Experts say regulators may consider other steps to shore up troubled sector

China surprisingly kept the benchmark for mortgage rates unchanged on Monday, signaling that a policy mix that is more substantial than cutting the benchmark to address the property sector downturn is likely on the horizon, experts said.

Some of the first-tier cities (Beijing, Shanghai, and Shenzhen and Guangzhou in Guangdong province) may ease property market restrictions while commercial banks may accelerate the repricing of outstanding mortgages, they said.

The unexpected skip of a rate cut also reflects the intensified pressure on commercial banks' profit margins, they said, indicating that measures to ease banks' funding costs may follow shortly as well, with a focus on reducing the reserve requirement ratio and deposit rates.

On Monday, the over-five-year loan prime rate, a market-based lending benchmark on which lenders base their interest rates for new mortgages, came in at 4.2 percent, unchanged from July, according to the People's Bank of China.

This surprised the market as many analysts expected the over-five-year LPR to drop amid ramped-up policy support for the property sector, especially as the PBOC last week cut the interest rate on the medium-term lending facility, a key policy benchmark, a move that usually guides LPRs lower.

Experts said the move should not be misread that policymakers are paddling back policy support for the property sector. Instead, the absence of a rate cut implies that regulators may be mulling other more substantial measures, as simply cutting the mortgage rate benchmark has proven to have a limited impact on shoring up the sluggish homebuying demand.

The over-five-year LPR decreased by 10 basis points to 4.2 percent in June. Though the move helped ease homebuyers' costs, China's property sales continued to contract. The area of commercial buildings sold came in at 665.63 million square meters in the first seven months, down 6.5 percent year-on-year, compared with 5.3 percent in the first six months, according to the National Bureau of Statistics.

Wen Bin, chief economist at China Minsheng Bank, said the impact generated by the decrease in the interest rates of new mortgages seems to be limited.

"Reducing the interest rates of outstanding mortgages can better play the role of anchoring expectations, stabilizing the property sector and shoring up credit expansion," Wen said, adding that holding the over-five-year LPR unchanged will help commercial banks maintain a reasonable profit margin and reserve the scope for them to reduce the interest rates on outstanding mortgages at an early date.

At a joint meeting of the PBOC, the National Financial Regulatory Administration and the China Securities Regulatory Commission on Friday, it was decided that the prices of new and outstanding financial products should be coordinated while property credit policies should be adjusted and optimized.

"It takes the coordination and optimization of more property sector policies to promote a substantive recovery in market expectations," said a report by the China Index Academy, a real estate data and analytics provider. The report indicated a growing likelihood of the first-tier cities easing their property market restrictive measures in the short term as their areas of weekly home sales have dropped by nearly 30 percent compared with July since the beginning of August.

Potential measures include reducing down payment requirements, easing homebuying restrictions and reducing taxes and fees on home transactions, the report said.

While the over-five-year LPR was held steady on Monday, the one-year LPR, on which lenders base their short-term financing to enterprises and consumer loans, dropped by 10 basis points to 3.45 percent, the second decline this year following one in June.

The move will help spur individuals' credit demand and corporate financing needs, but more efforts are needed at an early date to reverse the worsening investor confidence and market expectations, experts said.

On Monday, the benchmark Shanghai Composite Index dropped by 1.24 percent to 3092.98 points, going below the psychological level of 3100 points and marking the lowest reading in seven months.

"Big steps in policy adjustments are needed. Otherwise, market expectations may not be able to turn around," said Gong Liutang, a member of the 14th National Committee of the Chinese People's Political Consultative Conference.

Gong, also a professor of applied economics at Peking University's Guanghua School of Management, underscored the need for further easing of interest rates, boosting the scale of central government bonds and promoting consumption tax reform.