Zou Lan, head of the PBOC’s monetary-policy department, said last Friday in a briefing that the central bank will encourage lenders to renew existing mortgage contracts or swap previous loans for new and cheaper ones.

However, lenders may comply only gradually, noted Zhu He, senior follow at the China Finance 40 Forum, saying that refreshing contracts will further squeeze interest margins. The PBOC must further lower bank funding costs in order to prompt lenders to reduce the debt burden of the household sector and benefit consumption, he said.

Banks’ annual interest income would fall by CNY38.8 billion to CNY77.6 billion should the outstanding mortgage rate be reduced by 40bps, equivalent to to a 2-4bp reduction in interest margins, Citic Securities estimated. Authorities, including the PBOC, will likely provide incentives to offset the hit to revenue, said Citic analyst Ming Ming.

FIVE-YEAR LPR CUT

Market participants expect authorities to reduce the over-five-year LPR later this year to support the housing market. A cut in reserve requirements ratio would feed into a lower LPR and ensure a soft landing for property, said Wang Qing, chief macroeconomic researcher at Golden Credit Rating.

The central bank will make further efforts to expand credit in Q3, such as guiding down deposit rates to relieve pressure on interest margins, as domestic demand remains tepid while external orders slow, Wang said. Policymakers must address weak domestic economic drivers and accumulated risks from key sectors including property, he noted.