Hang Seng Finds Support as China Slashes Key Rate to Help the Property Sector

Property Sector Support

China’s real estate market is in bad shape due to years of overbuilding following the pandemic and the government’s efforts to limit the sector’s excessive borrowing. The poster child of the property crisis, Evergrande, was forced into liquidation by court earlier this year. The International Monetary Fund expects the problems to persist and projects “fundamental demand for new housing is expected to decline by almost 50 per cent over the next 10 years”.

Authorities have taken various measures to support the ailing real estate market and the central bank (PBoC) took further action today. It slashed the five-year Loan Prime Rate (LPR) by 25 basis points, to 3.95%.This is the biggest cut ever, in the rate that affects mortgage prices.

The historic move could be a signal of Beijing’s intention to become more forceful in boosting sentiment in the property market and propping up demand. On the other hand, this may be too little, too late. The lower rate will take time to filter through to mortgages and the one-year LPR that impacts most loans, was kept unchanged.

Piecemeal Approach

China’s post-pandemic recovery has been uneven, with sluggish growth, weak factory activity, deflation and high youth unemployment. Authorities have been trying to revitalize economic activity, but have refrained from big stimulus, opting for targeted measures. Perhaps for good reason. Bold fiscal stimulus could threaten the country’s credit ratings, while deeper rate cuts intensify pressures on the ailing currency.

In any case, the piecemeal approach has failed to inspire markets, with Hong Kong’s Hang Seng Index shedding more than 10% last year. Yesterday’s move to support the property sector is definitely significant, but likely not enough and some fiscal injection will need to follow as well as generally bolder measures. Furthermore, the LPR cut will put pressure on the profitability of banks. Financials is the largest sector of the index, which finds limited support today.

 
By Nikos Tzabouras, Senior Financial Editorial Writer at Tradu,