China Holds Mortgage Rates Steady Despite Real Estate Crisis...Maintains Cautious Stance

Concerns over a domino effect of defaults in the Chinese real estate market are growing, ranging from large-scale construction projects to trust funds. However, the local central bank has maintained a cautious stance by freezing the interest rates linked to mortgage loans. The market, which had anticipated a rate cut, expressed concerns about measures to restore confidence and argued for more active intervention.

On the 21st, the People's Bank of China, the country's central bank, announced that it would keep the 5-year prime loan rate (LPR) linked to mortgage rates steady at 4.20%. The 1-year LPR, which affects general loan rates such as corporate loans, was lowered by 0.1 percentage points from 3.55% to 3.40%.

This rate adjustment fell short of market expectations. Previously, financial institutions had anticipated that the People's Bank of China would cut the 1-year and 5-year LPR by 0.15 percentage points each on this day. The LPR is calculated by aggregating the loan rate trends of prime customers from 18 designated banks. Local financial institutions use this as a benchmark to set loan interest rates, making it a practical reference rate.

Prior to this, the People's Bank of China injected 297 billion yuan (approximately 51 trillion won) into the market through 7-day reverse repurchase agreements (reverse repos), and also lowered the policy rate for the 1-year Medium-term Lending Facility (MLF) loans from 2.65% to 2.50%, a 0.15 percentage point cut, which had further strengthened market expectations for a rate cut.

The monetary authorities appear to have taken a conservative stance on liquidity supply to the real estate market while lowering general loan rates to stimulate domestic demand. This decision is particularly significant given the increasing risk of domino defaults among large real estate developers such as Evergrande and Biguiyuan, as well as trust companies like Zhongrong International.

The Hong Kong South China Morning Post (SCMP) described the mortgage rate freeze as "surprising from the perspective of economists," noting that "experts are concerned about how China will resolve the real estate crisis and restore homebuyers' confidence in the future." It added, "Analysts emphasize that the rate adjustment is insufficient and that more focused and stronger policies are needed to have a visible impact."

Some analysts suggest that President Xi Jinping and the top leadership are deliberately allowing real estate companies' defaults to persist, indicating a lack of will to revive and support the real estate sector. Park Suhyun, team leader of the KB Securities Research Division, analyzed that since real estate accounts for a large portion of China's GDP, the government is laying the groundwork for long-term fiscal health and direct response to the downturn. It is expected that active intervention will be postponed as much as possible to encourage restructuring such as mergers and acquisitions (M&A) of distressed companies during this process.

This content was produced with the assistance of AI translation services.