China's Guangzhou eases mortgage curbs to boost property market

August 30, 2023 (MLN): Guangzhou on Wednesday became the first major Chinese city to announce an easing of mortgage curbs as the government ramps up efforts to revive the crisis-hit property sector and shore up a sputtering economy, as Reuters reported.

The decision comes as some Chinese state-owned banks are expected to lower interest rates on existing mortgages, three sources familiar with the matter said on Tuesday, in the first such cut since the global financial crisis.

Beijing hopes the reduction in mortgage payments will help revive consumer demand for the property sector, which has led economic growth for several years and is now dragging it down amid slowing home sales and a string of defaults by developers.

China's mortgage loans totaled 38.6 trillion yuan ($5.29tr) at the end of June, representing 17% of banks' total loan books.

In a notice, the Guangzhou city government said mortgage curbs would be eased, allowing home buyers to enjoy preferential loans for first-home purchases regardless of their previous credit record.

The rest of China's top four first-tier cities; Beijing, Shanghai, and Shenzhen are expected to follow suit. Some smaller cities have already taken steps to make it easier to buy homes.

Hong Kong's Hang Seng Mainland Property Index rose 3% after the Guangzhou city government's announcement.

The property sector, which accounts for roughly a quarter of the economy, has lurched from one crisis to another since 2021, and contagion fears deepened this month after liquidity stress in leading developer Country Garden became public.

Just how cash-strapped Country Garden is will be the focus when China's largest private property developer is due to report its first-half results on Wednesday.

Like its peers, the company has been hurt by a drop in margins as property sales and the value of the homes themselves plummeted as the economy slowed.

Support Measures

The reduction in existing mortgage rates is one of several support measures Beijing has announced over the past few weeks, as concerns mount about the health of the world's second-largest economy.

The move, however, will add to margin pressure on banks. Three of China's largest banks said in interim financial reports their net interest margin (NIM), a key gauge of profitability, shrank in the second quarter.

Vivian Xue, director of APAC Financial Institution at Fitch Ratings, said revenue pressure on the banking sector was expected to persist in the second half of this year and into 2024, due to narrowing NIM and tepid retail loan demand.

China's benchmark banking sector index fell 1.04% after the Guangzhou mortgage announcement while China's CSI300 index gained 0.02%.

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