China slashes banks' reserve requirements as USA trade war imperils growth

Ivan Schwartz
October 10, 2018

"We've been expecting for some time now the USA market to start delivering volatility".

China has slashed reserve requirements for the country's banks, freeing up an estimated $109 billion of extra cash for infrastructure and investment, in a bid to bolster its vulnerable economy.

Still, some analysts said the "national team", a term used by Chinese investors to refer to state-supported funds created during the 2015 market crash, may be behind the stock's rise, buying it up to prevent the benchmark gauge from sinking further. "We do not look for the return of RMB depreciation pressure after the Fed's anticipated rate hike, which had been fully priced in".

China's RRR cut reinforces expectations of more policy easing ahead, putting China on a divergent path of monetary policies with the United States, where 10-year treasuries yields hit seven-year highs as the Federal Reserves keeps raising rates. In June, the gap was more than 70 bps, and traders say any further narrowing could increase capital outflows from China.

China's yuan was weaker at 6.8981 per USA dollar at 0519 GMT, compared with a previous onshore close of 6.8725 per dollar.

But most currency strategists remained optimistic on the yuan's outlook for the coming year on hopes some trade negotiations will be initiated between Washington and Beijing.

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The offshore yuan was also weaker at 6.9050 per dollar.

The PBOC will continuously implement a prudent and neutral monetary policy, refrain from using a deluge of stimulus and focus on targeted adjustment to maintain sound and sufficient liquidity, facilitate rational growth in monetary credit and social financing and create a proper monetary and financial environment for the country to pursue high-quality economic development and advance the supply-side structural reform, it said.

"We expect the dollar rally to lose steam".

US President Donald Trump kicked off the trade war in June by slapping additional tariffs on billions of dollars Chinese exports, piling up pressure on China to reduce over USD 335 billion trade deficit in the USD 710.4 billion bilateral trade. Xie Yaxuan, chief economist at China Merchants Securities said in a note that the timing of the announcement was a deliberate move by Beijing "to offset the shock from declines in global stock and bond markets to the domestic economy". The week-long National Day holiday begins on October 1.

The dollar index, which tracks the greenback against a basket of six major rivals, was flat at 95.617. The global dollar index rose to 94.143 from the previous close of 94.133.

Following the PBOC's move, the offshore yuan was 0.2 percent weaker against the dollar in early trade on Monday. Puregold Price Club Inc. of retail tycoon Lucio Co. dropped 4.1 percent to P42.20, while Jollibee Foods Corp., the biggest fast-food chain, slipped 1.6 percent to P243. Retail sales this year have grown at the slowest rate in a decade. The FTSE China A50 Index of large caps, which includes stocks most favoured by overseas investors, sank nearly 5 per cent for its biggest selloff since January 2016. Negative number indicates that spot yuan is trading stronger than the midpoint.

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