China mortgage rate cut unexciting for Hong Kong investors

 

The announced 5% cut in mortgage rates by the People’s Bank of China (PBOC) is unlikely to generate much interest from Hong Kong’s high net worth individuals (HNWIs) who may be looking to invest in mainland property.

 

Even with the cut in mortgage rates, financing from Chinese domestic banks are unlikely to be any cheaper compared with loans from Hong Kong banks. 

 

The PBOC announced on February 2 that banks will be allowed to cut mortgage down payment requirement from 25% to 20% for first-home purchases, and from 40% to 30% for second-home buyers in cities without purchase restrictions. 

 

China Merchants Bank’s 30-year renminbi (RMB) loan rates for example are currently priced at 4.9% more than double Citibank’ (Hong Kong) HK dollar (HKD) 30-year mortgage rate at 2.1%. 

 

Technically, Hong Kong HNWIs can take out mortgage loans from domestic banks in China without actually having to live there as long as they can show proof of income in either Hong Kong or the mainland. 

 

But Hong Kong HNWIs would rather secure loans in Hong Kong than in China because of the cost differential and tax regulations. 

 

What they do normally is set up a mainland-domiciled shell company that make them beneficial owners of properties they purchase. They typically use HKD financing to buy the property in the company’s name. This practice is expected to continue even after China’s mortgage rate cut.  

 

Overall, analysts think that the latest PBOC rate cut is expected to improve sentiment in the mainland’s property market, especially in the third and fourth-tier cities. Last year, the PBOC cut mortgage rates in March and September. 

 

“The previous two cuts had triggered strong pick-ups in housing sales across the country. Yet the latest figures suggest that growth in housing sales started to lose steam. This move should help improve the sentiment, especially in the third and fourth tier cities, yet it is will not be sufficient by itself to rein in the general deflationary trend. More forceful policy responses including bigger fiscal and monetary stimuli are still warranted,” says Jing Li, economist for Global Research of HSBC.

 

“This is clearly in line with the destocking theme in the property market. We believe that the relaxation of mortgage policy will somewhat help accelerate the destocking process in the lower-tier cities,” Zhou Hao, an analyst with Commerzbank AG in Singapore, writes in a note to clients.

 

 

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