China to cut reserve requirement ratio, with monetary policy unchanged

10 October, 2018, 15:02 | Author: Regina Silva
  • The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

A net 750 billion-yuan ($109.2 billion) will be injected in cash into the banking system as Sunday's move will release a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of the total to counterbalance medium-term lending facility (MLF) loans.

It is the fourth such move this year, as China seeks to blunt the economic impact US President Donald Trump's imposition of $250 billion dollars of Chinese goods, roughly half of country's exports to the US.

"This is a sign of policy easing to counter (the effects of) the US-China trade war and shows (Beijing's) determination to maintain growth", said Liao Qun, chief economist of China Citic Bank International. Policy divergenceChina'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.

The country's central bank, People's Bank Of China (PBOC), said it would cut the reserve requirement ratio by one percentage point from October 15 to make sure there is reasonable supply of credit for economic development. Shanghai led the retreat as mainland investors returned from a week-long break, during which time China was accused of using microchips in computer equipment sold in the United States as part of a drive to steal technology secrets. China's banking system continues to have high amount of liquidity and the government aims to channel the cash towards the real economy with potential plans for a further 1% cut in RRR at the end of the year. The Philippine Stock Exchange Index fell 27.38 points, or 0.4 percent, to 7,050.82 on a value turnover of almost P4 billion.

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The move has resulted in an increased weakening of China's currency, which has been down nearly 6% against the dollar this year and, following the news, on Monday the Chinese currency slipped to 0.4% versus the dollar. July saw a rise in nationwide jobless rate to 5.1%. Before trading began on Monday, the PBOC set the midpoint of the yuan's daily trading band at 6.8957 per dollar, its weakest level since May 11, 2017. Some market participants also said they were unwilling to hold large positions for their proprietary trade, amid global market uncertainty, during China's coming lengthy public holiday.

However, Beijing has refused to yield to USA complaints that the Chinese government steals or pressures foreign companies into handing over technology. Mainland tech firms tumbled across the board, while companies in Hong Kong and Taipei including Lenvo and Taiwan Semiconductor Manufacturing also extended Friday's sharp losses.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management said the RRR cut indicates central bank's worries about the impact of "external shocks" to the markets.

A anxious China has injected $110 billion into its economy in the wake of the trade war with the USA in order to shore up business confidence. "The RRR cut will help but the China economy will need more monetary policy persuasion to snap its current funk".

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