China shares fall despite central bank action

Gladys Abbott
October 10, 2018

The losses in China also came despite a cut in the amount of cash the country's commercial banks must keep in reserve, which its central bank says will pump more than $100 billion into financial markets.

On the back of the central bank's announcement, China's mainland markets traded in negative territory for much of their first trading day following the Golden Week holiday. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.9523, 1.37 percent weaker than the midpoint.

The "very timely" RRR cut is big enough to help boost confidence in the economy, said Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a Beijing think-tank.

Washington and Beijing have imposed punitive tariffs of up to 25 percent on billions of dollars of each other's goods in an escalating fight over USA complaints China steals or pressures companies to hand over technology.

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.

"The PBOC is expected to leave its 7-day reverse repo yield unchanged at 2.55 percent akin to Fed's meeting in June, given PBOC's easing bias", Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said in a note.

In addition, the liquidity of another 750 billion yuan (USD 110 billion) will be injected into the market for lending, according to the PBOC statement.

With China's economy cooling and the full impact of USA trade tariffs still to be felt, policy makers are shifting their priorities to reducing risks to growth, with the yuan and stock markets under pressure.

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The PBOC will continuously implement a prudent and neutral monetary policy, refrain from using a deluge of stimulus and focus on targeted adjustment to maintain sound and sufficient liquidity, facilitate rational growth in monetary credit and social financing and create a proper monetary and financial environment for the country to pursue high-quality economic development and advance the supply-side structural reform, it said.

The move comes as officials have warned that trade frictions with the United States could shave as much as almost one percentage point from China's annual economic growth.

But the central bank's move to ease some pressure on the banking sector signals that the situation in China is perhaps not all rosy, experts noted. But some key activity indicators have weakened more sharply.

While non-performing loans saw a surge in the second quarters and defaults climbing, fixed-asset continues to grow at the slowest pace on record.

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.

Chinese commission and state council have also substituted the term "deleveraging" with "structural deleveraging", a swap indicating less stringent on debt.

"Liquidity is flush in the banking system".

"The external environment is becoming tougher and we can not rule out further RRR cuts", he said.

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