Published: Wed, October 10, 2018
Electronics | By Shannon Stone

China stocks tumble despite central bank's move to support economy

China stocks tumble despite central bank's move to support economy

China's decision over the weekend to cut the required reserve ratio (RRR) by 100bp (effective Oct 15), the fourth cut this year, will inject around CNY 750bn in liquidity into China's money markets.

Reserve requirement ratios (RRRs) - now 15.5 percent for large commercial lenders and 13.5 percent for smaller banks - will be cut by 100 basis points effective October 15, the PBOC said, matching a similar-sized move in April.

China's foreign-currency holdings fell in September, as heightened trade tensions with the US fueled concerns of capital outflow and further yuan depreciation.

Late last month, the administration of U.S. President Donald Trump invoked tariffs on an additional $200 billion in Chinese imports. 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 dispute with the adding to downward pressure on an economy that already was forecast to cool after Beijing tightened lending controls to rein in a debt boom. "There is room for further reductions and I expect another 1 percentage point cut by the year-end".

"Although we face relatively large external uncertainties, the Chinese economy has the ability to accommodate and fend off external risks", the statement said.

Foreigners dumped 9.7 billion yuan (S$1.94 billion) of A shares through exchange links with Hong Kong on Monday, just short of a record hit eight months ago, as mainland markets reopened after a week-long break.

But China has bigger problems than the trade war. 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. "Cutting RRR at a time of relatively ample liquidity in the banking system is not likely to have much effect", wrote Zhao Jian, a finance professor of the University of Jinan.

Friday's USA non-farm payrolls showed job creation slowed in September, likely from Hurricane Florence's impact on restaurant and retail payrolls, but the Labor Department report also showed a rise in wages that could keep the Federal Reserve on track for more interest rate hikes. Some market participants also said they were unwilling to hold large positions for their proprietary trade, amid global market uncertainty, during China's coming lengthy public holiday. However, some key activities have abated more steeply.

Smaller companies, in particular, are having a tough time securing loans and are grappling with rising borrowing and operating costs, fueled in part by a lengthy official clampdown on riskier lending like shadow banking. "The key question is how to channel cash to the real economy", said Zhang Yiping, senior economist at Merchants Securities in Shenzhen.

"The RRR cut announced today sends a clear easing signal", Bank of America Merrill Lynch said in a research note.

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