<News Alert> China Property Sector: More policy easing on the way
- The People’s Bank of China has announced to cut the 1-year MLF rate by 10bps to 2.85%. This is expected to inject c.Rmb200 m of net medium-term liquidity into the financial system
- PBOC’s decision to cut their MLF and repo rates marks its first reduction since Apr 2020, and came in-line with our expectations of a potential rate cut. This move also hints that a potential cut on the 5-year LPR may follow on 20 Jan. If this materializes, we expect that it would help to boost homebuyers’ sentiment
- While policy impact that rolled out in Beihai City may be limited, more supportive measures are likely on the way
- We believe a meaningful turnaround and healthy physical market will be vital for banks to resume confidence in the sector and over developers’ financials
- The move will likely benefit C-REITs as well amid a lower interest rate environment. Our sector picks for the China Property Sector remains as COLI (688 HK), COGO (81 HK), CR Land (1109 HK) and Longfor (960 HK)
What’s new
The People’s Bank of China has announced to cut the 1-year MLF rate by 10bps to 2.85%. This is expected to inject c.Rmb200 b of net medium-term cash into the financial system. They have also lowered the 7-day reverse repurchase rate from 2.2% to 2.1%.
Our view
Hinting for a possible cut on 5-year LPR. PBOC’s decision to cut their MLF and repo rates marks its first reduction since Apr 2020, and came in-line with our expectations of a potential rate cut before CNY arrives. This move also hints that a potential cut on the 5-year LPR may follow on 20 Jan as history shows that every 10 bps drops in 1-year MLF rate is set to follow by another 5 bps dips in 5-year LPR. If this materializes, we expect that it would help to boost homebuyers’ sentiment and offer support to the ongoing contraction in the physical market.
More local supportive measures to be rolled out. Beihai City in Guangxi Province announced on Jan 12 to lower requirement on loan-to-value (LTV) for second-hand homebuyers that opts to utilize their housing provident fund accounts from the original 40% to 60%. While policy impact from this signal policy change may be limited, more supportive measures are likely on the way.
Concrete turnaround in the physical market is key to restore confidence. Sentiment and confidence of financial institutions and homebuyers have been further dampened by the ongoing actual/rumoured credit default events. Developers’ liquidity have been taking severe hits alongside the significant slowdown in presales performances. We believe a meaningful turnaround and healthy physical market will be vital for banks to resume confidence in the sector and over developers’ financials. This in turn would be one of the key prerequisites for the restoration of both construction and mortgage loans origination. Stability of the physical market would therefore be key in order for developers to get out of this vicious cycle, in our view.
C-REITs and quality developers to benefit. We believe the rate cut is a supportive move for the sector. On one hand, physical market outlook could be supported, which as we explained above would be the prerequisite for the sector to turnaround. Meanwhile, the move will likely benefit C-REITs as well amid a lower interest rate environment. Our sector picks for the China Property Sector remains as COLI (688 HK), COGO (81 HK), CR Land (1109 HK) and Longfor (960 HK)
Chart: 1/5YR LPR and MLF
Source: Wind, DBS Bank (HK)