Chinese Central Bank
PBOC Liquidates 1.2 Trillion Yuan Citing Economic Incumbrance

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. Soaring U.S. interest rates and uncertainties surrounding trade war pressurizes worldwide economies. The Central Bank of China declared on Sunday that it was clipping the reserve requirement ratios (RRRs) by one percentage point from 15 October to lower the financing costs and encourage growth in the world’s second-largest economy.

However, economists expect further cuts ahead.

Beijing has intensified cash flow across the financial system this year since policymakers are concerned on soothing capital outflow fears and strive for soothing pommeled markets amid the growing anxieties regarding frenzied trade war with the U.S. could have a damaging effect on the broader economy.

Although the Chinese Yuan has cut losses since the authorities have aided support, losing over 8% between March and August at the peak of market worries, yuan faced strong selling pressure this year.

A net 750 billion-yuan ($109.2 billion) will be injected in cash into the banking system as Sunday’s move will release a total of 1.2 trillion yuan in liquidity, with 450 billion yuan of the total to counterbalance medium-term lending facility (MLF) loans.

Zhang Yi, chief economist at Zhonghai Shengrong Capital Management said the RRR cut indicates central bank’s worries about the impact of “external shocks” to the markets.

U.S. Vice President, Mike Pence in his speech last week increased Washington’s pressure crusade against Beijing on Thursday by hinting malign Chinese efforts to emasculate Donald Trump before congressional elections that are about to take place next month.

 The timely RRR Cut

Deputy Chief Economist at the China Center for International Economic Exchanges, Xu Hongcai stated that this “very timely” RRR cut is enough to boost up confidence in the economy.

Xu further added, “The trade war’s impact on the economy is showing. There is room for further reductions and I expect another 1 percentage point cut by the year-end.”

Chinese Minister Liu Kun stated, “Some regions and companies have been hit (by trade frictions), but China has the ability to minimize the impact.” He also assured that the government has implemented measures to help the companies affected by the trade war.

Relaxing Focus on Cutting Debt

With the full impact of U.S. trade tariffs still to be felt and China’s economy waning, policymakers are changing their urgencies to reduce risks to growth, with the stock markets and yuan under pressure.

The Chinese economic growth slackened somewhat to 6.7% in the second quarter year-on-year, still above the government’s full-year target of approximately 6.5%. However, some key activities have abated more steeply.

While non-performing loans saw a surge in the second quarters and defaults climbing, fixed-asset continues to grow at the slowest pace on record. July saw a rise in nationwide jobless rate to 5.1%.

The Chinese banking regulator has requested banks to lower funding costs significantly and raise their lenience for non-performing ratios to small and micro firms.

Chinese commission and state council have also substituted the term “deleveraging” with “structural deleveraging”, a swap indicating less stringent on debt.

Zhang Yiping, senior economist at Merchants Securities in Shenzhen said, “Liquidity is flush in the banking system. The key question is how to channel cash to the real economy. The external environment is becoming tougher and we cannot rule out further RRR cuts.”