On Monday, China’s central bank made an unexpected move by cutting key interest rates in an effort to revive its struggling property sector. The People’s Bank of China (PBOC) reduced the five-year loan prime rate (LPR), which influences mortgage rates, from 3.95% to 3.85%.
Additionally, the one-year LPR was lowered from 3.45% to 3.35%. This decision was part of broader measures to stimulate the economy, reflecting ongoing concerns about economic growth and the impact of the property market slump.
In tandem with the rate cuts, the ruling Communist Party released a detailed summary of a recent top-level meeting. The document, spanning 50 pages in English, outlines ambitious goals for transforming China into a “high-standard socialist market economy” by 2035.
It emphasizes enhancing social welfare, such as pensions, and reforming the tax system while ensuring equal access to public services for rural migrants. It also promises support for both private enterprises and state-owned companies, alongside improved international economic policy coordination.
China Cuts Key Interest Rates to Boost Property Sector and Economic Growth
Economists, including UBS’s Nina Zhang and Tao Wang, believe that the central bank’s measures if effectively implemented, could improve resource allocation, mitigate financial risks, and bolster investor confidence.
However, they stress that the success of these policies will depend on their execution and long-term sustainability. The detailed document from the party meeting provides a policy roadmap, but actual reforms and legislation will take time to materialize.
China’s economy has struggled to regain momentum post-COVID-19, with a notable slump in the property market exacerbating the issue. Recent economic growth was recorded at 4.7% for the last quarter, maintaining the government’s target rate of around 5% for the first half of the year.
The property market’s downturn, driven by regulatory crackdowns on excessive borrowing by developers, has negatively affected related sectors such as construction and home appliances.
Market reactions to the central bank’s measures have been mixed. Despite the rate cuts and other liquidity measures, including reduced collateral requirements and lower interest rates on short-term securities, the Shanghai Composite Index fell by 1%.
However, the Hong Kong market saw a boost, with the Hang Seng Index rising by 0.8% due to gains in technology stocks. Yet, property developers’ shares continued to struggle, with notable declines in major companies like Country Garden and China Vanke.
