Morning Update

China have wasted little time getting back to business following the New Year holiday: Yesterday they cut the 5-year mortgage benchmark rate from 4.2% to 3.95%, the biggest cut since the benchmark was introduced in 2019. The move means a few things…

Borrowing costs will drop, which will help homeowners who are struggling with general affordability. The government also hopes that it will entice people into the housing market, which is desperately needed given the abundance of available housing stock following years of highly leveraged construction projects – though there are major concerns over the ability for developers to complete and deliver pre-sold projects because their cash reserves are running at a faster burn rate than their income from new sales, which have all but dried up. On top of that, house prices continue to fall, which means little incentive to want to try and catch a falling knife.

Lastly, Beijing will hope that it sends a signal that they are serious about supporting the sector and are willing to make bigger moves, instead of drip-feeding nominal amounts of support. The hope now is that this will be followed by more action specifically in the property sector, but also in the wider market. Data from China continues to show significant headwinds, with factory activity slowing and, perhaps more worryingly, inflation recording its steepest fall in 14 years, which is raising fears over deflation.

When you compare where China’s property market is now to where the US was at about the same time during the 2008 crash, China could be seen as only being about halfway through the peak to trough of house price declines. Furthermore, the Chinese property sector is about 3.5 times more leveraged than the US were at the time. The recipe for disaster is there and it really is down to Beijing to do all that it can to avoid their own version of the GFC, which in the world’s second largest economy, we should all probably be taking more notice of than we currently are.

With all eyes on the geopolitical situation in the Middle East, headlines are this morning centring on the US which is proposing a UN Security Council Resolution which would call for a temporary ceasefire in Gaza and call for Israel to halt its plans for an offensive in Rafah. It’s understood that the resolution will call for the ceasefire to come about “as soon as practicable”.

This marks a departure from the US existing stance which has so far vetoed calls for a ceasefire – though called for temporary humanitarian pauses, paving the way for getting aid through to Gaza and for the release of Israeli hostages held by Hamas. For example, in mid-December the US vetoed a draft resolution submitted by the UAE which demanded a ceasefire in Gaza. 13 other members in the UNSC backed the motion for a ceasefire, with the UK abstaining.