China's mega-city home loan rates set to drop beneath 3%
How the Chinese central bank adjusts the interest rates corridor. Beijing flags sweeping housing reforms.
Our briefing on critical economic and financial developments in China as of Friday, 26 July, 2024:
China’s tier-1 mega-cities expected to see home loan rates decline below 3%, after the LPRs fall and the central bank cuts the policy rate.
How the Chinese central bank keeps its interest rates corridor steady by adjusting multiple monetary policy instruments.
All six of the big state-owned banks have cut deposit rates following central bank easing, in a move which portends further loan rate cuts, hopes to spur consumption, and increased demand for other financial assets.
Top US corporate leaders meet with China’s foreign minister following the Communist Party’s historic Third Plenary Session.
Beijing signals sweeping reforms of the Chinese housing sector.
Communist Party hails rise in tech investment, courtesy of Xi Jinping’s signature “new quality productive forces” policy.
A leading Chinese financial expert has called for the banking sector to provide greater support to tech investment as part of the “new quality productive forces” policy.
In order for China become a “great financial power,” it needs to vigilantly maintain strict regulation of the banking sector, says economist Mo Kaiwei.
Shanghai’s Nasdaq-style tech board celebrates its 5th anniversary.
China's mega-cities expected to see home loan rates drop below 3% threshold following central bank easing
Rates for first home loans in China's tier-1 mega-cities are expected to soon fall below the 3% threshold, following the launch of monetary easing measures by the Chinese central bank earlier this week.
On 22 July, the People's Bank of China (PBOC) - China's central bank - announced that the benchmark loan prime rates (LPR) had both fallen 10 basis points this month, to 3.35% for the 1-year LPR and 3.85% for the 5-year LPR.
The announcement has already prompted banks in major cities around China to further reduce home loan rates, following the earlier removal of floors for these rates by PBOC on 17 May.
In the first-tier cities of Beijing, Shanghai and Shenzhen, rates for first home loans have fallen to 3.4%, while in Guangzhou they've dropped to 3.1% at select lenders.
Industry sources told Securities Journal that Chinese banks still have room to make further reductions, with expectations that first home loan rates could soon fall below the 3% threshold.
China's interest rates corridor explained
PBOC has fine-tuned its toolkit of monetary policy instruments to keep its interest rates corridor steady, following declines in the benchmark rates and a cut to the policy rate.
On 22 July, PBOC reduced the rate for its standing lending facility (SLF) - a comparatively little-known monetary policy tool, by 10 basis points to 2.55%.
Given that the SLF is not its mainstay monetary policy tool, domestic analysts speaking to 21st Century Business Herald opined that the adjustment was an ancillary move, intended to keep PBOC’s interest rates corridor on an even keel following falls in the main benchmark rates.
The SLF reduction coincided with PBOC’s far more important announcement of a 10 basis point decline in both its 1-year and 5-year loan prime rates (LPR) to 3.35% and 3.85% respectively.
The LPRs are considered the benchmark rates for China's financial system, since the launch of reform measures in 2019.
On the same date, PBOC also reduced its 7-day reverse-repo rate 10 basis points to 2.70%. The reverse repo rate is considered PBOC's short-term policy rate, and is expected to play an increasingly important role in Chinese monetary policy going forward, displacing the medium-term lending facility (MLF).
For this reason, the cut in the SLF is viewed as a move keep China's interest rates corridor in balance, particularly following the cut to the reverse-repo rate.
China’s interest rates corridor is established using the upper and lower boundaries for the rates on PBOC’s tools for lending to or accepting deposits from Chinese financial institutions.
The goal of this is to ensure that the short-term money market rate (which in China is mainly considered the DR007) consistently hovers around the short-term policy rate, which is the 7-day reverse repo rate.
The ceiling for the interest rates corridor is the 7-day SLF - being the rate for financial institutions to borrow from the central bank, thus serving as a cap on what interbank lenders can charge.
The floor is the excess reserves rate, being the amount paid by PBOC to financial institutions, thus serving as the lowest amount of interest that financial institutions can pay for funds.
The interest rates corridor is thus considered the difference between the SLF and the excess reserves rate. Under ideal conditions, market rates in China should fluctuate between these two rates set by the central bank.
Big state-owned banks cut deposit rates
All six of China's big state-owned lenders have reduced their deposit rates, in a move which paves the way for further cuts to lending rates, and could potentially spur both household consumption and whet demand for other financial assets.
On 25 July, the Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications (BOCOM), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and Postal Savings Bank of China (PSBC) concurrently announced that their 2-year, 3-year and 5-year fixed deposit rates would fall 20 basis points, to 1.65%, 1.95% and 2.00% respectively.
The big six banks play an outsize role in the Chinese banking sector, which in turn plays a dominant role in China's financial system.
