Thursday, 18 October, 2018

China Stocks, Yuan Tumbled Yesterday After PBOC Unveiled RRR Cut

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China aims to expand its economy by around 6.5 percent in 2018.

For the Chinese currency, investors always anchor an important "psychological" exchange rate at 7 against the United States dollar, and they worry that market panic may emerge if the renminbi weakens past that rate.

This photo taken on August 1, 2018 shows the People's Bank of China, the country's central bank.

Beijing has increasingly geared its policies toward supporting exporters and persuading banks to offer more loans to small and medium-sized firms, which account for the bulk of the country's jobs, by lowering banks' RRRs.

"That means to keep a stable exchange rate remains one of the priorities of China's monetary policy", said Ming Ming, an analyst with CITIC Securities.

A man is seen behind an electronic board displaying the Nikkei average and Japanese yen rate againt the USA dollar at the Tokyo Stock Exchange in Tokyo, Japan, October 11, 2018.

Economists predicted further RRR cuts ahead, though the central bank is not expected to lower its benchmark interest rates - unchanged since October 2015 - in the near term. On Wednesday morning, the onshore spot yuan traded in a thin range of less than 60 pips.

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The "very timely" RRR cut is big enough to help boost confidence in the economy, said Xu Hongcai, deputy chief economist at the China Centre for International Economic Exchanges, a Beijing think-tank.

"We've been expecting for some time now the USA market to start delivering volatility". 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. Any decline in foreign exchange reserves has been limited as reflected in the latest FX reserves data, which revealed that FX reserves dropped by $22.7bn only in September, suggesting that as yet there have not been significant capital outflows (ie panic) from China and limited need for FX intervention to support the CNY.

Tourism spending by domestic travellers in the first four days of the National Day holiday, which ended on Sunday, rose just 8.1% from previous year, which is much less than the 21% growth recorded in 2017, according to figures from the China Tourism Academy. 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.

That left the dollar at 95.4397 against a basket of currencies. Retail sales this year have grown at the slowest rate in a decade.

In response, officials have pledged to pump billions of dollars into infrastructure projects, shored up the value of the currency and moved to backstop a plunging stock market.

"The yuan has already weakened significantly, to offset the tariffs announced so far", said Alan Ruskin, Deutsche's global head of G10 FX strategy.

In currency markets, the dollar was 0.07 percent stronger against the yen at 113.78, while the euro was 0.05 stronger against the dollar at $1.1528.

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