China slashes banks' reserve requirements as trade war imperils growth

China slashes banks' reserve requirements as trade war imperils growth

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.

Spot yuan was on track for its lowest close in seven weeks against the USA dollar, as expectations of more easing measures by China, plus surging United States bond yields, put pressure on the Chinese currency.

Friday's US 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.

The blue-chip CSI300 index was down 2.3 percent at the open and off more than 3 percent by 0215 GMT, while the Shanghai Composite Index dropped some 2.5 percent.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management, said the cut suggested the central bank was anxious about the impact of "external shocks" to markets such as the one delivered last week by US Vice President Mike Pence's criticism of Beijing.

The move is not expected to put depreciatory pressure on the yuan, the statement said, adding that the bank would continue to maintain a "prudent and neutral" monetary policy.

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The RRR cut, announced on the last day of China's week-long national day holiday, indicates that the central bank is anxious about the impact of "external shocks" to markets such as a speech last week by USA vice-president Mike Pence, said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management.

Despite China's flagging economy, President Trump has rejected recent Chinese calls for negotiations over the trade dispute, claiming the offers are inadequate and that it is not the right time to make a deal.

According to the Chinese central bank, Chinese banks can receive 1.2 trillion yuan from the one percentage point cut in required reserve ratio, in which 450 billion yuan (US$65 billion) will be used to repay their existing borrowing from the central bank and the other 750 billion yuan (US$110 billion) can be used to lend. "The issue is the loss of confidence", said Zhao, adding China is in a "liquidity trap" where there's a shortage of credit demand from the real economy, especially the private sector. Sydney retreated 1.4 percent, Singapore eased 0.5 percent, and Taipei and Seoul were each 0.6 percent lower.

The 30-year Treasury bond reached a four-year high of 3.424 percent, and was at 3.4054 percent at the USA close on Friday. On Wednesday morning, the onshore spot yuan traded in a thin range of less than 60 pips.

Reflecting expectations of further yuan weakening, the one-year non-deliverable yuan futures in Hong Kong fell to the lowest level in 15 months, to 7.0095 against the dollar. The last close before the long holiday was 6.8725 to the dollar.

China's effort to support its decelerating economy is heaping pressure on the yuan, signaling challenges for Beijing as it tries to stimulate growth without triggering destabilizing capital outflows.

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