China Stocks, Yuan Tumbled Yesterday After PBOC Unveiled RRR Cut

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China Stocks, Yuan Tumbled Yesterday After PBOC Unveiled RRR Cut

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.

News also emerged over the weekend that China's central bank would cut the required reserve ratio for Chinese banks by 1%.

Shares in Asia slumped Monday as China's markets stumbled in their first trading day after a one-week holiday even though Beijing's central bank increased liquidity to offset the impact of an escalating trade dispute with the United States.

A prolonged trade war as the us economy appears strong may lead to more investors pulling money out of China. The yuan had depreciated by 8% between March and August earlier this year, sparking fears over potential capital outflows which would place further pressure on the economy.

The move signals China's economy "is really not doing well", Chen Shouhong, founder of the investment information platform Gelonghui, wrote on WeChat, a Chinese social media service. The move hopes to reduce financing costs and spur growth amid growing concerns over a potential economic slowdown resulting from the trade war between the USA and China.

About $65 billion of that cash injection will be directed to banks to repay debts that are due in coming weeks, while the rest will be pushed into the financial market.

"Some regions and companies have been hit [by trade frictions], but China has the ability to minimize the impact", Mr. Liu was quoted as saying. He also assured that the government has implemented measures to help the companies affected by the trade war.

China's central bank is due to release September money and lending data between October 10 and October 15.

"We expect the PBoC will continue its easing efforts to keep liquidity ample and loosen its credit control to make funds more accessible to the broader economy", BofA Merrill Lynch analysts said in a note.

"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 U.S. rate hikes would help strengthen the dollar further.

The scale of China's foreign exchange reserve was expected to maintain stable despite fluctuations, it said.

"Economic growth in China is slowing and you're starting to see the government more proactive in terms of trying to provide stimulus", she added. But some key activity indicators have weakened more sharply.

The margin of decline has been unusually wide because other currencies in the basket used by the Chinese central bank to set exchange rates have not risen along with the greenback.

Zhang Yiping, senior economist at Merchants Securities in Shenzhen said, "Liquidity is flush in the banking system".

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