China’s state banks face profit squeeze as they comply with Beijing’s call for mortgage-rate cuts to aid property market

The impact of the cut will be felt differently across various Chinese cities, due to the complexity of how mortgage rate spreads are set in different locations.

Chinese banks will cut rates on 16 trillion yuan (US$2.2 trillion) of existing first-home loans, helping households save up to 109 billion yuan in interest outlays and total expenditures of 117 billion yuan, about 0.2 per cent of annual household disposable income, according to ANZ.

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Despite the measures, the boost for mortgage demand and home sales is likely going to be limited, some analysts said, as the fundamental problem is low consumer confidence in the face of a slowing economy.

“The reduced interest payments will mainly be translated into precautionary savings rather than consumption, because mortgage interest rates above 4 per cent are still too high for households facing a deteriorating job market,” Xing Zhaopeng, senior China strategist at ANZ Research, said in a report.

The mortgage rate cut will have a tangible impact on bank profit margins, however, and China’s major lenders are already preparing to reduce deposit rates by up to 25 basis points starting this month, as reported by local media.

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“A 10-basis-point cut in deposit rates will add 150 billion yuan to profits, which will sufficiently offset the impact of the mortgage rate cut,” the ANZ report said. “Therefore, it will be depositors who pay for the cut.”

The four banks’ property-related non-performing loans totalled 185.7 billion yuan in the first half of 2023, up 3.1 per cent from last December.