<중앙은행>, Indicates Additional Interest Rate Cut... "Will Induce Reduction in Financial Costs"

Repeated Emphasis on Real Estate Stimulus Intent
Close Attention to LPR Rate Announcement on the 20th

The People's Bank of China, the country's central bank, mentioned a continued policy of interest rate cuts, signaling its intention to stimulate the economy, including the real estate sector. There is also speculation about a possible further reduction in the Loan Prime Rate (LPR) scheduled for announcement on the 20th.

On the 6th, the Monetary Policy Department of the People's Bank of China issued a statement titled "Deepening Market-Based Interest Rate Reform," emphasizing that interest rate marketization is one of the core aspects of financial reform. The statement highlighted the priority of interest rate reform, stating, "We must open channels for funds to enter the real economy to promote optimal allocation of resources," and added, "We will continue reforms to promote the marketization of deposit and loan interest rates to induce a sustained reduction in financial costs." It further noted, "To better support rigid and improved housing demand, the marketization of mortgage interest rates must be continuously improved."

[Image source=Yonhap News]

In particular, the statement stressed the importance of interest rate adjustments to "support improved housing demand." It emphasized, "We will firmly implement the requirements to promote a virtuous cycle between finance and real estate, continuously improve differentiated housing credit policies, and fully leverage the dynamic adjustment mechanism of the new first mortgage interest rate policy." Additionally, it stated, "Mortgage interest rates will be independently set, and municipal governments will be supported to utilize policies based on their respective cities," and urged, "Financial institutions are encouraged to continuously implement reductions in existing mortgage rates, and through adjustments with existing rates, reduce interest burdens to support investment and consumption."

According to the People's Bank of China, in May last year and August this year, Chinese authorities lowered the policy floor rates for first-home and second-home loans by 0.2 percentage points and 0.4 percentage points, respectively. Since then, over 50 million people have benefited from the rate cuts, with annual interest expenses reduced by approximately 160 billion to 170 billion yuan (about 28.608 trillion to 30.396 trillion Korean won).

However, the market expects that the mortgage rate cuts will target local cities where the real estate market recovery is challenging, rather than major cities like Beijing and Shanghai. Tian Yuanjing, head of market research at China Index Academy, explained to China Business Journal, "Allowing mortgage rates to be independently set means that in some cities, rates are expected to remain at relatively high levels."

According to China Index Academy, as of last month, the average mortgage rates for first-time and second-time home purchases in major cities nationwide were 3.88% and 4.44%, respectively. In contrast, cities such as Nanning, Liuzhou, and Zhuhai have seen rates lowered to as low as 3.6%. Tian predicted, "Lowering existing mortgage rates will help residents reduce their burdens and improve their willingness to consume," and added, "For commercial banks, lowering existing mortgage rates may also somewhat slow down early repayments of existing loans."

The People's Bank of China will decide the November LPR on the 20th. In October, the 1-year LPR was held steady at 3.45%, and the 5-year LPR was maintained at 4.20%. The LPR is calculated by aggregating the loan rates offered to the best customers by 18 designated banks. Local financial institutions use this as a benchmark for lending, making it a practical reference interest rate. The 1-year rate affects general loans, while the 5-year rate influences mortgage loans. Until early 2020, the 1-year LPR was maintained in the 4% range, but the People's Bank of China began cutting rates from April 2020 as the COVID-19 pandemic intensified.

While the market speculates that China may implement additional rate cuts to stimulate the economy, it is difficult to make a definitive judgment given that U.S. interest rate hikes may still be ongoing. Especially amid concerns over yuan depreciation and intensified capital outflows, the possibility of maintaining current rates cannot be ruled out.