(Yicai) Aug. 30 -- China’s banks are laying the groundwork to reduce the interest rates on outstanding personal housing loans, following a recommendation from the country’s central bank earlier this month, the 21st Century Business Herald reported yesterday.

Lowering existing mortgage rates is now a distinct probability, Peng Jiawen, executive assistant president of China Merchants Bank, said at the lender’s earnings call yesterday. China Merchants Bank has formulated plans, but they are not ready yet as many factors need to be taken into account at the same time.

Agricultural Bank of China will finalize details and finish preparations as soon as possible, Vice President Lin Li said at the bank's earnings call held the same day.

The People’s Bank of China said on Aug. 1 that it will guide commercial banks to lawfully and orderly adjust the rates on outstanding personal mortgages. This is an escalation of its previous wording last month of ‘encouraging’ and ‘supporting’ banks to do so.

Lowering the interest rates on outstanding mortgages has entered the stages of preparation and actual implementation, said Yan Yuejin, research head of the think tank E-House China Research and Development Institute.

Existing mortgage rates refer to those housing loans that have already been issued and not yet fully paid off. Many were issued at a time when interest rates were much higher than they are now. The mortgage rate for first-time home buyers is now under 4 percent, but existing mortgages are close to 5 percent and some are even as high as 5.2 percent, which has led to many home buyers repaying their mortgages early.

Banks need to consider carefully how they will lower existing mortgage rates, Yan said. Policies in different regions vary, so the reductions should also differ. But if the interest rates of some clients are lowered and others are left unchanged, there will be an uproar.

There is not a “one-size-fits-all” solution, said Ming Ming, chief economist at Citic Securities. The locations of the properties, the time at which they were purchased and the clauses in the contracts all mean that adjustments to existing mortgage rates need to be customized separately.

Shrinking Margins

Cutting existing mortgage rates will also put more pressure on banks’ net interest margins, which are a key measure of profitability, causing their profit to shrink, said Sheng Liurong, chief financial officer at China Construction Bank.

“Banks need to keep their profit and net interest margins at a reasonable level to maintain stable operations and prevent financial risk so as to be able to support and enhance the real economy,” Sheng said, citing the PBOC’s second-quarter monetary policy implementation report.

Policies are designed to keep lenders’ net interest margins at a relatively stable level and China Construction Bank would also like the contraction in its net interest margin to slow, Sheng added.

Banks are extending more credit this year in order to boost the real economy, but the interest rates of medium to long-term loans issued in the first half are very low, a banking insider said.

Editor: Kim Taylor