China shares weigh on regional markets despite central bank support

China,Trade wars,Beijing

On Sunday, the People's Bank of China announced a 100-basis-point cut to lenders' reserve requirement ratio (RRR), stepping up efforts to pump more liquidity into markets and support the domestic economy.

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.

"China's foreign-exchange reserves should decline given a stronger dollar and increasing depreciation pressures on the yuan, which could prompt the PBOC to intervene", said Ken Cheung, a senior currency strategist at Mizuho Bank Ltd.

Chinese markets plunged on Monday after a week-long national holiday, and a day after the People's Bank of China injected more cash into the banking system in a move aimed at stirring economic growth in the country.

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.

China says it has no intention of boosting its exports by a competitive devaluation of its currency or using the yuan exchange rate as a weapon in trade disputes.

"The ongoing China-US trade war is imposing headwind to China's growth, and monetary easing is being used to counter that", ChiXi Consultants said in a research note to its clients on Monday.

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"Some of the difficulties encountered by enterprises are brought about by trade frictions and some due to China's economic transformation", Ning said. "There is room for further reductions and I expect another 1 percentage point cut by the year-end". The government has taken measures to help companies impacted by the trade war, he added.

Beijing has increasingly geared its policies towards supporting exporters and persuading banks to offer more loans to small and medium-sized firms, which account for the bulk of the country's jobs, by lowering banks' RRRs.

China's economic growth rate slowed slightly to 6.7 per cent in the second quarter year-on-year, still well above the government's full-year target of around 6.5 per cent. However, some key activities have abated more steeply.

In a speech, U.S. vice-president Mike Pence said on Thursday that China's onshore stock market fell by 25% in the first nine months of the year because Washington "has been standing strong against Beijing's trade practices".

Worldwide investors had started to load up on Chinese shares as global index compilers increased weightings of yuan-denominated shares on their benchmarks and a slump made valuations more compelling relative to global peers.

After all, RRR cuts are meant to "guide" liquidity to targeted recipients and are less about directly producing an effect, according to the editorial.

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