On August 22, 2022, the People’s Bank of China reduced the five-year loan prime rate by 1.5% points to 4.3% from 4.45%, which is equal to the largest decrease on record. The recent cuts in mortgage rates underline efforts by the authorities to stabilize the real estate market after a series of defaults by real estate developers and a decline in home sales following falling demand from consumers. At the same time, local governments began to provide loans to real estate developers so that they could continue building unfinished homes.
Real Estate Market in Trouble
The property crisis escalated after the major real estate developer, Evergrande, defaulted on its debt in 2021. Since then, both the prices of real estate and the sales of new residences have been declining. Recently, Country Garden, the largest developer in China by sales, highlighted the downturn by announcing in a stock exchange filing that it anticipated the profits for the first-half of 2022 to fall by as much as 70% YoY. Concerns about financial stability caused a number of Chinese developers to halt the construction of homes that have already been sold. Homebuyers across the country have stopped paying their mortgages on unfinished homes, which jolted the markets and prompted businesses and authorities to swing into action to control the situation.
Interest Rate Cuts to Stimulate Economic Growth
China lowered its benchmark interest rate as the country attempts to revive the economy that was hampered by a real estate crisis and an increase in COVID-19 cases. The central bank lowered its one-year loan prime rate by five basis points to 3.65%. The central bank also pledged to increase assistance for the recovery of the economy, which is at a critical stage, and urged the major state banks to take the lead in maintaining loan growth and safeguarding the financing requirements of the real estate sector.
Tough Times Ahead
China, the second-largest economy in the world, narrowly avoided contraction in the second quarter of 2022 as widespread lockdowns due to COVID-19 and a housing crisis eroded consumer and business confidence. The likelihood of a robust revival in the country is threatened by a global slowdown and ongoing supply-chain problems. The Chinese government stated that it could miss its target of 5.5% annual economic growth in 2022.
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