China Seeks to Stimulate Economy

China Seeks to Stimulate Economy

China’s central bank announced Sunday it would reduce the reserve requirement ratio (RRR) for most banks by one percentage point, the fourth time this year the country has sought to free up credit for businesses as they face down $250 billion in US tariffs.

The move to cut the amount of cash which most commercial and foreign banks must hold in reserve, to repay loans obtained via the central bank’s medium-term lending facility, will take effect on October 15.

The decision is intended 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 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 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.

It is the fourth such move this year, as China seeks to blunt the economic impact US President Donald Trump’s imposition of $250 billion dollars of Chinese goods, roughly half of country’s exports to the US.

Asian markets fell on Monday, extending last week’s sell-off as another strong US jobs reading further fanned expectations the Federal Reserve will hike interest rates at a quicker pace.

Shanghai led the retreat as mainland investors returned from a week-long break, during which time China was accused of using microchips in computer equipment sold in the US as part of a drive to steal technology secrets.

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.

Dealers were given a negative lead from Wall Street, where all three main indexes ended with sharp losses following news that unemployment had hit a 49-year low and wages saw healthy gains.

The report, which followed a slew of strong indicators on the world’s top economy, saw yields on benchmark 10-year Treasuries rise for the third straight day, hitting a fresh seven-year high with the Fed expected to stick to its rate hike drive.

Analysts said the sudden surge in interest rates had deepened worries about higher inflation and an uptick in costs for loans and mortgages.

The losses in New York seeped into Asia, where Shanghai sank 2.4 percent and Hong Kong lost 0.8 percent with property firms hit by expectations the city’s banks will lift mortgage rates again as they track a likely Fed hike.

Sydney retreated more than one percent, Singapore eased 0.5 percent, Seoul was 0.2 percent lower and Taipei gave up 0.8 percent.

Tokyo was closed for a public holiday.

Chinese dealers were playing catch-up with sharp losses last week, when Bloomberg reported that Beijing inserted microchips into equipment made in China for Amazon and Apple, and possibly for other companies and government agencies.

It claimed a unit of the People’s Liberation Army was involved in the operation that looked to steal tech secrets. Mainland tech firms tumbled across the board, while companies in Hong Kong and Taipei including Lenvo and Taiwan Semiconductor Manufacturing also extended Friday’s sharp losses.

The selling trumped news that the People’s Bank of China had lowered the required reserve ratio (RRR) as it looks to shore up the economy after a series of weak data, while it also battles a long-running trade row with the United States.

However, Stephen Innes, head of Asia-Pacific trading at OANDA, said: “It’s not too much of a stretch to assume markets should expect more policy easing measures and increased infrastructure spending. The RRR cut will help but the China economy will need more monetary policy persuasion to snap its current funk.”

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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