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China Implements Largest-Ever Cut to Key Mortgage Rate in Bid to Boost Housing Market

China's central bank

China’s central bank, the People’s Bank of China (PBOC), has taken unprecedented measures by making the biggest cut to its key mortgage reference rate. In an effort to address the ongoing property crisis, PBOC has reduced its five-year loan prime rate (LPR) from 4.2% to 3.95%, while maintaining the one-year LPR at 3.45%. This 25 basis point cut to the five-year LPR marks the most significant reduction since the central bank revamped its LPR system in 2019. Importantly, it is also the first reduction to the five-year LPR since June 2023.

The LPR functions as the rate at which commercial banks lend to their premier customers, with the five-year rate typically serving as a benchmark for mortgages.

China has been grappling with a real estate downturn since 2021, triggered by a government crackdown on developers’ borrowing. This has led to a liquidity crisis in the sector, resulting in a prolonged slump in property investment and sales. Major developers, including Evergrande, have defaulted on their debt, and the crisis has spurred protests, impacting construction workers, homebuyers, and investors. Beijing has implemented various measures to revive the property sector, such as interest rate cuts, reduced down payments, and easing restrictions on home purchases.

Amidst these challenges, China is also facing capital flight, deflation, and low confidence. The country’s direct investment liabilities dropped by 82% in 2023 compared to the previous year, reaching the lowest level since 1993. The country’s stock markets have witnessed a prolonged slump, with over $6 trillion in market value wiped out since 2021.