China shares tumble despite central bank's move to aid economy

Marco Green
October 10, 2018

Amid signs higher U.S. interest rates and fears of a global trade war are having an impact on the world's second-largest economy, China's central bank hopes cutting the reserve requirement ratios (RRRs) by 1% from 15 October will lower financing costs and spur growth.

The yuan was also down, as expectations of more easing measures by China, plus surging United States bond yields, exert downward pressure on the Chinese currency. At its two-day meeting ending later on Wednesday, the Fed is expected to increase USA interest rates for the third time this year.

The People's Bank of China announced on Sunday a 100 basis points cut to the reserve requirement ratio (RRR) for most banks, which will result in an injection of 750 billion yuan ($109.2 billion) in cash into the banking system.

China is heightening its efforts to strengthen its flagging economy by injecting it with money to combat the effects of a trade war with the US.

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 United States vice-president Mike Pence, said Zhang Yi, chief economist at Zhonghai Shengrong Capital Management. Stocks in Shanghai and Shenzhen were down nearly 3 percent on Monday morning, while Hong Kong was down close to 1 percent. In June, the gap was more than 70 bps, and traders say any further narrowing could increase capital outflows from China.

The People's Bank of China announced earlier yesterday that it would lower the required reserve ratio by 1 percent for most banks on October 15, allowing lenders to pay off CNY450 million (USD65 million) in medium-term lending facilities due to mature that day and freeing up another CNY750 million in liquidity. The key question is how to channel cash to the real economy. "The narrowing interest rate differentials between China and the U.S. will exert more downward pressure on the RMB", wrote Nathan Chow, strategist at DBS Group Research.

The spot market opened at 6.9000 per dollar and was changing hands at 6.8979 at midday, 254 pips away from the previous late session close and 0.03 per cent away from the midpoint. Before trading began on Monday, the PBOC set the midpoint of the yuan's daily trading band at 6.8957 per dollar, its weakest level since May 11, 2017. Reflecting expectations of further yuan weakening, the one-year non-deliverable yuan futures in Hong Kong fell to around 7.015 against the dollar on Monday, the lowest level in 15 months.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China's markets prepare to reopen following a week-long holiday and after its central bank cut banks' reserve requirements in a bid to support growth. When Chinese markets were closed last week, Hong Kong stocks fell for four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show.

Other reports by Click Lancashire

Discuss This Article

FOLLOW OUR NEWSPAPER