SHANGHAI - China ramped up support for the troubled property sector with its biggest-ever cut to a key mortgage reference rate, raising expectations for more aggressive measures to support the economy in the months to come.

Chinese lenders slashed their five-year loan prime rate (LPR) by 25 basis points to 3.95 per cent, the People’s Bank of China (PBOC) announced on Feb 20. It was the first cut since June 2023 and the largest reduction since a revamp of the rate was rolled out in 2019.

Lowering that rate will allow more cities in China to reduce minimum mortgage rates for home buyers, thereby stimulating sluggish demand for apartments as prices fall. The property crisis has been a major drag on the world’s second-largest economy over the past couple of years and has threatened its path towards sustainable growth.

Banks also maintained their one-year LPR – the de facto benchmark lending rate – at 3.45 per cent. While expectations for a smaller reduction in the five-year LPR were fairly widespread, economists were split on a one-year LPR cut.

The move failed to impress investors. China’s benchmark CSI 300 Index was down about 0.3 per cent in morning trade.

“A bigger cut may boost housing sentiment in the near term, though this unlikely marks a turnaround in the property sector,” said TD Securities macro strategist Alex Loo.

Mr Loo cited the nation’s “urgency” to entice more home buyers as property sales in key cities slumped during the week-long Chinese New Year holiday. March is traditionally a peak season for home sales, making any efforts to spur more purchases all the more timely.

Even so, it is not clear the five-year LPR cut will offer much of a boost. The average rate of new mortgages granted in December had already fallen to a record low of 3.97 per cent, while megacities like Beijing, Shanghai and Guangzhou have been relaxing curbs on home purchases for months.

The cut will probably provide the most benefit for new home buyers right now, since many existing mortgages are repriced only at the beginning of the year.

Several economists pointed to the need for additional easing in 2024 – including through cuts to the central bank’s one-year policy loan rate, or the medium-term lending facility (MLF) rate.

The PBOC refrained from lowering that rate on Feb 18, making the Feb 20 action the first time since May 2022 that the five-year LPR rate was cut following an MLF rate hold.

The LPRs are based on the interest rates that 20 banks offer their best customers, and are quoted as a spread over the central bank’s MLF rate. The PBOC, which publishes the LPRs monthly, is seen as having significant sway over them. 

The LPR cut “looks late”, said Mr Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group.

“The distress has been passed on to domestic demand,” he said.

Mr Xing projects 20 basis points worth of cuts to policy rates in 2024.

The PBOC has taken some steps to support the economy.

Earlier in February, it unleashed one trillion yuan (S$189 billion) of liquidity into the banking system via a trim to the reserve requirement ratio. It also lowered interest rates on relending funds provided to lenders to incentivise loans to agricultural and small companies.

Banks also cut their deposit rates in late 2023, which helped ease pressure on profit margins.

PBOC governor Pan Gongsheng flagged the likelihood of a lower LPR during a press briefing in January, citing the lower relending and deposit rates.

The hesitancy to reduce policy loan rates may also reflect concerns about creating too wide of a divergence with the United States Federal Reserve, which has yet to start lowering its own interest rates as US inflation remains hot.

Still, economists pointed to China’s ongoing issues with deflationary pressures as reason to consider more rate cuts. BLOOMBERG