Recently, despite the People's Bank of China continuously lowering related loan interest rates to support the sluggish economic outlook, the decision to keep the benchmark interest rates for housing mortgage loans unchanged indicates that the People's Bank of China aims to support the economic outlook and real estate market while also considering the profit outlook of the Chinese banking industry.
Data shows that on August 15, the People's Bank of China cut the medium-term lending facility (MLF) rates by 15 basis points for one year, and on August 21, reduced the one-year loan prime rate (LPR) by 10 basis points to 3.45%. However, the five-year loan market quote rate (LPR) for housing mortgage loans, a benchmark, has remained unchanged.
The five-year LPR is the benchmark interest rate for housing mortgage loans. With the real estate market experiencing turbulence and major private real estate developers teetering on the brink, financial markets are closely watching any information on the five-year LPR. The People's Bank of China's recent decision to keep the five-year loan interest rate unchanged, despite cutting some rates, surprised the market, which had initially expected the central bank to cut both the one-year and five-year LPR by 15 basis points.
Analysts at Nomura, in a report earlier this week, indicated that this reluctance to lower the benchmark rate for housing mortgage loans suggests the People's Bank of China's concern that reducing the rate could squeeze banks' net interest margin, thereby exerting a more significant negative impact on bank profits, which are already being dragged down by a slump in the real estate sector.
Recently, negative news about Chinese real estate developers has dominated headlines in global media. On August 17, China Evergrande Group filed for bankruptcy under Chapter 15 of the U.S. Bankruptcy Code, while its competitor, Country Garden, sought to extend the bond repayment period. Data from real estate services company CRIC China showed that in July, sales by large developers in China fell by 33.1% year-on-year to 350.4 billion yuan.
Despite earlier statements by the People's Bank of China that it would optimize credit policies for the real estate industry and coordinate financial support to address local government debt issues, Nomura Securities anticipates in its report that the central bank will encourage banks to reduce deposit rates in the coming weeks, creating more room for an eventual reduction in the benchmark LPR.
On August 22, BNY Mellon Investment Management noted that the lack of decisive and swift interest rate cuts reflects ongoing internal government debate over the nature and extent of the required easing, available policy space, and other risks and priorities.
Data from the China Banking and Insurance Regulatory Commission shows that the return on equity for Chinese commercial banks remained at a historic low of 1.74% in the second quarter of 2023. The bank's interest spread and profits, as well as the Renminbi exchange rate, may be the main factors restraining the People's Bank of China's easing actions because lowering interest rates not only squeezes the bank's interest spread and profits but could also lead to an expanded interest rate differential between China and the United States, putting further depreciation pressure on the Renminbi exchange rate.
Currently, China is attempting to reverse the real estate bubble formed over the past thirty years, and lowering the five-year LPR might negatively affect the recent "housing is for living, not for speculation" control policies. BNY Mellon said that a package of fiscal measures targeting the cash flow risks of local government financing platforms and ensuring the stability of local government debt is about to be introduced, which might also be a reason for the People's Bank of China to keep the five-year LPR unchanged.
