China Considers Cutting Mortgage and Deposit Rates... Inevitable Impact on Banking Sector

On the 29th (local time), Bloomberg reported that major Chinese banks are considering lowering mortgage and deposit interest rates to support economic stimulus.

Bloomberg, citing sources familiar with the matter, stated that Chinese state-owned banks are reviewing plans to reduce interest rates on most of the outstanding mortgage loan balance nationwide, which amounts to 38.6 trillion yuan (approximately 6996 trillion won). This is expected to apply only to initial mortgages.

According to Citigroup, about 17.7 trillion yuan in mortgage loans were approved from the fourth quarter of 2017 to the first quarter of 2022, which is close to half of the current outstanding mortgage loan principal. According to a survey by Long360, a Chinese mortgage data provider, the average mortgage interest rate for first-time homebuyers in December last year was 4.16%, down 1.37 percentage points from the same period the previous year. This is the lowest level since the survey began in 2015.

JPMorgan estimated that the new mortgage interest rate would be around 4.18%, which is 0.6 percentage points lower than the outstanding mortgage loan principal. As a result, some consumers are expected to use short-term loans to repay their mortgages early.

Previously, Chinese state-owned banks took similar measures to lower interest rates for qualified borrowers in 2009, right after the global financial crisis. Bloomberg evaluated that while this move is likely aimed at promoting consumption and revitalizing the stock market, it is unclear whether it will be sufficient to restore investor confidence. Larry Hu, Chief China Economist at Macquarie Group, explained, "Because trust is still low, the interest rate cut is not a game changer but a gradual policy step," adding, "I expect real estate easing to occur within the next few weeks, but it is uncertain whether the intensity will be sufficient."

Deposit interest rates are also expected to decrease. Sources said that lending institutions such as Industrial and Commercial Bank of China and China Construction Bank will lower deposit rates by 0.1 to 0.25 percentage points within this week. If implemented, this would be the third rate cut in one year. The report described this as "part of the Chinese government's goal to stimulate consumer spending and bring more funds into the stock market." Financial authorities have already approved the large banks' plans to reduce deposit rates, and sources explained that the changes could take effect as early as September 1.

However, a decline in bank profitability seems inevitable. According to JPMorgan, assuming all mortgages are refinanced with a 0.6 percentage point rate cut, Chinese banks' earnings are expected to decrease by 8% next year. The firm forecasts that about 50% of mortgage holders are likely to refinance, which will impact bank profits in the short term.

Earlier, the People's Bank of China, the country's central bank, lowered the Loan Prime Rate (LPR), which effectively serves as the benchmark interest rate, on the 21st. The one-year LPR linked to general loans was cut by 0.1 percentage points to 3.45%, while the five-year LPR linked to mortgages was held steady at 4.2%. The market interpreted this as the Chinese government signaling its willingness to supply liquidity while maintaining a cautious stance on the real estate market.

Prior to that, on the 15th, the short-term policy rate for the 7-day reverse repurchase agreement (reverse repo) was lowered by 0.1 percentage points to 1.8%, and the one-year Medium-term Lending Facility (MLF) rate was cut by 0.15 percentage points to 2.5%. As a result, the total liquidity supplied to the market is estimated at 605 billion yuan.

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