China is considering cutting interest rates on as much as $5.3 trillion of mortgages in two steps to lower borrowing costs for millions of families while easing the profit squeeze on its banking system.
Financial regulators have proposed reducing rates on outstanding mortgages by a total of about 80 basis points (bps), part of a package that includes an accelerated timeline for when mortgages become eligible for refinancing, according to people familiar with the matter. The first cut may come in the next few weeks while the second would take effect at the beginning of next year, said the people.
The yet-to-be-finalised plan is likely to apply to first and second homes, pending approval from the top leadership, two of the people said. In China, regulators set benchmarks for mortgage rates that are followed closely by banks. The National Financial Regulatory Administration didn’t respond to a request for comment.
Chinese regulators are walking a fine line as they attempt to shore up the battered property market and economy while safeguarding the nation’s $66 trillion financial system. Lowering rates too aggressively would pile pressure on the banks, which have already seen their margin tumble to a record low of 1.54% as of end-June, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability.
Bloomberg News reported last week authorities are mulling a plan to let homeowners renegotiate terms with their current lenders before January, when banks usually reprice mortgages. They would also be allowed to refinance with a different bank for the first time since the global financial crisis, said people familiar with the issue.
Analysts at China International Capital Corp and Jefferies Financial Group earlier expected that homeowners at some cities would see up to 100 bps of decline in their mortgage rates. Concerns about the Chinese economy have intensified after weak earnings reports from major consumer companies and as major global banks downgraded their growth forecasts, suggesting the country may struggle to meet its official target of around 5% this year. The real estate downturn has heavily impacted household wealth and spending.
“In essence, it’s a transfer of wealth from banks to households, so positive for consumption,” Larry Hu, head of China economics at Macquarie Group Ltd, wrote in an August 31 note. If all existing mortgages are to be refinanced, borrowers can save about 300 billion yuan ($42 billion) in interest payments annually, equivalent to 0.6% of the nation’s retail sales or 0.2% of its gross domestic product, he estimated.
For banks, Citigroup Inc estimated the worse-than-expected potential cut could lead to an average 8-bp margin contraction next year and hurt their earnings by 6.4%. Lenders with higher mortgage exposure like the big four state-run banks could be more vulnerable to the reduction, analysts led by Judy Zhang wrote in a note last week. Existing mortgages carried an average interest rate of about 4.27% as of end-2023, compared with a record low of 3.45% on newly-issued home loans.
Source Homevior.in
