MNI STATE OF PLAY: China’s 5-Yr LPR To Fall As Soon As October

The reference rate used to price Chinese mortgages is expected to be cut as soon as next month to help bolster the property market and economic recovery after both the one-year and five-year Loan Prime Rates were kept steady at their monthly pricing.

The LPR for loans of five years or more, which is used to price mortgages, remained at 4.3% and the one-year rate was unchanged at 3.65%, according to the People’s Bank of China. The LPRs are priced off the rate of the PBOC’s medium-term lending facility and quotes submitted by 18 banks. The MLF rate, a key policy rate for pricing bank funding, is expected to be cut in the fourth quarter.

Analysts forecast the LPR will be cut again later this year as major banks have made across-the-board cuts in deposit rates, reducing their funding costs and providing leeway for lower loan rates. (See: STATE OF PLAY: China LPR Seen Steady, Before Cuts Later In '22).

The five-year LPR may be reduced by 10-15bps next month, said Golden Credit Rating chief macroeconomic researcher Wang Qing. He said lower mortgage rates would be key to rekindling interest in the real estate market as sales continue to fall despite the easing of regulatory restrictions.

The PBOC is likely to keep easing as the pandemic continues to disrupt the economy and slower global growth could hurt exports. Domestic credit expansion is viewed as crucial to supporting growth.

Wang said the PBOC may cut the MLF rate if consumption and investment remain tepid in Q4. Well behaved inflation and controlled weakness in the yuan also leave room for easing.

SEPTEMBER PAUSE

The decision to keep the LPRs unchanged was partially attributed to cuts in the MLF and the LPR last month. Authorities are monitoring the impact of those cuts – the five-year LPR was cut 15bps and the one-year by 5bps— and expected hikes in U.S. interest rates. Banks left their quotes unchanged due to pressure on net interest margins this month.

The LPR was unlikely to change this month because the MLF, which is the pricing base for the LPR, was unchanged, said China Minsheng Bank chief economist Wen Bin.

He said a cut to the five-year LPR in the wake of banks lowering their deposit rates would support the property market, as well as infrastructure and manufacturing investment over the longer term.

PROPERTY PAIN

The property market still needs support from easier credit and lower mortgage rates in big cities, said Shell Research Institute analyst Liu Lijie.

The mortgage rate for first-time home buyers dropped to 4.15%, down 17bps from August, and the rate for second-time buyers fell 15bps to 4.91% following the 15 bps cut in the LPR last month, according to a survey of 103 major cities conducted by the Institute.