China cuts key interest rate as home sales collapse

The People’s Bank of China cut its five-year loan prime rate (LPR) by 15 basis points to 4.45%, the second cut this year and the largest ever. Most analysts had expected a five basis point cut.

China’s LPR is the rate at which commercial banks lend to their best customers. It serves as a benchmark for other loans and the five-year maturity is commonly used as a benchmark for mortgages.

The central bank’s decision to cut five-year yields is the latest in a series of steps China has taken to address a real estate crisis as Covid lockdowns threaten to push the economy into its first quarter contraction since early 2020.

According to the National Bureau of Statistics earlier this week, new home sales in April fell 47% from a year earlier, while prices in 70 cities fell for the eighth straight month.

†[Friday’s move] indicates that the leadership has … decided to save [the property sector] as soon as possible,” said Zhaopeng Xing, senior China strategist for ANZ Research. “It also suggests that China is making great efforts to meet its growth target of 5.5%.” before 2022, he said.

The Chinese economy could contract in the second quarter as Covid lockdowns wreak havoc on activity. Consumer spending and factory output both contracted sharply last month, while unemployment rose to its highest level since the first coronavirus outbreak in early 2020.

The real estate sector, which makes up a whopping 30% of China’s GDP, is also in an ever-deepening crisis.

Evergrande, one of the country’s largest developers, is undergoing massive restructuring after defaulting on its massive debts late last year. Analysts have long feared the collapse of Evergrande would have a ripple effect on the real estate sector.

Real estate sales have slowed since last year as tight credit policies and a weakening economy dampened demand. This year’s Covid lockdowns hit the industry further.

“The Omicron wave and draconian lockdowns in about 40 cities have significantly reduced mobility, employment, income and confidence of Chinese households,” said Nomura analysts.

“Beijing wants to rescue the real estate markets, which have experienced the worst contraction in many years,” she added.

China’s central bank announced a number of other measures this week to boost the market. The PBOC said last Sunday it would lower mortgage rates for first-time home buyers.

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