China Move To Stimulate Economy

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China’s central bank acts to stimulate economy as Yuan and manufacturing slide

Chinese Assets Slip

China’s stocks and currency value have taken a dive as markets reopened after a week-long closure for public holidays.

Growing concerns over the Chinese economy have impacted the markets despite the central bank of China releasing money to promote more lending from banks.

The Chinese public holidays have delayed the general slide that has affected other Asian markets taking effect.

The strength of the U.S. dollar and yields of the U.S. Treasury have caused a slump in stocks markets and currencies across Asia.

PBOC Reduce Reserve Limits

The People’s Bank of China (PBOC) has moved to address the slump by reducing the amount of funds required by lenders to hold in reserve, the reserve ratio requirement (RRR).

The ongoing trade war between China and the U.S. continues to affect the Chinese Yuan but analysts predict that the move to decrease RRR could release around $175 billion to stimulate the economy.

The PBOC has now reduced RRR four times since the fall of 2017. Some banks have seen a decrease of up to 100 basis points, which means they will only be required to hold reserves of between 12.5% to 14.5%.

The RRR reduction was larger than many predicted and is likely a result of the slow growth in manufacturing in the country and the anti-China rhetoric coming from U.S. officials.

Analyst Views

The Markit Manufacturing Purchasing Managers’ Index (PMI) saw a drop to 50 in September, down from 50.6 in August.

The 50 mark is significant as it is the benchmark for whether manufacturing during the month is expanding (above 50) or contracting (below 50).

Analysts expect another move by the PBOC to reduce RRR is expected within the year to increase liquidity in the economy.

However, that would increase the pressure on the Chinese Yuan with American bank Merrill Lynch predicting the Yuan to fall to 6.95 against the USD by the start of 2019.

The PBOC is likely to try and maintain a level of 7 Yuan to 1 USD to avoid a consistent currency downturn taking effect.

Measures the PBOC could implement include stricter controls over capital and intervening in the market by issuing bills in Hong Kong to strengthen Yuan that is traded outside of mainland China.