China stocks tumble despite central bank's move to support economy

China Slashes Banks Reserve Requirements As Trade War Hits Growth

On Sunday, the People's Bank of China said it would cut the amount of money that some lenders are required to hold in reserve - called the reserve ratio - by 1 percentage point.

RMB 450 billion of the cash released will be used to offset maturing medium-term lending facility loans.

China's central bank will cut the reserve requirement ratios (RRR) by one per cent from October 15 which will inject a net United States dollars 109.2 billion in cash into the banking system.

Coming on the final day of the National Day holiday, the South China Morning Post says "the central bank's announcement may also serve as a shot in the arm for the China's stock market when trading resumes on Monday morning".

The yuan was expected to gain around 1.7 percent to 6.80 per dollar in a year's time from around 6.92 now, according to the poll of over 50 foreign exchange strategists.

"Some of the difficulties encountered by enterprises are brought about by trade frictions and some due to China's economic transformation", Ning said. "Other possible triggers could also stem from a stronger trade relationship between China and Europe or investors finally finding another positive reason to put risk on the table again".

Equity markets around the world came under pressure last week after a steep sell-off in U.S. Treasuries, prompted by hawkish comments from U.S. Federal Reserve officials and data widely seen as bolstering the case of further U.S. rate hikes.

U.S. President Donald Trump last month imposed a tariff increase on $200 billion of Chinese goods over what he has labeled unfair trading practices and intellectual property demands.

Foreigners dumped 9.7 billion yuan (S$1.94 billion) of A shares through exchange links with Hong Kong on Monday, just short of a record hit eight months ago, as mainland markets reopened after a week-long break. The government has taken measures to help companies impacted by the trade war, he added.

"Moreover, there is still room for further RRR cuts when necessary, though the chance for an interest rate cut is limited given the continued Fed rate hiking cycle, in our view."On Monday, the spread between Chinese and US 10-year Treasury bonds was 58.1 basis points according to Eikon data, compared with 150 basis points at the end of 2017".

With China's economy cooling and the full impact of USA trade tariffs still to be felt, policy makers are shifting their priorities to reducing risks to growth, with the yuan and stock markets under pressure.

In response, officials have pledged to pump billions of dollars into infrastructure projects, shored up the value of the currency and moved to backstop a plunging stock market.

To assess China's economic situation, one must take a longer view and a more holistic approach, Ning Jizhe, vice chairman of China's state planner, told the People's Daily in an interview, stressing that growth, employment, prices and worldwide balance of payments have been stable. The July nationwide jobless rate rose to 5.1 per cent.

The Chinese banking regulator has requested banks to lower funding costs significantly and raise their lenience for non-performing ratios to small and micro firms.

Zhang Yiping, senior economist at Merchants Securities in Shenzhen said, "Liquidity is flush in the banking system".

"The external environment is becoming tougher and we can not rule out further RRR cuts", he said.

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