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techkenyot.com January 17, 2019


China slashes bank reserve requirements amid trade war

10 October 2018, 03:02 | Hattie Nash

China slashes bank reserve requirements amid trade war

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

China's central bank announced Sunday it would reduce the reserve requirement ratio (RRR) for most banks by one percentage point, the fourth time this year the country has sought to free up credit for businesses as they face down $250 billion in U.S. tariffs.

Spot yuan was on track for its lowest close in seven weeks against the United States dollar, as expectations of more easing measures by China, plus surging U.S. bond yields, put pressure on the Chinese currency.

Despite the PBOC's official stance that its monetary policy is not yet accommodative, the fourth RRR cut of the year came as trade tensions between China and the US escalate and will likely drag longer than many expect, analysts noted.

The PBOC will continue to adopt a prudent, neutral monetary policy and this reserve ratio cut won't lead to yuan depreciation pressures, the central bank said in the statement.

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China's blue-chip CSI300 index was 3.6 percent lower in morning trade, while the country's main Shanghai Composite Index lost 3 percent.

The US is fighting a trade war with China which threatens the outlook for Chinese manufacturing and exports.

Monday was the first chance for mainland investors to react to the escalating trade tensions and a sell-off in Hong Kong markets last week after a week-long holiday on the mainland to celebrate National Day.

Despite China's flagging economy, President Trump has rejected recent Chinese calls for negotiations over the trade dispute, claiming the offers are inadequate and that it is not the right time to make a deal.

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Sunday's move will inject a net ¥750bn in cash into the banking system by releasing a total of ¥1.2-trillion in liquidity, with ¥450bn of that to offset maturing medium-term lending facility loans. Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.633 per cent on Monday. Prior to Wednesday's market opening, the PBOC set the yuan's midpoint rate at 6.8571 per dollar, the weakest level since August 24, and 131 pips or 0.19 percent weaker than the previous fix of 6.8440. At present, the interest rate on China's benchmark bond is about 60 basis points higher than on the USA one.

The spot market opened at 6.9000 per dollar and was changing hands at 6.8979 at midday, 254 pips away from the previous late session close and 0.03 per cent away from the midpoint. When Chinese markets were closed last week, Hong Kong stocks fell for four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show. The onshore yuan has weakened about 5.5 per cent against the dollar this year.

China's effort to support its decelerating economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth without triggering destabilizing capital outflows.

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.

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