Bleaker end to 2018 for China
Reserve ratio cut again as policy makers seek to boost economy
BEIJING: China’s central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policy makers seek to shore up the faltering domestic economy amid a worsening trade war.
The People’s Bank of China (PBoC) lowered the required reserve ratio for some lenders by one percentage point effective Oct 15, according to a statement on its website Sunday.
The cut will release a total of 1.2 trillion yuan (US$175bil), of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing, the central bank said.
The central bank has shifted to looser monetary policies this year as the combined effects of Beijing’s financial clean up and the trade conflict with the United States threatened the economic expansion.
As there’s now every sign that the Trump administration intends to continue pressing Beijing on trade and other fronts, China is faced with a more urgent need to support the domestic economy, even if that may increase downward pressure on the currency.
“The move is part of policymakers’ defensive easing package, in view of headwinds on broad credit growth and more visible activity moderation in September,” economists including Robin Xing, chief China economist at Morgan Stanley in Hong Kong wrote in a note.
“To keep the economy on the path of soft landing amid persistent trade tensions, we think more easing measures are needed to foster a modest rebound in credit growth.”
Though further reserve-ratio cuts had been forecast by economists, Sunday’s move may offer some reprieve for equity and fixed income investors.
After a week-long holiday, Chinese stocks opened down, with the CSI300 Index dropping 3% and the main benchmark Shanghai Composite falling 2.4%.
The currency also dropped against the dol- lar, trading 0.4% lower after the central bank set the fixing at the weakest since May 2017.
Surging US Treasury yields had signalled pressure on Chinese debt, and Hong Kong stocks took a beating last week while their onshore counterparts were closed for trading.
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.
The cut will apply to large commercial banks, joint-stock commercial banks, city commercial banks, non-county rural commercial banks and foreign banks, according to the statement.
The increased liquidity will help support bank lending and credit in general, and unlike that from the PBoC’s medium-term funding tools, it is permanent, which can help banks’ liquidity expectations, according to Wang Tao at UBS Group AG.
The cut gives the market a stronger easing signal and can support sentiment, which has been negative on China and emerging markets in the past few days, she said.
Two gauges of activity in China’s manufacturing sector worsened in September, with the official reading for new export orders falling to the lowest reading since 2016.
Growth in the world’s second-largest economy is forecast to slow this year to 6.6%, broadly in line with the official target of 6.5%.
The lack of progress in negotiations between Washington and Beijing over their trade rivalry means that there’s a good chance the current roster of tariffs on US$250bil of Chinese goods exported to the United States will grow, as President Trump has threatened.