China's central bank cuts reserve ratio for some lenders

10 October, 2018, 20:30 | Author: Eric Barnett
  • China pumps USD 109 billion into economy as trade war bites on growth

"This is a sign of policy easing to counter (the effects of) the US-China trade war and shows (Beijing's) determination to maintain growth", said Liao Qun, chief economist of China Citic Bank International.

Spot yuan was on track for its lowest close in seven weeks against the U.S. dollar, as expectations of more easing measures by China, plus surging United States bond yields, put pressure on the Chinese currency.

"There's an acute shortage of confidence in the market".

Steven Leung, executive director at UOB Kay Hian (Hong Kong) Ltd, said: "Foreign investors turned bearish, unlike their previous optimistic buying of Chinese A shares".

"We believe that the most likely trigger would be a resolution of US-China trade talks, given the unpredictable nature of US President Donald Trump".

The losses in China dragged down MSCI's broadest index of Asia-Pacific shares outside Japan, which was 0.8 percent lower.

At 0540 GMT, China's blue-chip CSI300 index was 3.5 percent lower while the main Shanghai Composite Index was down 2.9 percent.

The dollar index rose 0.12 percent, with the euro down 0.25 percent to $1.1494.

On Monday, Hong Kong's Hang Seng index was down 0.5 percent and a sub-index tracking information technology firms was 0.9 percent lower.

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. "And today's fall is not surprising after weak performance in external markets during the holiday".

Then on Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE Corp, slumped on a Bloomberg report that the systems of multiple US companies had been compromised by malicious computer chips inserted by Chinese spies.

The Shenzhen Composite Index, which tracks stocks on China's second exchange, fell 3.83%, or 55.26 points, to 1,386.28.

"China sectors such as energy, IT and industrials will be most impacted based on our analysis, while sectors such as real estate, insurance, diversified financials, telecom and utilities generate virtually no revenue from the United States", a team led by Pedro Martins said in a note.

Some of the liquidity unleashed will be used to pay back the 450 billion yuan (USD 65 billion) of the medium-term lending facility that will mature on October 15, state-run Xinhua news agency reported.

"The PBOC will continue to take necessary measures to stabilize market expectations and keep the foreign exchange market running smoothly", it said. "Liquidity is not the issue".

The US Federal Reserve move to increase the interest rates also sparked fears of more capital outflows from China. That compares with the 3.227 percent yield for USA bonds. Investors have been turning to regional markets for trading clues after a weeklong holiday, as global stocks have been battered by a liquidity squeeze amid rising US Treasury yields.

"Expectations of a weaker Chinese yuan may help to lift market sentiment as well", he said. On Wednesday morning, the onshore spot yuan traded in a thin range of less than 60 pips.

Sixteen strategists see the yuan weakening to 7 to the dollar or higher at some point over the 12-month period, the highest number of respondents in the Reuters poll predicting that since August 2017.



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