Lower interest rates unlikely to boost China’s property market: expert

Amid a housing developer debt crisis, China’s central bank consecutively lowered its prime lending rate (LPR) in a bid to boost sales in the property market. However, experts say the move is unlikely to upset the market.

On August 22, China’s central bank cut its prime lending rate (LPR) for the third time as property developers suffered large losses due to liquidity problems.

At least 50 listed developers disclosed losses in August, the season for interim financial reporting, including those that have already reported a liquidity crunch, such as Logan Group, Powerlong Real Estate Holdings and China South City.

Leading Chinese developer Country Garden Holdings ranked 138th Fortune 500 2022 and second among Chinese developers, issued a profit warning (pdf) August 18.

“The expected decline in earnings is primarily attributable to the challenging business environment in the real estate industry and the continued impact of the COVID-19 pandemic,” the company said.

Similarly, Greenland Holdings, China’s top-ranked developer, revealed that its 2022 interim net profit plunged 48.98% year-on-year (YOY) and cash flow from operating activities fell. fell 54.30% year-on-year.

As the highest ranked Chinese real estate developer, Greenland Holdings is also ranked 125 on the 2022 Fortune 500.

At a seminar on August 22, the Central Bank of China revealed that now is the most difficult time to stabilize the economy while protecting the reasonable financing needs of the real estate sector.

On the same day, the central bank cut the five-year loan prime rate (LPR) for the third time this year, from 4.45% to 4.3%, down 15 basis points. Meanwhile, the one-year LPR was reduced by five basis points.

Consecutive Rate reductions

The five-year LPR was reduced in January and May 5 and 15 basis points, respectively. In August, the five-year LPR was cut by 35 basis points.

The LPR, serving as a price reference for bank credit, is calculated by the National Center for Interbank Financing (NIFC) from China. Currently, the LPR is composed of rates with two maturities: one year and more than five years. The five-year LPR determines deposit and borrowing rates for five years and beyond.

On August 22, the day of the third LPR cut, mortgage rates for first-time buyers in Beijing, Shanghai, Guangzhou and Shenzhen fell below 5%, with the lowest mortgage rate in many cities falling to 4.1 %, according to Shanghai Securities News. .

“The five-year LPR is a benchmark interest rate for long-term loans, and the cut is intended to boost sales by lowering mortgage payments. However, the current housing demand is low, mainly because people’s incomes have dropped due to the economic downturn and their confidence in the future is low,” said Li Songyun, a doctor of economics and economics expert. Chinese, at The Period Times.

Mortgage rates in China have now fallen to a record low since 2007, but the contribution of home loans to new loans has fallen to 11%, the lowest level since 2009.

Since the beginning of this year, sales of commercial buildings in China have declined in terms of area and sales. The country national housing climate index (NRECI) also showed a continuous decline since 2021, falling from 100.97 last July to 95.26 this year, except for a slight rebound of 0.08 in February.

The NRECI is a composite index reflecting the current situation and the development trend of the Chinese real estate market. Generally, the most appropriate level of NRECI is 100.

According to Li, China’s real estate sector has been hit hard by developer defaults and unfinished buildings.

“Lowering interest rates cannot solve the problem”: an expert

A backlog of millions of unfinished and pre-sold buildings across China has led to serious problems that go beyond property developers’ liquidity crises. Most Chinese banks are facing a halt in mortgage payments or a “mortgage strike” – where buyers refuse to pay mortgages unless developers resume building construction.

S&P Global has estimated that 2.4 trillion yuan (about $355 billion) in mortgages could be at risk of not being paid, representing about 6.5% of all outstanding mortgages.

The rating agency also predicts that home sales in China could fall by up to 33% this year amid the mortgage strike, further reducing liquidity for struggling developers and leading to more defaults.

Unfinished buildings also trapped some upstream contractors. Shanghai Construction Group has filed 75 lawsuits or arbitrations against property developers over payment defaults, with a combined total of 7.709 billion yuan (about $1.156 billion), according to an August 12 announcement.

“Lower interest rates alone cannot eliminate people’s worries and therefore cannot stimulate the real estate market. Also, lower interest rates can only save about $4,500 per $145,000 mortgage,” Li said in response to the unfinished building issue.

“Furthermore, according to July statistics, social finance growth hit its lowest level in six years, indicating the failure of previous monetary easing policies – demand for credit is still sluggish, with the economy falling into a cash trap.”

Li added that the most crucial factor behind China’s weak real estate demand is the zero-COVID policy implemented by the Communist Party of China. And that small cuts in the LPR are unlikely to have much of a stimulating effect on the economy.

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Kathleen Li has contributed to The Epoch Times since 2009 and focuses on China-related topics. She is a professional engineer, registered in civil and structural engineering in Australia.