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China's Central Bank Releases 750B Yuan into Banking System as Trade War Pains Grow

October 8, 2018

On October 7, China’s central bank made a major cut in the amount of cash its banks must hold in reserve, effectively pushing 750 billion yuan (US $109.2 billion) of liquidity into the economy.

China's Central Bank hopes easing bank reserve requirements will help stabilizes its current wobbly economy.

Of that, 450 billion yuan will be used to offset maturing medium-term lending facility loans.

This change in the Reserve Requirement Ratios (RRRs) is the fourth put forth by the People’s Bank of China (PBOC) this year alone. The current RRRs are 15.5% for large commercial lenders and 13.5% for smaller banks. With an effective date of October 15, this new move will cut 100 basis points off both numbers.

The PBOC and the Chinese government felt something like this new announcement was needed soon. Just between March and August 2018 alone, China’s yuan had dropped 8% in value. It has recovered a little since then. The new bank rates should produce yet another ‘bounce” for the currency as well.

In parallel, the situation between the United States and China has, if anything, worsened further. The U.S. imposed sanctions on a Chinese company for buying military fighters and missile systems from the Russians, as a penalty for violating sanctions imposed by a U.S. law passed with the intent of putting pressure just on Russia. Then U.S. President Mike Pence took the opportunity to attack China for its military actions in the South China Sea. He also condemned Beijing for supposedly attempting to meddle in next month’s mid-term Congressional elections in the U.S., despite having revealed no evidence to back up his statement.

As China attempts to defend its economy with the RRR adjustments, that will help stabilize business interests to some extent. Analysts expect China to take other actions against the U.S. in retaliation for what they consider an unjust trade war started by Donald Trump.

Copyright: North America Procurement Council Inc., PBC