Published: Wed, October 10, 2018
Economy | By

China Cuts Bank Reserves To Spur Growth

China Cuts Bank Reserves To Spur Growth

The People's Bank of China (PBOC) decided on Sunday to cut the reserve requirement ratio (RRR) for RMB deposits by one percentage point starting from October 15, but the stance of China's monetary policy remains unchanged.

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

Celebrations for China National Day ended Friday and over the weekend the People's Bank of China once again cut the reserve requirement ratios levied on commercial banks.

Late last month, the administration of U.S. President Donald Trump invoked tariffs on an additional $200 billion in Chinese imports.

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 USA escalate and will likely drag longer than many expect, analysts noted.

The market's obliviousness toward the RRR cut - China's central bank said the move would inject a net 750 billion yuan ($109.2 billion) in cash into the banking system - highlights concerns that monetary easing alone would do little to heal battered confidence. Richard Jerram, chief economist at Bank of Singapore, said while the Fed would not be panicked by the increase in wages "evidence that tight capacity conditions-such as a low unemployment rate-are pushing prices higher will keep them on the current tightening path". Xie Yaxuan, chief economist at China Merchants Securities said in a note that the timing of the announcement was a deliberate move by Beijing "to offset the shock from declines in global stock and bond markets to the domestic economy". "There is room for further reductions and I expect another 1 percentage point cut by the year-end", Xu added.

Chinese banks were told by the government Sunday to lend more to entrepreneurs to help shore up flagging economic growth amid an escalating trade dispute with Washington.

"In the face of rising trade frictions, moderate yuan depreciation aids exporters and is what the market expects to see", Tang Xiangbin, currency analyst at China Minsheng Banking Corp said, predicting additional U.S. rate hikes would help strengthen the dollar further.

"Economic growth in China is slowing and you're starting to see the government more proactive in terms of trying to provide stimulus", she added. However, some key activities have abated more steeply. The report, which followed a slew of strong indicators on the world's top economy, saw yields on benchmark 10-year Treasuries rise for the third straight day, hitting a fresh seven-year high with the Fed expected to stick to its rate hike drive.

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.

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