Central bank to cut reserve requirement by 1%

Central bank to cut reserve requirement by 1%

China's foreign-currency holdings fell in September, as heightened trade tensions with the US fueled concerns of capital outflow and further yuan depreciation. At its two-day meeting ending later on Wednesday, the Fed is expected to increase USA interest rates for the third time this year. Trump has shown little inclination to back off, and relations between the two countries have cooled, suggesting the trade war could worsen. In March, the PBOC raised short- and medium-term rates right after a Fed hike, while in June China's central bank stood pat after a USA increase. "Other possible triggers could also stem from a stronger trade relationship between China and Europe or investors finally finding another positive reason to put risk on the table again".

"The RRR cut announced today sends a clear easing signal", Bank of America Merrill Lynch said in a research note. "We do not look for the return of RMB depreciation pressure after the Fed's anticipated rate hike, which had been fully priced in".

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

"China sectors such as energy, IT and industrials will be most impacted based on our analysis, while sectors such as real estate, insurance, diversified financials, telecom and utilities generate virtually no revenue from the United States", a team led by Pedro Martins said in a note.

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China's IT sector was particularly hit Monday, with shares losing about 4 percent in the morning session.

The offshore yuan was also weaker at 6.9050 per dollar. Stocks in Shanghai and Shenzhen were down nearly 3 percent on Monday morning, while Hong Kong was down close to 1 percent. "Another rate hike in December seems very likely, and we expect four more in 2019". 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. Investors have been turning to regional markets for trading clues after a weeklong holiday, as global stocks have been battered by a liquidity squeeze amid rising US Treasury yields.

The dollar index, which tracks the greenback against a basket of six major rivals, was up 0.09 percent at 95.707. Still, tariffs could hurt the economy the longer they last. The onshore traded renminbi was 6.8814 per dollar by the end of September, having weakened by 5.4 percent compared with its value at the beginning of this year, according to data from the central bank. Before trading began on Monday, the PBOC set the midpoint of the yuan's daily trading band at 6.8957 per dollar, its weakest level since May 11, 2017. One-year NDFs are settled against the midpoint, not the spot rate. For the year, both Chinese indexes are down about 18 per cent. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said that the worst that could happen is the US imposing levies on all Chinese imports, but that would only hit 0.7 percentage points of China's growth.

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