China Pumps $109 Billion Into Economy Amid Trade War With US

Fredrick Soto
October 16, 2018

China's central bank cut the amount of cash lenders must hold as reserves for the fourth time this year, as policymakers seek to shore up the economy amid a worsening trade war.

The move will be used to pay down 450 billion yuan ($65.6 billion) of medium-term lending facilities, it said, adding that it could also free up another 750 billion yuan in funds.

The cut will fill in the liquidity gap of banks and put no downward pressure on the yuan, the central bank said in a statement, as the country's monetary policy has not been eased.

China stocks tumbled on Monday, as investors back from a long holiday dumped shares across the board despite Beijing's weekend move to spur more lending at a time of growing fears the economic impact of the Sino-U.S. trade war will deepen.

U.S. President Donald Trump last month imposed a tariff increase on $200 billion of Chinese goods over what he has labeled unfair trading practices and intellectual property demands.

Chinese investors faced a barrage of negative news from last week, including weak manufacturing data, a close call between a United States and a Chinese destroyer, a North American trade deal that is set to sideline China, accusations of election meddling and a Bloomberg News report that the country spied on USA companies.

Chinese market weakness comes despite authorities taking steps to support the economy amid concerns over growth and the impact of the trade war.

Economists predicted more RRR cuts ahead, though China has repeatedly said it will not resort to massive stimulus, concerned about introducing excessive leverage into the financial system. "There is room for further reductions and I expect another 1 percentage point cut by year-end", he added.

The Chinese economic growth slackened somewhat to 6.7% in the second quarter year-on-year, still above the government's full-year target of approximately 6.5%.

At the same time, the greenback continues to draw strength from the strong USA economic growth and continued tightening policy there.

But shares also fell in a host of other sectors after two Chinese gauges of manufacturing activity weakened in September and the US-China frictions worsened. July saw a rise in nationwide jobless rate to 5.1%.

China's banking regulator has asked banks to significantly lower funding costs for smaller firms and raise their tolerance for non-performing ratios for loans to small and micro firms.

These concerns can also be seen in the offshore Chinese Yuan, with the USDCNH advancing above 6.90 for the first time in almost two months. "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 will engineer a credit impulse into the economy, representing an upside risk to growth, according to the latest report from ANZ Research.

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