China Lowers Its Main Interest Rate As Home Sales Plummet

China Lowers Its Main Interest Rate As Home Sales Plummet

China lowered a key interest rate on Friday to save its sagging property market; it is also trying to avoid a serious economic crisis in its second-largest economy.

The People’s Bank of China lowered its five-year loan prime rate (LPR) by 15 basis points to 4.45 percent, the greatest fall on record. Most experts had predicted a five-basis-point decrease.

The LPR in China is the interest rate at which commercial banks lend to their most valuable customers. The five-year maturity is often used as a reference for mortgages, and it acts as a standard for other loans. The central bank’s move to lower the five-year rate is the latest in a series of measures adopted by China to address a real estate crisis; COVID lockdowns threatening to send the economy into its first quarterly downturn since early 2020.

House Sales Plummets in China

According to the National Bureau of Statistics, new house sales fell 47 percent in April compared to the same month a year ago, while prices in 70 cities fell for the eighth month in a row. “[Friday’s move] suggests that the leadership has… determined to rescue [the property industry] as soon as feasible,” Zhaopeng Xing, ANZ Research’s senior China analyst, said. He said, “It also implies that China is putting in a lot of effort to meet its 5.5 percent growth objective” for 2022.

As a result of the Covid lockdowns, the Chinese economy may contract in the second quarter. This month, consumer spending and manufacturing production dropped sharply; unemployment hit its worst level since the early 2020 coronavirus epidemic. The property market, which accounts for up to 30% of China’s GDP, is also changing.

After defaulting on its massive debts late last year, Evergrande — one of the country’s largest developers — is undertaking a massive reorganization. Analysts have long worried that Evergrande’s demise will have ramifications throughout the real estate market. Since last year, property sales have slowed as stringent credit restrictions, and a faltering economy dampened demand. The Covid lockdowns this year wreaked even more havoc on the sector. According to Nomura analysts, “the Omicron wave and punitive lockdowns in around 40 cities have significantly limited Chinese families’ travel, employment, income, and confidence.”

“Beijing wants to save the property markets,” they noted, “which have seen the greatest decline in recent years.”

This week, China’s central bank unveiled further market-stimulating measures. Last Sunday, the PBOC said it would lower first-time homeowners’ mortgage rates.

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