China's RRR cut will add RMB 750 bln into the economy

China's RRR cut will add RMB 750 bln into the economy

China's RRR cut will add RMB 750 bln into the economy

The People's Bank of China's move will release 1.2 trillion yuan in liquidity, with 450bn yuan of that due to offset maturing loans - meaning 750bn yuan will be injected into the financial system.

Reserve requirement ratios (RRRs) - now 15.5 per cent for large institutions and 13.5 per cent for smaller banks - would be cut by 100 basis points effective Oct 15, the PBOC said.

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.

The U.S. -China trade rift has been the buzzing topic since last few months as the U.S. government imposed three rounds of tariffs on Chinese goods that totals up to $250 billion.

Looking forward, the widening US-China differential could add to the bearish pressure around the Chinese currency, although as of writing, the CNY is gaining ground.

The nation's equity market had already lost US$2.4 trillion in value since January before Monday, amid signs that deleveraging and a trade spat with the USA is hurting economic growth.

At the World Economic Forum in Tianjin, China in September, an official from the country's securities regulator said there was nothing President Donald Trump's administration could do to make a significant dent in the Chinese economy.

"Compared with the RRR level of 9.5 percent in 2007, there is still room for further reduction in the current ratios of 14.5 percent for large financial institutions and 12.5 percent for small and medium-sized lenders". The government has taken measures to help companies impacted by the trade war, he added.

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The RRR cut will fill in the liquidity gap of banks and put no downward pressure on the yuan as the country's monetary policy is not eased, the PBOC statement.

Will RRR cut push the dollar-yuan exchange rate to beyond 7?

The central bank claimed the move would have little impact on the yuan, saying it had solid fundamentals and would remain stable, but reduced the central parity rate against the dollar by 165 basis points yesterday, to 6.8957. But some key activity indicators have weakened more sharply.

Weakening exports were already a drag on growth in the first half of the year after giving an added boost to the economy last year, highlighting the need for sustained strength in domestic demand if significant new USA tariffs are imposed.

The spot market opened at 6.9000 per dollar and registered its weakest official closing level since mid-August, at 6.9135.

"Liquidity is flush in the banking system".

China's RRR cut reinforces expectations of more policy easing ahead, putting China on a divergent path of monetary policies with the United States, where 10-year treasuries yields hit seven-year highs as the Federal Reserves keeps raising rates.

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