China / China further cuts banks' reserve requirements as trade war imperils growth

China pumps USD 109 billion into economy as trade war bites on growth

The fourth RRR cut of the year will cover the yuan deposits of large commercial banks, share-holding commercial banks, city commercial banks, non-county rural commercial banks and foreign banks.

The cut in RRR will introduce about RMB 750 billion of cash into the banking system through the release of RMB 1.2 trillion in liquidity.

Wen Bin, chief researcher of China Minsheng Bank, said that the move would unleash 1.2 trillion yuan of capital into the market, but it would not change the central bank's stance of sticking to a prudent and neutral monetary policy, as its goal was to reduce financing costs of the real economy.

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. 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 U.S. as part of a drive to steal technology secrets.

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The total funds released by RRR cut is slightly more than the amount banks needed to repay their MLF. Dealers were given a negative lead from Wall Street, where all three main indexes ended with sharp losses following news that unemployment had hit a 49-year low and wages saw healthy gains. When policy is said to be accommodative, it means the central bank is making it cheaper for businesses and households to borrow in hopes that they will increase spending and lift the economy. 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. The last close before the long holiday was 6.8725 to the dollar.

"Whether it is just in response to the weight of evidence from the strong USA data or instead an active decision by Fed officials to steer the market more towards its tightening profile (the "dots") presented at its rate decision last month, there is little doubt that officials have turned more hawkish recently", analysts at ANZ said in a note.

However, Beijing has refused to yield to US complaints that the Chinese government steals or pressures foreign companies into handing over technology. It claimed a unit of the People's Liberation Army was involved in the operation that looked to steal tech secrets.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management, said the cut suggested the central bank was anxious about the impact of "external shocks" to markets such as the one delivered last week by US Vice President Mike Pence's criticism of Beijing. "The RRR cut will help but the China economy will need more monetary policy persuasion to snap its current funk".

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