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China’s state banks are throwing nearly all they have at seeking to boost consumer spending, directed by policymakers who are digging deeper into their toolkit to shore up growth in the world’s second-largest economy.
As soon as Tuesday, China may announce that the big state-owned banks are cutting rates on the majority of the nation’s 38.6 trillion yuan ($5.3 trillion) of existing mortgages, according to people familiar with the matter. The reductions will only affect loans on first homes, according to two of the people.
At the same time, lenders such as Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. are poised to later this week cut deposit rates for a third time in a year to shore up their plunging margins.
The move would be the latest piecemeal step rolled out by Beijing as authorities try to spur consumer spending, drive more funds into the stock market and alleviate pressure on lenders.
The People’s Bank of China didn’t immediately respond to a request seeking a comment.
The mortgage cuts, highly anticipated by the market after the central bank hinted at support in mid-July, comes as Beijing is struggling to reboot economic growth as borrowing demand slumps, deflation pressure takes hold and confidence tanks. Investors are also concerned about contagion risks of China’s years-long property woes following a liquidity crisis at a major shadow bank.
The government has been cautious about rolling out broad stimulus, instead relying on targeted measures to boost household spending. While China has reduced benchmark rates and pushed the average mortgage cost to a record low, most of the Chinese households didn’t benefit as banks won’t reprice existing loans until the beginning of next year.
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JPMorgan Chase & Co. analysts estimated that the annualized rate on new mortgages stands at 4.18%, about 60 basis points lower than the outstanding borrowings. That has prompted some consumers to take out out short-term loans to repay mortgages early.
More than 90% of China’s outstanding mortgages were for first homes as of July 2021, according to the latest public data available from the banking regulator. In 2022, more than 80% of new home loans were on first homes, according to the housing ministry.
The latest policy push has sparked concerns over banks’ burden of performing a “national service” and lower margins, Citigroup Inc. analysts said in an August note.
To ease the burden, the big state banks may cut rates on local currency deposits across key tenors by between 5 and 20 basis points, said the people, asking not to be identified discussing a private matter. Regulators have signed off on the plan, the people added. The cut may come as soon as Friday, one of the people said.
Defaults
China’s financial sector is already struggling with rising defaults at shadow banks, which have triggered a fresh wave of anxiety about hidden distress and the potential spillover to state-owned lenders. Analysts have also highlighted growing risks associated with the debt-laden local government financing vehicles, with Goldman Sachs Group Inc. saying the exposure pf banks could weaken their capital positions and lead to lower dividend payouts.
Beijing has so far moved cautiously to revive the economy while at the same time safeguarding financial stability. China’s central bank kept a key interest rate that guides mortgages on hold and made a smaller-than-expected cut to another rate in August, which could help boost supply without squeezing banks’ margins too much.
In a surprise move, the PBOC earlier this month made the steepest cut in three years on the rate on its one-year loans.
As of June, 100 out of 343 Chinese cities have lowered the rate floor of new-home mortgages or removed the minimum required, the PBOC said in its quarterly monetary policy report on Thursday. That has brought the nation’s average mortgage rate to 4.11% in June, down 0.51 percentage point from a year earlier.
In a worst case scenario assuming the entire mortgage loan book is refinanced with a rate reduction of 60 basis points, earnings at Chinese bank for next year will be cut by 8% with net interest margin narrowing by 7 basis points, according to JPMorgan Chase % Co. The US bank expects that about 50% of mortgage owners are likely to refinance and most of the impact on bank earnings will be in the near-term.
The last time China allowed a similar move was during early 2009, when some state-owned banks gave a discount on interest rates to qualified borrowers in certain areas in response to the global financial crisis, according to a Zhongtai Securities report.
--With assistance from Fran Wang, Jing Zhao and Emma Dong.
