Hit by a resurgence of the coronavirus in Shanghai, Beijing and a few other major cities, China’s economy reversed its growth trend in April and slowed as tougher pandemic control measures, such as lockdowns in Shanghai, have seriously harmed economic activities. To reverse the downward trend of the economy, the government is taking measures.
Last week, China’s central bank twice announced a major easing of financial policy, cutting mortgage rates linked to the benchmark prime rate (LPR) by a total of 35 basis points for five-year loans. or more.
Policy easing of this magnitude is specifically aimed at rejuvenating China’s urban real estate sector in hopes of triggering a wave of new home sales, with the aim of inspiring fervent housing consumption across the country.
Under the new banking policy, Chinese residents who want to buy their first home will be able to borrow money from banks and other financial organizations at a much lower interest rate than in previous months, according to April. As the majority of home mortgages last longer than five years and are pegged to the five-year prime lending rate (LPR) which was 4.6% in April, the new mortgage rate could be as low as 4.25 % now.
The substantial reduction in mortgage rates has apparently sent a clear and strong signal that Chinese policymakers will not tolerate a freefall in the economy and are pushing for effective policy easing to fuel the real estate sector – a vital industry that has accounted for around 20 % of China’s annual GDP over the past five years.
Moreover, the purchase of a new house will immediately increase the consumption of furniture, kitchen utensils, household appliances and a wide variety of building materials such as steel, cement, wood, glass, paint and more – what economists define as “synchronized consumption”. caused by real estate sales. Due to pandemic-induced lockdowns and strict prevention restriction measures, the country’s domestic consumption fell more than 11% in April year-on-year, which significantly slowed the month’s economic growth, as consumption is the main driver of the economy.
In announcing the mortgage rate cut, the central bank said the policy change is aimed at “supporting housing demand and will help promote the stable and healthy development of the housing market.” The decision to cut rates comes after a sharp fall in mortgage lending in April, with data released last week showing a contraction of $60.5 billion ($8.95 billion) in new mortgages, a decline of 29.5% year-on-year.
Immediately after the easing of central bank policy, lenders in major Chinese cities, such as Suzhou and Nanjing in Jiangsu Province, Dalian and Shenyang in Liaoning Province, the city of Tianjin in northern China and Guangzhou and Shenzhen in southern Guangdong province have already decided to cut mortgage rates. up to 4.25% for loans of five years and over. Young people preparing for marriage or families who want to move to a larger apartment are enthusiastic about the reduction in mortgage rates and are actively applying for bank loans.
And China could do even more. Central authorities in Beijing are expected to encourage local governments to boost housing demand by easing strict administrative regulations and controls on property in cities and provinces across the country. For example, all provincial capitals and so-called second and third tier cities should develop more favorable policies and incentivize new home buyers. Some Tier Two and Tier Three cities are beginning to allow residents to purchase second and even third apartments.
The country’s housing market, a crucial source of economic growth, has been in freefall for 12 months, with sales declining at a double-digit pace every month since August 2021, and new home prices continuing to fall following an orchestrated government pressure on indebted property developers – with the aim of reducing their leverage ratio and reducing a significant potential risk in the financial system.
Now good news is coming, as Shanghai announced it had started to reopen after a six-week lockdown that inhibited economic activity and undermined industrial production in one of China’s most important cities on the economic plan. Other major cities like Shenzhen, Guangzhou, Changchun and Xi’an have largely returned to normalcy in business operations and social life, having controlled local resurgences of the coronavirus and achieved the goal of “dynamic COVID-zero”.
Led by an expected increase in real estate sales in Chinese cities, as well as their usual caution and vigilance against the virus, the Chinese economy will gradually regain its growth momentum, as the resilience, potential and space of the economy were tested, time and time again, during the SARS onslaught of 2003, the global financial crisis of 2008-09 and the first wave of COVID-19 attacks in 2020.
Global swings regarding the Ukraine crisis and many other factors, typically soaring inflation in the US, Europe and elsewhere, exceeded policymakers’ expectations. There is no doubt that China is facing great difficulties in meeting the economic growth target of 5.5% forecast for 2022.
But the pessimism is unwarranted because China is always good at braving headwinds and getting the job done. Increased government investment in infrastructure and a rebound in the real estate sector, along with robust exports, will likely lead to a rapid return to buoyant development.