China’s yuan, stocks tumble on worries about economic slowdown, even as central bank acts to encourage more lending

China’s central bank acts to encourage more lending. Although it was already priced into the market, the move was bigger than expected, amid signs of slowing manufacturing and more anti-China rhetoric out of the US.

PUBLISHED : Monday, 08 October, 2018, 10:52am
UPDATED : Monday, 08 October, 2018, 6:16pm

China’s stocks and currency slumped on Monday because of mounting concerns about the country’s economy, even as the country’s central bank moved over the weekend to free up more money and encourage banks to lend.

Market trading got back under way following a weeklong public holiday. That meant some of the weakness might have been China’s currency and stock markets catching up with declines seen in other Asian markets due to the strength of the US dollar and treasury yields in the past week.

The People’s Bank of China’s move over the weekend to reduce how much cash lenders must hold as reserves -- the so-called reserve requirement ratio (RRR) -- came as challenges to the economy grow, including fallout from the US-China trade war. Analysts estimate the step could pump about $175 billion into the economy, especially to small to medium size businesses.

Onshore yuan, traded on the mainland, slid 0.82 per cent to 6.9253 against the US dollar, marking the biggest daily decline since July 19. The central bank lowered the daily yuan reference rate to a five-month low of 6.8957. Traders are allowed to trade 2 per cent up or down from the reference point.

US-China trade war is helping to boost use of yuan in international transactions

The central bank’s RRR cut was its fourth since September 2017. For some banks, it was a reduction of 100 basis points, meaning they would need to keep reserves in a range of 12.5 per cent to 14.5 per cent, depending on the bank. While the cut was already priced into market, the PBOC’s action was bigger than expected. That was likely in part due to signs of slowing manufacturing and harsher anti-China rhetoric out of the US, analysts said.

The closely watched Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 50 in September. That was below the 50.5 level forecast by economists polled by Reuters and the 50.6 recorded in August. The 50 mark divides expansion from contraction on a monthly basis.

China economy shows fresh signs of cooling amid US trade war

“When the PBOC still cuts the RRR when the yuan is facing depreciation pressure, can you imagine what kind of economic pressure China is facing?” said Jimmy Zhu, chief strategist at Fullerton Markets.

The PBOC is likely to continue to keep liquidity ample, and cut the RRR again as early as December, analysts said. But that would also mean more pressure on the yuan given the divergence in monetary policy between China and the US, Bank of America Merrill Lynch said in a research note. It predicted the yuan will weaken to 6.95 against the dollar by the end of the year.

Standard Chartered Bank expects the PBOC to defend the key 7 yuan-to-one US dollar level to try to prevent a “one-way” down sentiment from building up. The PBOC may use tighter capital controls and market interventions, including issuing PBOC bills in Hong Kong, to support the yuan traded offshore.

The PBOC said the RRR cut would not create bearish pressure around the yuan.