China cuts interest rates again in bid to shore up a real estate bubble

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On Monday, China’s central bank slashed key rates in a bid to help its struggling economy and deepen the real estate crisis.

The People’s Bank of China (PBoC) cut its five-year prime lending rate (LPR) – the benchmark for mortgages – by 15 basis points to 4.3%. The central bank already cut the five-year LPR by the same amount in May, the biggest cut since 2019. On Monday, the PBoC also cut the one-year LPR by five basis points to 3.65%.

China’s real estate crisis has deepened in recent months as hundreds of thousands of buyers have begun protesting and refusing to pay their mortgages due to stalled and delayed real estate projects. Massive mortgage boycotts mean that eroding consumer confidence could hamper any housing recovery, “which will eventually ripple through the national economy”, ratings agency Fitch said in a report. ‘august. Real estate and related industries account for 25% of national GDP.

The interest rate reduction is an attempt to reduce interest payments on existing loans from developers and to lower the price of new loans. The government will also provide special loans to help its indebted property developers complete suspended housing projects, Chinese state media Xinhua reported on Friday, citing a joint statement from the central bank and China’s finance and housing ministries. . The size of the loan program is nearly $30 billion, according to a Bloomberg report.

China’s actions show it knows it needs to do something to address the worsening housing crisis, but its efforts will not be enough to solve its deep-rooted housing crisis, analysts say.

“We expect further easing in the coming months, but policymakers still seem reluctant to stage a strong pick-up in credit growth,” Sheana Yue, a China economist at research firm Capital Economics, wrote on Monday. “The policy is being relaxed, but not dramatically.”

No big bailout

Lowering interest rates in China may seem like a big move, experts say, but it will do little to ease people’s housing concerns and stabilize the housing market.

“It will drive mortgage rates down further, but it won’t be enough to reverse the negative trend,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis. wrote on Twitter. “Households no longer want to buy a property because they fear that the projects will not be carried out, but also [fear] lower prices in the future,” she said.

The weakness in loan demand is “partly structural, reflecting a loss of confidence in the housing market and uncertainty caused by recurring disruptions to China’s zero-COVID strategy,” Yue wrote. “These are brakes that cannot be easily solved by monetary policy.”

It could cost up to 6% of China’s GDP to shore up property developers’ balance sheets, said Neil Shearing, chief economist at Capital Economics Group, on Monday.

According to data released last week by the country’s statistics bureau, China’s economy overall slowed down last month, due to weak housing confidence and continued disruptions from COVID-19. , with retail sales, fixed asset investment and real estate prices and sales all falling.

Home sales plunged 29% year-on-year and new housing starts fell 45%. Investment bank Goldman Sachs then lowered China’s full-year GDP growth to 3.0% from 3.3%.

Beijing is wary of a huge bailout for property developers in case it shifts the entire burden of responsibility onto the central government. He wants local governments to step in, Houze Song, a fellow at the Paulson Institute think tank that focuses on the Chinese economy, wrote in a report last week. “No major central government bailout is on the horizon, as Beijing will likely wait to see how local governments proceed for some time,” he said.

At a housing fair last week, Deng Bibo, county party secretary of China’s Hunan Province, urged “all comrades [to] buy a property, then a second. If you’ve already bought a second one, buy a third one. Bought a third? So buy your fourth.

Deng’s speech went viral as Chinese social media users laughed it off. One user sarcastically wrote on Douyin, China’s version of TikTok, “It’s as easy as buying vegetables at the market.”

Yet local governments may not have the capacity to help developers. Local authorities in Zhengzhou, a city in east-central China’s Henan province, have allocated $12 billion to bail out developers, most of which comes from local government financing vehicles (LGFVs) and banks. But as Song points out in his research, the city’s LGFVs are broke.

“The Zhengzhou LGFVs are probably in worse shape than the property developers they are supposed to save. The town hall is appealing [them] contribute at least $3 billion to the bailout fund, but the LGFVs themselves have racked up over $15 billion in losses and tripled their debt to over $105 billion since 2015,” Song wrote.

As a result, Yue predicts that any additional support from Beijing “will not be enough to drive a strong recovery.”

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