Published: Wed, October 10, 2018
Money | By Ralph Mccoy

China cuts bank reserve requirement to spur economy amid trade war

China cuts bank reserve requirement to spur economy amid trade war

The yuan slumped as much as 0.78 per cent onshore to 6.9260 per dollar amid speculation that the central bank will give up defending the 6.9 level, further hurting the outlook for A shares.

PBOC's latest move came at the end of a week-long national day holiday in China.

Beijing has stepped up liquidity support across the financial in recent months as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets as anxiety grows that the tit-for-tat trade war with the United States could deal a damaging blow to the broader economy.

PBOC sets the benchmark on the morning of each business day, allowing spot rates to deviate 2 percent above or below the figure.

In its Sunday statement, the Chinese central bank said some of the liquidity released by the reserve rate cut will be used to pay back 450 billion yuan ($65.5 billion) of a medium-term lending facility that will mature on October 15.

Worldwide investors had started to load up on Chinese shares as global index compilers moved to increase weightings of yuan-denominated shares on their benchmarks and this year's slump made valuations more compelling relative to global peers.

"An RRR cut is not enough to counter the impact of the trade war". "The economy is weak, and I see a growing number of companies selling their assets".

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Core inflation, which excludes volatile items such as energy, will vary from country to country, it said. It also predicted that unemployment here will fall to 5.3% by the end of this year and 5.1% next year.

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However, Beijing has refused to yield to USA complaints that the Chinese government steals or pressures foreign companies into handing over technology.

The report, which raised the spectre of further USA retaliation against China, had already caused Chinese IT shares in Hong Kong to tumble on Friday. On Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE, slumped on a media report that the systems of multiple USA companies had been compromised by malicious computer chips inserted by Chinese spies. Yuan traders will be watching the People's Bank of China's response to the Fed's action and statement wording.

The central bank made the move to ensure "reasonable and sufficient liquidity" in China's economy, it said. 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.

Friday's US non-farm payrolls showed job creation slowed in September, likely from Hurricane Florence's impact on restaurant and retail payrolls, but the Labor Department report also showed a rise in wages that could keep the Federal Reserve on track for more interest rate hikes. At present, the interest rate on China's benchmark bond is about 60 basis points higher than on the US one.

Following the PBOC's move, the offshore yuan was 0.2 percent weaker against the dollar in early trade on Monday.

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.

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