PBoC announce historic reduction in loan prime rate

context: The PBoC (People’s Bank of China) announced a reduction in bank reserve ratios in January 2024, a move interpreted by many commentators as creating room for further cuts to borrowing costs. The central bank cut both 1- and 5-year LPRs (loan prime rate) twice in 2023 in an effort to stimulate demand for real estate. The real estate sector is facing structural adjustment, with investment falling 9.6 percent y-o-y in 2023 and prices continuing to fall, including in first-tier cities.

The PBoC (People's Bank of China) announced a 25 percentage point reduction in the 5-year LPR (loan prime rate) on 20 February 2024, reducing borrowing costs for mortgages. 

The reduction is 10 percentage points larger than the previous record and the largest cut since Beijing implemented the LPR mortgage pricing system in late 2019. (CP note: since 2019, banks base mortgage interest rates on the 5-year LPR with an additional fixed markup) The 1-year LPR, which mostly influences short-term loans to industry and consumers, was left unchanged. 

The cut will reduce borrowing costs, stimulating enterprise investment demand, contends Wang Qing 王青 China Orient Golden Credit Rating chief macroeconomic analyst, sending the signal that Beijing is increasing efforts to stabilise real estate. 

The PRC’s 30 largest cities saw the lowest volume of real estate transactions since 2019 in January 2024, including a 19 percent y-o-y reduction. Transaction volumes slowed even further during the Chinese New Year Holiday.

The large reduction in the 5-year LPR is meant to show a strong policy response, preventing potential buyers from delaying purchases due to expectations of future rate reductions, explains Li Yujia 李宇嘉 Guangdong Housing Policy Research Centre chief researcher. Leaving the short-term LPR unchanged means the centre sees no need to further stimulate industrial and consumer financing, notes Yang Chang 杨畅 Zhongtai Securities.