Wednesday, 12 December, 2018

China cuts bank reserve requirement to spur economy amid trade war

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects China attempts to boost flagging economy in the face of US trade war | Articles | CFO
Kayla Schwartz | 10 October, 2018, 17:42

Amid signs higher U.S. 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.

"A cut of 1 per cent by the Chinese central bank was unexpected because it would "release something like 700 billion yuan (approximately $101.72 billion)" into the country's banking system", Francis Lun, the CEO of Geo Securities, said.

China's national bank said it would cut save prerequisite proportions by 100 premise focuses from 15 October.

The decision is meant to "further encourage the stable development of the real economy, optimise the liquidity structure of commercial banks and financial markets, lower financing costs, and to continue increasing the financial systems' efforts to support small businesses, private enterprise and innovation", the People's Bank of China said in a statement.

The ongoing trade war with the USA has exerted great pressure on Chinese exports as rounds of retaliatory tariffs undercut China's price advantage.

China's yuan currency has faced strong selling pressure in 2018, losing more than 8% in March-August at the height of market worries, though it has since cut losses as authorities stepped up support.

The dispute with the U.S.is adding to downward pressure on an economy that already was forecast to cool after Beijing tightened lending controls to rein in a debt boom.

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China would also adopt a more proactive fiscal policy, including potential tax cuts on a larger scale, to safeguard economic growth, state-run Xinhua News Agency reported later on Sunday, citing Finance Minister Liu Kun. The cut is equivalent to an injection of 750 billion yuan ($109 billion) in cash 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. 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.

Beijing has increasingly geared its policies toward supporting exporters and persuading banks to offer more loans to small and medium-sized firms, which account for the bulk of the country's jobs, by lowering banks' RRRs.

"Also, capital outflows should be increasing due to mounting risks on China-U.S. trade war risks".

"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.

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.

"After today's announcement in the RRR cut, we expect a further cut in January 2019".

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