Nomura Weigh In On Today’s LPR Fixings

Nomura note that “the National Interbank Funding Center (NIFC) cut the 5-Year Loan Prime Rate (LPR) by 15bp to 4.45% from 4.60%, while keeping the 1-Year LPR at 3.70%. This cut immediately follows the PBoC’s cut of the minimum mortgage rates to 20bp below the LPR from the LPR itself.”

• “The intent and message from these two consecutive policy moves are very clear: Beijing wants to rescue the property markets, which have experienced the worst contraction in many years. New home sales for the top 100 developers were down 59% Y/Y in April, and many private developers appear to be on the brink of insolvency. China’s economy is facing an increasing risk of recession, as it has been hard hit by the latest wave of Omicron and massive lockdowns.”
• “We believe the impact on the property sector from the 15bp cut to the 5-Year LPR will likely be limited. The 15bp cut, together with the cut last week, will undoubtedly benefit mortgage borrowers and developers. Increased new home sales would also benefit local governments, for which revenues from land sales dropped by 37.9% Y/Y in April. However, relative to previous downcycles, this mortgage rate cut is small (at the beginning of this year, there was a 5bp 5-Year LPR cut), while the Omicron wave and draconian lockdowns in around 40 cities have significantly limited mobility, employment, income and the confidence of Chinese households. A majority of college graduates this year may not be able to find jobs due to the sharp economic slowdown.”
• “One more reason on why the impact is limited: Mortgage rates have already started to decline, even before recent policy moves. Even though the PBoC had left both the MLF rate and LPR unchanged before today’s cut, since making a 5bp cut in January (Figure 1), mortgage rates in many cities have fallen notably over the past couple of months to alleviate the impact of the pandemic on local housing markets. According to Beike Research Institute, average mortgage rates for first-time home buyers in 103 surveyed cities fell further by 17bp to 5.17% in April from 5.34% in March.”
• “Why the 1-Year LPR was left unchanged? The NIFC left the 1-Year LPR unchanged perhaps because it wanted to protect bank net interest margins, as banks are under pressure from rising NPLs.”