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Market Outlook: China cuts reserve requirements

10 October 2018

Zhang Ming, a researcher with the Chinese Academy of Social Sciences (CASS), expressed concern that the trade row would hurt exports and consequently reduce investment in the crucial manufacturing sector.

Beijing must draw up strong stimulus policies to inject new momentum into the real economy. Indeed, growth was already slowing before the United States tariffs impact bites and will likely slow further in the months ahead as the impact of tariffs has a greater effect.

China's foreign exchange reserves fell more than expected in September to a 14-month low as the yuan currency weakened further against the dollar amid mounting trade tension with the United States.

The central bank said Sunday it had released 750 billion yuan ($109 billion) for additional lending by reducing bank reserve requirements by 1 per cent.

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"It is possible for the Hong Kong and Shanghai stock markets to recover from recent losses if investors can derive optimism based on the change to monetary policy", Jonathen Chan, a market analyst at CMC Markets and Stockbroking, said in a note.

"MALIGN" EFFORTS Last week, US Vice President Mike Pence intensified Washington's pressure campaign against Beijing by accusing China of "malign" efforts to undermine President Donald Trump ahead of next month's congressional elections and of reckless military actions in the South China Sea.

The People's Bank of China's turn will discharge 1.2 trillion yuan in liquidity, with 450bn yuan of that because of counterbalance developing credits - meaning 750bn yuan will be infused into the money related framework. The move hopes to reduce financing costs and spur growth amid growing concerns over a potential economic slowdown resulting from the trade war between the USA and China.

About $65 billion of that cash injection will be directed to banks to repay debts that are due in coming weeks, while the rest will be pushed into the financial market. The government has taken measures to help companies impacted by the trade war, he added.

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"Cutting RRR at a time of relatively ample liquidity in the banking system is not likely to have much effect", wrote Zhao Jian, a finance professor of the University of Jinan.

The PBoC also reiterated that China's M2 money supply growth will be kept stable and the RRR cut will not fuel depreciation pressure on the yuan's exchange rate. However, some key activities have abated more steeply. July saw a rise in nationwide jobless rate to 5.1%.

China's banking regulator has asked banks to significantly lower funding costs for smaller firms and raise their tolerance for non-performing ratios for loans to small and micro firms.

"Liquidity is flush in the banking system".

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"After today's announcement in the RRR cut, we expect a further cut in January 2019".

Market Outlook: China cuts reserve requirements