China orders more lending to entrepreneurs amid trade spat

Daniel Fowler
October 10, 2018

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.

Amid signs higher USA interest rates and fears of a global trade war are having an impact on the world's second-largest economy, China's central bank hopes cutting the reserve requirement ratios (RRRs) by 1% from 15 October will lower financing costs and spur growth.

Mr. Pence's speech marked a sharpened US approach toward China, going beyond the bitter trade war between the world's two biggest economies, which has magnified concerns about the outlook for China's economy.

The PBOC would "maintain reasonably ample liquidity to drive the reasonable growth of monetary credit and social financing scale", it said. The Shanghai Composite Index falls some 2.5 per cent this morning (October 8, 2018).

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"An RRR cut is not enough to counter the impact of the trade war", Shanghai Wisdom Investment General Manager David Dai told Reuters.

A net 750 billion-yuan ($109.2 billion) will be injected in cash into the banking system as Sunday's move will release a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of the total to counterbalance medium-term lending facility (MLF) loans. Chinese dealers were playing catch-up with sharp losses last week, when Bloomberg reported that Beijing inserted microchips into equipment made in China for Amazon and Apple, and possibly for other companies and government agencies. 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.

China has retaliated with its own set of tariffs, and has accused the USA of launching the largest trade war in economic history. The gauges followed Hong Kong's Hang Seng index, which remained open during the holiday and slid 4.38 percent over its course. At its two-day meeting ending later on Wednesday, the Fed is expected to increase USA interest rates for the third time this year. 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. That compares with the 3.227 per cent yield for USA bonds., the highest level since May, 2011. Tokyo was closed for a public holiday.

"In the face of rising trade frictions, moderate yuan depreciation aids exporters and is what the market expects to see", Tang Xiangbin, currency analyst at China Minsheng Banking Corp said, predicting additional USA rate hikes would help strengthen the dollar further.

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