BEIJING/HONG KONG, Aug 30 (Reuters) – Guangzhou on Wednesday became the first major Chinese city to announce an easing of mortgage curbs and the country’s top banks flagged mounting risks from property sector turmoil, as Beijing ramps up efforts to shore up the sputtering economy.
The city’s 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 property. The sector had been a major economic growth driver for years but is now dragging it down amid slowing home sales and a string of defaults by developers.
China’s mortgage loans totalled 38.6 trillion yuan ($5.29 trillion) at the end of June, representing 17% of banks’ total loan books.
Two of China’s biggest banks — Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS) and Bank of China (BoC) (601988.SS) reported sluggish profit growth and shrinking profit margins for the first half.
In a sign of mounting challenges for lenders from the deepening property crisis, BoC’s Chief Risk Officer Liu Jiandong said the bank’s mortgage asset quality was facing pressure but there was no material deterioration.
RESTRICTIONS ON HOME BUYING EASED
In Guangzhou, China’s fifth biggest city, the government said in a notice that 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 – could follow suit, together with a dozen second-tier cities which have not eased yet. Many smaller cities have already taken steps to make it easier to buy homes.
Hong Kong’s Hang Seng Mainland Property Index (.HSMPI) rose as much as 3.3% after the Guangzhou announcement, but later gave back most of the gains.
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 (2007.HK) became public.
Just how cash-strapped Country Garden is will be the focus when China’s largest private property developer reports 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.
Reuters reporters who visited two of the company’s property projects near Beijing on Friday found construction had partially or fully stopped. Workers at dormitories on the sites complained of months without pay.
SUPPORT MEASURES
The expected 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.
But some analysts and home buyers were not convinced about how effective the steps would be in reviving buyer demand, as consumer confidence has been badly hit by broader economic woes that pushed the youth unemployment rate to a record high in June.
Property agents said there were few people shopping in the secondary market, and commercial mortgage rates are still much higher than the rates offered by the housing provident fund, a savings program by governments for housing purchases.
Home owner Jackson Wang said he is going to move his mortgage with a top Chinese bank to the provident housing fund, which would lower his interest rate to 3.2% from the current 4.8%. He pays more than 5,000 yuan ($686) per month for a flat in the eastern city of Linyi.
“I have already bought a home at a high price and been paying a high mortgage, so I’m hoping for a rate cut,” Wang, 38, said.
“I’m too disappointed in China real estate. I will not be attracted by the sector again unless home prices are reduced, a lot.”
Raymond Cheng, Hong Kong-based head of China research at CGS-CIMB Securities Ltd, said the easing in mortgage rules came too late and their impact on boosting home sales may not be significant given very weak homebuyer sentiment.
“The impact could be much bigger on developers’ sales if regulators implemented the policy six to nine months ago.”
BANKS MARGIN
The mortgage rate cuts will add to margin pressure on banks. Three of China’s largest banks said in interim financial reports on Wednesday that their net interest margins (NIM) – a key gauge of profitability – shrank in the second quarter.
Chinese lenders are battling headwinds such as lower lending rates and pressure from the government to prop up the economy as well as bad debts related to property developers and local government financing vehicles (LGFV).
Bank of China said that some regional local government financing vehicles (LGFV) — which play a key role in the country’s infrastructure development — have defaulted, but the business is operating steadily.
“For Bank of China the current overall business with local government financing platforms remains stable, and the total amount of credit granted is relatively moderate among peers,” BoC’s Liu said.
“Therefore, the asset quality has declined slightly compared with the beginning of the year but it is still under control.”
Big state-owned banks have recently been rolling over loans to LGFVs — which have an estimated $9.1 trillion in debt — or lent more to them.
Vivian Xue, director of APAC Financial Institution at Fitch Ratings, said revenue pressure on the banking sector was expected to persist into 2024, due to narrowing margins and tepid retail loan demand.
China’s benchmark banking sector index (.CSI399986) fell 1.04% after the Guangzhou mortgage announcement while China’s CSI300 index (.CSI300) gained 0.02%.
To soften the effect, the sources told Reuters that major state banks would also lower interest rates on some fixed-term deposits, and the quantum of cuts would range from 10 basis points to 25 basis points.
($1 = 7.2905 Chinese yuan renminbi)
Reporting by Ziyi Tang, Liangping Gao and Ryan Woo; Additional reporting by Clare Jim in Hong Kong; Editing by Sumeet Chatterjee, Robert Birsel, Miral Fahmy and Kim Coghill
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