Market Outlook: China cuts reserve requirements

The reserve requirement cut comes after Beijing pledged to expedite plans to invest billions of dollars in infrastructure projects

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The Chinese mainland's stock markets and the onshore yuan exchange rate both fell yesterday, the first day back after the week-long National Day holiday and the same day the central bank unveiled plans to lower the reserve requirement ratio.

Analysts say the yuan's decline has been driven mostly by China's slowing economic growth and the divergence between USA and Chinese interest rates.

With the increase in U.S. tariffs likely to start "being a drag" on Chinese exports, Fenner said Beijing wants to "shore up and provide some support for domestic demand".

China's yuan currency has faced strong selling pressure in 2018, losing more than 8% in March-August at the height of market worries, though it has since cut losses as authorities stepped up support. "There is room for further reductions and I expect another 1 percentage point cut by the year-end". Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.9523, 1.37 percent weaker than the midpoint.

But China has bigger problems than the trade war. The government has taken measures to help companies impacted by the trade war, he added.

The yuan has been on a downward trend for months, weakening around 9% since the start of April, according to data from the central bank. "Cutting RRR at a time of relatively ample liquidity in the banking system is not likely to have much effect", wrote Zhao Jian, a finance professor of the University of Jinan. Some market participants also said they were unwilling to hold large positions for their proprietary trade, amid global market uncertainty, during China's coming lengthy public holiday.

The stock market declined Monday taking its cue on Asian trading, as another strong United States jobs reading further fanned expectations the Federal Reserve will hike interest rates at a quicker pace.

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To assess China's economic situation, one must take a longer view and a more holistic approach, Ning Jizhe, vice chairman of China's state planner, told the People's Daily in an interview, stressing that growth, employment, prices and global balance of payments have been stable. But some key activity indicators have weakened more sharply.

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.

The margin of decline has been unusually wide because other currencies in the basket used by the Chinese central bank to set exchange rates have not risen along with the greenback.

China's Politburo and State Council have also replaced use of the term "deleveraging" with "structural deleveraging", a change that suggests less harsh curbs on debt.

Zhang Yiping, senior economist at Merchants Securities in Shenzhen said, "Liquidity is flush in the banking system".

"The RRR cut announced today sends a clear easing signal", Bank of America Merrill Lynch said in a research note.

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