China's state-owned banks are taking aggressive measures to boost consumer spending and stimulate economic growth. This week, the banks are expected to announce interest rate cuts on most of the country's existing mortgages, which amount to a staggering 38.6 trillion yuan ($5.3 trillion). However, the rate reductions will only apply to loans on first homes. In addition to this, banks like Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp. are also planning to lower deposit rates for the third time in a year to stabilize their declining profit margins.
These moves are part of the government's strategy to revitalize economic growth, counter deflationary pressures, and restore consumer confidence. Beijing has been cautious about implementing broad stimulus measures and has instead relied on targeted actions to encourage household spending. While benchmark rates have been reduced and average mortgage costs have reached record lows, most Chinese households have not benefited as banks typically do not adjust existing loan rates until the following year.
According to JPMorgan Chase & Co. analysts, the current annualized rate on new mortgages is 4.18%, which is approximately 60 basis points lower than outstanding borrowings. This has led some consumers to take out short-term loans to repay their mortgages early. The majority of China's outstanding mortgages, more than 90%, are for first homes. In 2022 alone, over 80% of new home loans were for first homes, according to the housing ministry.
While these measures are expected to stimulate consumer spending, they have raised concerns about the burden on banks and their lower profit margins. The recent rate cuts on mortgages and deposits could add strain to banks' already troubled financial sector, increasing the risk of defaults and potential spillover effects on state-owned lenders. The exposure of banks to debt-laden local government financing vehicles could also weaken their capital positions and lead to lower dividend payouts, according to Goldman Sachs.
To alleviate this burden, the state-owned banks are planning to reduce rates on local currency deposits by 5 to 20 basis points across various tenors. Regulators have reportedly approved this plan, and the rate cuts could be implemented as soon as this Friday. However, the potential benefits of these measures for the economy could be overshadowed by the risks associated with rising defaults and financial instability.
Overall, the Chinese government is striving to strike a balance between stimulating economic growth and maintaining financial stability. While targeted measures such as interest rate cuts on mortgages and deposits are expected to boost consumer spending, the challenges and risks facing China's financial sector should not be overlooked.