China: Easing toward the property sector
- PBOC lowers the five-year LPR by 15bps to 4.45%
- It demonstrates an increased urgency to prevent a housing market crash
- Near-term impact could be limited amid protracted pandemic measures alongside slowing income growth
- Rather than a broad-based easing, PBOC going forward might be more inclined…
- … to adopt targeted policies stabilizing property market and prioritizing job creation
The People's Bank of China lowered the five-year loan prime rate, a benchmark for mortgage loans, by 15bps to 4.45%. The reduction came after the authority announced a cut to mortgage rates earlier this week. These measures demonstrate an urgency to support the property market. A continued drop in values has so far failed to entice prospective buyers. Reports about developers’ heightened liquidity issues, ratings downgrades and auditor resignations have also been sapping confidence. While today’s move was encouraging, we expect limited impact in the near term amid protracted pandemic measures alongside slowing income growth.
The one-year loan prime rate was kept unchanged at 3.7%. It reflects policy efforts to strike a balance between stabilizing a slumping housing market and sheltering from the risk of capital outflows. The economic situation has been challenging, with mobility restrictions dragging industrial activities and consumption down to the weakest levels since the pandemic began. Factory production fell 2.9% YoY in April as Shanghai lockdown led to supply chain disruption in the Yangtze River Delta that accounts for one-fourth of China's GDP. Retail sales plunged 11.1%, with unemployment rising to the second highest level on record. And yet subdued loan demand due to pandemic controls are hindering the efficacy of monetary policy. Credit growth slowed last month with new yuan loans sinking to the lowest in more than four years.
However, cutting rates aggressively, when the US Fed is going in the opposite direction, may not be on the cards, in our view. Running too divergent a monetary policy relative to the US could exacerbate pressure on yuan, which has already depreciated 6% against the dollar since end-March. Meanwhile, room for further reserve ratio cut is narrowing, with April’s reduction has already brought commercial banks’ RRR to the lowest level since 2007.
Looking forward, the central bank might therefore be more inclined to adopt targeted policies stabilizing housing market, prioritizing job creation, and relieving downstream manufacturers whose margins were squeezed by elevated input costs. We think that fixed income investors should turn defensive in view of PBOC’s increasing restraint on broad-based easing. Indeed, most maturities along the CGB curve were little changed, while 5-year yields rose in today morning trading.
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