China cuts banks' reserve criteria to spur growth

Lloyd Doyle
October 10, 2018

The decision by China's central bank to cut the amount of reserves held by banks is an indication that authorities in the world's second-largest economy are getting nervous about a long-drawn trade war with the US, experts said.

The yuan was also down, as expectations of more easing measures by China, plus surging U.S. bond yields, exert downward pressure on the Chinese currency.

The stock market declined Monday taking its cue on Asian trading, as another strong USA jobs reading further fanned expectations the Federal Reserve will hike interest rates at a quicker pace.

China's central bank said it would cut reserve requirement ratios by 100 basis points from 15 October.

The easing, announced on the last day of China's week-long National Day holidays, came at a time when the world's second biggest economy is losing momentum amid an intensifying trade war with the US.

The blue-chip CSI300 index was down 2.3 percent at the open and off more than 3 percent by 0215 GMT, while the Shanghai Composite Index dropped some 2.5 percent.

The selling trumped news that the People's Bank of China had lowered the required reserve ratio (RRR) as it looks to shore up the economy after a series of weak data, while it also battles a long-running trade row with the United States.

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. "China trade tension further escalate". The key question is how to channel cash to the real economy.

Yields of China's 10-year central government bonds have been trending lower this year, standing at 3.64 per cent at lunch break on Monday. That compares with the 3.227 per cent yield for United States bonds., the highest level since May, 2011. "The narrowing interest rate differentials between China and the USA will exert more downward pressure on the RMB", wrote Nathan Chow, strategist at DBS Group Research. It was off 0.55 percent by mid-morning. The onshore yuan has weakened about 5.5 per cent against the dollar this year. 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.

Reflecting expectations of further yuan weakening, the one-year non-deliverable yuan futures in Hong Kong fell to the lowest level in 15 months, to 7.0095 against the dollar.

The decision is meant to "further encourage the stable development of the real economy, optimise the liquidity structure of commercial banks and financial markets, lower financing costs, and to continue increasing the financial systems' efforts to support small businesses, private enterprise and innovation", the People's Bank of China said in a statement.

Other reports by Iphone Fresh

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