Amid signs higher United States interest rates and fears of a global trade war are having an impact on the world's second-largest economy, China's central bank hopes cutting the reserve requirement ratios (RRRs) by 1% from 15 October will lower financing costs and spur growth.
China's central bank said on Sunday that it was planning to make moves to free up CNY750bn ($109bn) to be used for new lending, aimed to stimulate growth in its economy.
The People's Bank of China's move will release 1.2 trillion yuan in liquidity, with 450bn yuan of that due to offset maturing loans - meaning 750bn yuan will be injected into the financial system.
Shanghai: China stocks tumbled on Monday, as investors back from a long holiday dumped shares across the board despite Beijing's weekend move to spur more lending at a time of growing fears the economic impact of the Sino-US trade war will deepen.
Pence intensified Washington's pressure campaign against Beijing on Thursday by accusing China of "malign" efforts to undermine U.S. President Donald Trump ahead of next month's congressional elections and reckless military actions in the South China Sea. That said, amid a worsening trade-war outlook, negative sentiment around China's economy and a surging US dollar could yet test the nation's defenses.
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.
The US is fighting a trade war with China which threatens the outlook for Chinese manufacturing and exports. "There is room for further reductions and I expect another 1 percentage point cut by the year-end", Xu added. Richard Jerram, chief economist at Bank of Singapore, said while the Fed would not be panicked by the increase in wages "evidence that tight capacity conditions-such as a low unemployment rate-are pushing prices higher will keep them on the current tightening path".
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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.
But Nicholson noted that if the trade situation deteriorates further, China will have a number of levers to save its economy because President Xi Jinping has "political capital".
"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. However, some key activities have abated more steeply.
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.
"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.