China is set to cut interest rates on more than $5 trillion of outstanding mortgages, potentially as early as this month, in a significant move to stimulate the economy and boost consumer spending, Bloomberg reports, citing anonymous sources familiar with the matter.
Sources reportedly revealed that some banks were preparing for the upcoming adjustments, with homeowners potentially enjoying up to a 50 basis point immediate rate reduction.
The proposed cuts, likely to be implemented in two steps totaling about 80 basis points, will come before January, when banks typically reprice mortgages. While China has already brought average mortgage costs to a record low this year, the current system doesn’t benefit existing borrowers, as banks only reprice loans annually. This disparity has led to frustration among homeowners and a surge in early mortgage payments.
The move is part of a broader effort by policymakers to alleviate the financial burden on households, which are facing weakened domestic spending and a worsening deflation risk. It also comes amidst a growing number of Wall Street analysts predicting that China may miss its economic growth goal of 5% this year.
The deepening selloff in Chinese stocks and the crisis of confidence in the world’s second-largest economy are adding pressure on policymakers to reverse the downward trend.
The proposed mortgage rate cuts will likely create challenges for Chinese banks, which have already experienced a significant decline in their profit margins due to low interest rates.
Analysts at Shenwan Hongyuan Group estimate that an 80 basis point reduction would result in annual interest savings of over 300 billion yuan for homeowners. A household with 1 million yuan of 30-year mortgages could see their monthly payments drop by around 9%.
The government has taken several steps this year to lower borrowing costs, including scrapping the central government-guided mortgage rate floor. However, the property downturn persists, and the prospect of increasing protectionism and a fragile global outlook weighs on China’s export sector.
