China cuts mortgage rates by record amount to help struggling property

China made its biggest ever cut to mortgage rates on Tuesday, as the authorities try to support the struggling property sector, though the response from stock markets was muted.

The People’s Bank of China said that the country’s lenders would reduce their five-year loan prime rate (LPR) by 25 basis points to 3.95%, a bigger cut than expected and the first since June last year. The one-year LPR was maintained at 3.45%.

The lowering of borrowing costs was “a logical inevitability,” said Wei Yao, economist at Societe Generale, as Beijing battles to support an economy buffeted by a collapsing property market that has hit consumer sentiment amid slow growth and a deflationary environment.

“This rate matters specifically for the housing sector as it is the reference rate for household mortgages and long-term corporate loans,” Yao added. “Clearly, the PBoC wants to direct its easing to the housing market, which has continued to weaken around the turn of the year.”

The loosening of monetary policy is just the latest in a number of moves by China’s government to lift investor sentiment after the Shanghai Composite index
hit a five-year low at the start of February.

In recent weeks Beijing has said it would support the stock market by encouraging government-linked funds to purchase equities, and on Feb. 7 it replaced the head securities regulator with a veteran deemed more market-friendly.

However, the response to Tuesday’s rate-cut news was muted, with the Shanghai Composite adding 0.4% and Hong Kong’s Hang Seng
rising 0.5%.

Stephen Innes, managing partner at SPI Asset Management, said the latest move by Beijing shows the government is intensifying its efforts to stabilize the stock market and bolster the economic recovery amid ongoing challenges, but that more was needed.

“To be sure, Beijing has cobbled together a rescue package aimed at purchasing stocks, signaling a proactive approach to addressing market turmoil. The breadth of measures is encouraging but likely to lead to another chorus of calls for much greater fiscal and monetary stimulus,” said Innes.

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