China slashes banks' reserve requirements as trade war imperils growth

Irving Hamilton
October 10, 2018

These are now 15.5% for large commercial lenders and 13.5% for smaller banks.

The cut will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan is to be used to repay existing medium-term funding facilities which are maturing, the central bank said.

China's yuan eased against the U.S. dollar in thin trade on Wednesday, reflecting a weaker official midpoint, as the market waited to see what the U.S. Federal Reserve does at a policy meeting and how its Chinese counterpart reacts. "Also, capital outflows should be increasing due to mounting risks on China-U.S. trade war risks". Shanghai led the retreat as mainland investors returned from a week-long break, during which time China was accused of using microchips in computer equipment sold in the USA as part of a drive to steal technology secrets.

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"At the beginning of the year, I think (the RRR cuts) had more to do with kind of smoothing out the deleveraging process, just providing liquidity to the banks that might have been experiencing a credit crunch as they were trying to clamp down in shadow banking and some of the other more volatile activities", Cindy Ponder-Budd, an analyst from research firm View from the Peak, told CNBC's "Squawk Box" on Monday. That was the biggest drop in nearly a month and led to the redback's lowest dollar value since May previous year. 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. When Chinese markets were closed last week, Hong Kong stocks fell for four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show. Some analysts now expect a cut in the official policy interest rate to bring interbank lending rates down. The Philippine Stock Exchange Index fell 27.38 points, or 0.4 percent, to 7,050.82 on a value turnover of almost P4 billion. Prior to Wednesday's market opening, the PBOC set the yuan's midpoint rate at 6.8571 per dollar, the weakest level since August 24, and 131 pips or 0.19 percent weaker than the previous fix of 6.8440. It claimed a unit of the People's Liberation Army was involved in the operation that looked to steal tech secrets.

A anxious China has injected $110 billion into its economy in the wake of the trade war with the U.S. in order to shore up business confidence.

The Chinese mainland's stock markets and the onshore yuan exchange rate both fell yesterday, the first day back after the week-long National Day holiday and the same day the central bank unveiled plans to lower the reserve requirement ratio. "The RRR cut will help but the China economy will need more monetary policy persuasion to snap its current funk".

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