China To Cut Rates On $5 Trillion Mortgages As Early As September

(Bloomberg) -- China is poised to cut interest rates on more than $5 trillion of outstanding mortgages as early as this month, according to people familiar with the matter, as it accelerates a move to reduce the borrowing costs for millions of families to spur consumption. 

Some banks are making final preparations to get ready for the upcoming adjustments on mortgage rates, said the people, asking not to be identified discussing a private matter. Some homeowners may enjoy up to 50 basis points of immediate rate reduction, one of the people said. 

The timeline has yet to be finalised and could still change, said the people. The People’s Bank of China and the National Financial Regulatory Administration didn’t respond to requests for comment.

Bloomberg News reported earlier this month authorities are mulling a plan to allow borrowers to renegotiate terms with their current lenders before January, when banks typically reprice mortgages. The proposed cuts will likely come in two steps totaling about 80 basis points, people familiar with the matter said.

Policymakers are ramping up a push to reduce households’ financial burden amid weak domestic spending and worsening deflation risk. While China has pushed average mortgage costs to a record low this year, most families didn’t benefit as banks won’t reprice existing loans until next year. The disparity has frustrated some homeowners and fueled a wave of early mortgage payments. 

The move also comes as a growing number of Wall Street analysts are predicting China may miss its economic growth goal of about 5% this year. Meanwhile, a deepening selloff in Chinese stocks is exacerbating a crisis of confidence in the world’s second-largest economy, heaping pressure on policymakers to halt the downward spiral.

A Bloomberg gauge of Chinese developer shares plunged 8.3% this week to the lowest in four months, after some builders were removed from a program that connects the mainland bourses to the Hong Kong. 

Existing mortgages carry an average interest rate of about 4%, compared with 3.2% on newly-issued loans for a first home and 3.5% for a second home, according to data compiled by China Real Estate Information Corp in late August.  

China’s outstanding amount of mortgages, which count as prime assets at Chinese lenders, stood at 37.79 trillion yuan ($5.3 trillion) at the end of June, the lowest level in nearly three years. Further rate reductions would pile pressure on the banks, which have already seen their margin tumble to a record low of 1.54% as of end-June, well below the 1.8% threshold regarded as necessary to maintain reasonable profitability.

Homeowners would save more than 300 billion yuan in annual interest expenses assuming an 80 basis points cut, analysts at Shenwan Hongyuan Group estimated. For a household with 1 million yuan of 30-year mortgages, its monthly payment will drop by about 9%, they said.

Policymakers have taken some forceful steps to lower borrowing costs this year including scrapping a central government-guided mortgage rate floor for first and second home purchases. 

Still, Beijing has struggled to contain the property downturn and now faces the prospect of increasing protectionism and a shaky global outlook weighing on exports. Several rounds of measures aimed at reviving domestic demand have done little to overcome the retreat, endangering the government’s growth target and spurring economists to call for additional stimulus.