Five-year loan prime rate lowered by 25 basis points to 3.95 per cent. Image Credit: Reuters

Beijing: Chinese banks cut a key reference rate for mortgages by a record amount, a sign that the nation is ramping up support for the property sector in a bid to revive demand.

The five-year loan prime rate was lowered by 25 basis points to 3.95 per cent, according to a statement by the People's Bank of China on Tuesday. That was the first cut since June and the largest reduction since a revamp of the rate was rolled out in 2019.

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The larger-than-expected reduction may allow more cities in China to reduce minimum mortgage rates for homebuyers, thereby stimulating sluggish demand for apartments as prices fall. The property crisis has been a major drag on the world's second-largest economy over the past couple of years and has threatened its path toward sustainable growth.

"The cut will be effective on reducing the existing mortgage burden for households," said Xing Zhaopeng, senior China strategist at Australia and New Zealand Banking Group Co. Ltd. He warned, however, that the cut "looks late" as economic distress has spread more broadly to domestic demand, likely necessitating cuts to policy rates this year.

The one-year loan prime rate "- the de facto benchmark lending rate "- was maintained at 3.45 per cent. About half of the economists surveyed by Bloomberg projected a cut to that rate.

After the LPR cut, China's benchmark CSI 300 Index slid as much as 0.7 per cent in the opening minutes of trading. It soon pared about half of those losses.

The offshore yuan recouped earlier losses to trade flat, while its onshore peer was little changed and is approaching the closely-watched 7.2 level. Yields on China's government bonds slipped 1 basis point to 2.43 per cent. Those have been falling as traders bet on more easing by Beijing to buoy the economy.

While none of the economists surveyed by Bloomberg predicted a reduction as large as the one announced Tuesday, expectations for lending rate cuts had been rising.

Earlier this month, the PBOC unleashed 1 trillion yuan ($139 billion) of liquidity into the banking system via a trim to the reserve requirement ratio. It also lowered interest rates on relending funds provided to lenders to incentivize loans to agricultural and small firms.

Banks also cut their deposit rates late last year, which helped ease pressure on profit margins. Lower relending and deposit rates will help push the LPR lower, PBOC Governor Pan Gongsheng said during a press briefing last month.

The central bank has generally taken a moderate approach to monetary easing, a sign of its need to safeguard the yuan and avoid a rapid buildup of debt.

It refrained from cutting the rate on its medium-term lending facility on Sunday. That made Tuesday's action the first time since May 2022 that the five-year LPR rate has been lowered after a hold to that key one-year policy rate.

The LPRs are based on the interest rates that 20 banks offer their best customers, and are quoted as a spread over the central bank's MLF rate. The PBOC, which publishes the LPRs monthly, is seen as having significant sway over them.