The one-year loan prime rate was cut to 3.65% from 3.7%, the first reduction since January, and lower than the 10 basis-point drop that economists had expected. The five-year rate, a reference for mortgages, was reduced by 15 basis points to 4.3% after being cut by the same magnitude in May. 

“Asymmetric rate cuts underline the urgency of containing the worsening real estate crisis,” said Tommy Xie, head of Greater China research at Oversea-Chinese Banking Corp. “Lower mortgage rates could help sales stabilise, especially at a time when household expectations are so weak.”

The rate cuts follow news late Friday of additional financing to prop up the real-estate sector. The PBOC and two other ministries said special loans will be offered through policy banks to ensure stalled property projects are delivered to buyers.

Read more: China to offer special loans to troubled property developers

The offshore yuan weakened as much as 0.23%, hitting 6.85 against the dollar after the cut. Chinese stocks rose, with the benchmark CSI 300 Index gaining as much as 0.3% in early trading despite a broad decline in Asian equities.

What Bloomberg Economics says…

China is boosting monetary support – with the greatest urgency directed at supporting the property market. The deeper cut in the five-year loan prime rate (which banks use to price mortgages) relative to the one-year rate (short-term corporate loans) highlights that priority. Given July’s surprise slowdown and cratering credit, we expect the People’s Bank of China to do more to guide the borrowing costs lower.

Eric Zhu, China economist

Lower borrowing costs could help spur demand for loans, though it’s unlikely to reverse the sharp slump in consumer and business confidence triggered by turmoil in the property market and the stop-start reopening of the economy under the Covid Zero strategy. 

Banks are flush with cash, but are either unwilling or finding it difficult to finance projects. Credit demand weakened sharply in July, prompting some economists to warn of a “liquidity trap” in China, where low interest rates fail to spur lending in the economy. As the property crisis deepens, hundreds of thousands of homebuyers have gone on a mortgage strike, and more households are saving up and avoiding taking on debt. 

Xie said the smaller cut to the one-year loan prime rate could indicate that the PBOC will rely more on structural monetary policy tools.

“This shows that the Chinese banks would like to focus on lowering benchmark rates for mortgage lending and also other capital expenditure loans to boost related credit demand” while preserving some net interest margin at the short end, said Xiaojia Zhi, economist at Credit Agricole CIB Hong Kong branch.

The LPRs are based on interest rates that 18 banks offer their best customers and are quoted as a spread over the central bank’s rate on its one-year policy loans, known as the medium-term lending facility. BM