The move arrives after the central bank announced a 10 basis point decline in the benchmark loan prime rates (LPR) on 22 July.
Domestic analysts say the impacts of the reduction in deposit rates include:
Creating space for further cuts to lending rates, by ensuring net interest margins aren’t squeezed too tightly.
Spurring household deposits to shift towards consumption and investment in other financial assets, including bond-backed wealth management products and publicly offered funds.
Top US corporate leaders meet with China's foreign minister
A delegation of leading US business figures from companies including Boeing, Goldman Sachs, Starbucks and United Family has conducted a visit to China and met with foreign Minister Wang Yi (王毅) and vice-premier He Lifeng (何立峰).
At a routine press conference of the foreign ministry held on 24 July, ministry spokesperson Mao Ning (毛宁) highlighted the role of reform and opening in China's development, and especially since Xi's assumption of office at the 18th CPC National Congress over a decade ago.
"To achieve [China’s] second centenary goal, we still need to rely on reform and opening up," Mao said.
"We believe that the implementation of these reform measures...will provide more new opportunities for China to deepen mutually beneficial cooperation with other countries in the world and achieve common development."
China signals sweeping housing reforms following Third Plenum meeting
The Ministry of Housing and Urban-Rural Development (MOHURD) signalled plans for the sweeping reform of China's residential property market, at a meeting convened on 22 July just a week after the Communist Party's historic Third Plenary Session.
China's housing ministry flagged the goals of:
Enabling the masses to live in good housing that is green, low-carbon, smart and secure.
Focusing on the outstanding contradictions and problems constraining the high-quality development of urban and rural housing in China.
Making the resolution of major systemic and mechanism problems the utmost priority.
Communist Party says Xi Jinping's "New Quality Productive Forces" is supercharging Chinese tech investment
The People's Daily - the flagship newspaper of China's Communist Party, says Xi's policy to drive the growth of "new quality productive forces" is already bearing fruit in the form of rising investment in the tech sector.
Investment in China's tech industries increased by 10.6% year-on-year in the first half of 2024, while the added value of hi-tech manufacturing companies above designated size increased by 8.7% year-on-year - 2.7 percentage points higher than the figure for all companies above designated size.
China's policy for the cultivation of new quality productive forces first rose to prominence at China's Two Sessions congressional meeting in March.
"We must firmly grasp the primary task of high-quality development and develop new quality productive forces in accordance with local conditions," Xi said.
According to Xi, new quality productive forces will involve "focusing on key areas and weak links in the construction of a modern industrial system, increasing the supply of high-quality science and technology, cultivating and developing emerging industries and future industries, and actively using new technologies to transform and upgrade traditional industries."
Chinese banks need to support new quality productive forces, drive tech investment: Zeng Gang
Zeng Gang (曾刚), head of the Shanghai Institution for Finance and Development, has called for the development of a more pluralistic banking system in China, in order to support the diverse financing needs of the tech sector.
In an interview with the Chinese central bank's Financial News, Zeng said that the financial sector in general and banks in particular will play a critical role in funding China's "new quality productive forces" policy, that seeks to drive its ascent along the industrial value chain.
China needs stricter banking regulation to become a great financial power: Mo Kaiwei
A leading Chinese economist has highlighted the need to further step up and refine banking regulation in China, in order to achieve the goals of becoming a “great financial power” and driving high-quality development.
In an opinion piece published on Chinese social media, Mo Kaiwai (莫开伟) writes that ongoing strict regulation of the financial sector is a precondition for China’s economic development.
"It is obviously not possible to create a great financial power without the high-quality development of the banking sector.
"Only with continually strict and refined financial regulation can we enable banks to develop into a healthy condition."
Mo points out that China's financial regulators have led efforts to further tighten up banking scrutiny in 2024.
Since the start of the year, authorities have banned a total of 108 banking sector professionals from undertaking further work in the industry, with 40 incurring lifetime oustings.
Shanghai's Nasdaq-style tech board celebrates its 5th anniversary
The Shanghai Stock Exchange's Science and Technology Innovation Board (SSE STAR Market) celebrated its fifth anniversary on 22 July, following its launch in 2019 as China's version of the Nasdaq exchange.
In five years, the STAR Market has seen the listing of 573 enterprises in the tech sector and strategic emerging industries, with total market capitalisation of 5 trillion yuan.
According to a report from the People's Daily - the Communist Party's flagship newspaper, the STAR Market has supported 910.8 billion yuan in IPOs, and 158.1 billion yuan in subsequent financing, for total primary market fund raising of more than one trillion yuan.
The fifth anniversary of the STAR Market arrives just a month after the China Securities Regulatory Commission (CSRC) launched a raft of eight measures to drive further reforms of the board, in a bid to step up its role in funding the Chinese tech sector.
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