China is considering reducing interest rates on up to $5.3 trillion worth of mortgages in a bid to lower borrowing costs for millions of families while minimising the strain on its banking sector. Financial regulators have proposed cutting mortgage rates by about 80 basis points (bps) in two phases, with the first reduction expected in the coming weeks and the second in early 2025, according to sources familiar with the plan. The proposal, still awaiting approval from top leadership, may apply to both first and second homes. Chinese regulators, who set mortgage rate benchmarks for banks to follow, are attempting to revitalise the ailing property market without undermining the country's $66 trillion financial system. Banks are already facing squeezed profit margins, which fell to a record low of 1.54% as of June 2024, well below the threshold of 1.8% needed for sustainable profitability. Regulators are also expected to introduce measures allowing homeowners to renegotiate terms with their current lenders before banks usually reprice mortgages in January. For the first time since the global financial crisis, borrowers may be able to refinance with a different bank. Analysts from China International Capital Corp and Jefferies Financial Group have predicted mortgage rates could drop by up to 100 bps in some cities. The mortgage rate cuts are seen as part of efforts to address the economic slowdown, with concerns heightened after weak earnings from major consumer companies and growth downgrades from global banks. Larry Hu, Head- China Economics, Macquarie Group, noted that the cuts would essentially transfer wealth from banks to households, potentially boosting consumption. He estimated that refinancing existing mortgages could save borrowers around 300 billion yuan annually, equivalent to 0.6% of China's retail sales or 0.2% of its GDP. However, the cuts pose risks to banks, with Citigroup estimating an 8-bp contraction in margins and a potential 6.4% hit to earnings next year, particularly for major state-run banks with significant mortgage exposure. As of the end of 2023, existing mortgages had an average interest rate of 4.27%, compared to the record low of 3.45% on newly-issued loans. (ET)