In China, a reduction of 25 basis points in benchmark interest rates (LPR) for corporate and real estate loans was announced, which serve as the benchmark interest rates for 1 and 5-year credit.

According to the National Interbank Funding Center, the 1-year credit interest rate was reduced from 3.35% to 3.1%, and the 5-year credit interest rate was decreased from 3.85% to 3.6%. The LPR, determined based on the profit margins set by 18 banks in China above the central bank’s borrowing rate, has been serving as the country’s benchmark interest rate since 2019. The 1-year credit interest rate is considered a reference for corporate loans, while the 5-year interest rate is a reference for real estate loans. The most recent reductions in 1 and 5-year credit interest rates were 10 basis points each in July, where the 1-year rate decreased from 3.45% to 3.35% and the 5-year rate was lowered from 3.95% to 3.85%. Prior to this, in February, the 5-year credit interest rate, which is considered a reference for real estate loans to stimulate the real estate sector, was reduced by 25 basis points. The 5-year credit interest rate was cut from 4.20% to 3.95%, while the 1-year interest rate serving as a reference for corporate loans remained at 3.45%.

DECLINE IN REAL ESTATE INVESTMENTS
The contraction in China’s real estate sector and housing market, which began with the Covid-19 pandemic, has been one of the factors negatively affecting economic growth in the country for the past 3 years. Real estate investments, which declined annually by 10% in 2022 and by 9.6% in 2023, continued to decrease by 10.1% in the first 9 months of 2024, sustaining the downward trend of the past two years. It is observed that the government’s policies aimed at stimulating growth in the real estate sector and the private sector have not yet yielded results.

REVIVAL OF THE HOUSING MARKET AIMED
The decision on interest rates aims to revitalize the real estate and credit markets against the contraction in the real estate sector, relieving the burden on individuals and businesses. According to calculations in the Chinese media, with the new interest rates, the monthly minimum payment of a citizen with a 1 million yuan (140,000 dollars) real estate loan will decrease by up to 141.5 yuan (19.9 dollars). The 1-year borrowing rate (MLF) that should be announced by the People’s Bank of China (PBoC) before determining benchmark rates under normal circumstances is expected to be announced on October 25th. Analysts point out that if no reduction in the policy rate accompanies the reduction in benchmark interest rates, the pressure on banks could increase and new challenges might arise. While the growth figures for the third quarter announced last week in China showed that the Chinese economy fell short of the government’s growth target for this year in the first three quarters, the People’s Bank of China Governor Pan Gongsheng, at the Finance Street Forum in Beijing on September 18th, delivered a message of “strong macro support” to the economy. Pan had mentioned that after the 50 basis point reduction in the reserve requirement ratios for banks and credit institutions in September, they could make another reduction of 25 to 50 basis points in the fourth quarter and corresponding reductions in interest rates as well.