Three weeks ago, China fell short of implementing tit-for-tat tariffs when the U.S. imposed 10% dues on an additional $200B worth of Chinese goods.
Then, while the Chinese were enjoying a week-long holiday, a combo of hawkish remarks from Fed officials and rocketing U.S. Treasury yields inspired traders to ditch their high-yielding (mostly Asian) bets in favor of dollar-denominated assets.
Luckily, the People’s Bank of China (PBOC) isn’t taking the changes lying down. In fact, the central bank already got busy buffering its domestic economy from recent moves and speculations.
Here’s a short list of the PBOC’s efforts before we even hit the mid-week mark:
Steep RRR cut
The central bank started the month with a bang by cutting its reserve requirement ratio (RRR) for a FOURTH time this year.
If this is the first time you’ve heard of RRR, then lemme tell you that this simply refers to the level of cash that commercial banks are required to leave in the central bank’s vault.By lowering its RRR, the PBOC encourages banks to use more cash for their lending operations, eventually pumping more liquidity into the economy in hopes of boosting activity.
And this week’s cuts are nothing to sneeze at either.
Starting October 15, RRRs – currently at 15.5% for large institutions and 13.5% for smaller banks – would be cut by a full percentage point, which would free up around 750 billion yuan ($109.2B) into the banking system. Wowza!
Weaker yuan fixing
Premier Li Keqiang might have sworn that “China will by no means stimulate exports by devaluing the yuan,” but the PBOC sure has no problem weakening its currency this week!
The central bank fixed the yuan at 6.8957 per dollar on Monday, which marked the lowest fix since May 2017.
Then, it gave technical traders mini heart attacks today when it set the USD/CNY mid-point rate at 6.9019, which is above the psychological 6.9 mark and the lowest yuan pricing in 17 months.
Eyes on liquidity
If you recall, the central bank recently shared that:
“The prudent monetary policy will remain neutral, money supply will be properly managed to keep liquidity at reasonably ample levels, and steps will be taken to guide the reasonable growth of money supply, credit and aggregate financing to the real economy.”
Well, in the same announcement that brought us the RRR cuts, the PBOC repeated its commitment to “targeted adjustment instead of massive supply of liquidity” and to “keep liquidity at reasonable and adequate levels.”
Translation: We’re gonna make it rain if needed.
How have markets reacted so far?
For now, China’s markets are taking the PBOC’s moves positively, as investors cheer the government’s efforts to prioritize liquidity and the yuan’s stability.
Or maybe they’re just catching up to last week’s moves. Because other markets sure aren’t as upbeat.
See, analysts believe that the PBOC’s aggressive efforts mean the central bank is more concerned over the impact of U.S.’ tariffs and the flight away from riskier assets than they were a few weeks back.
Let’s see if these themes stick until the end of the week.
U.S. Treasury markets will reopen today and, word around is that $230B worth will be up for auction. If yields continue to make notable highs, then we might see an extension of last week’s trends.
And then there’s the escalating U.S.-China tensions.
In a presser with Chinese Foreign Minister Wang Yi, U.S. State Secretary Mike Pompeo declared that the U.S. and China have a “fundamental disagreement” over foreign policy.
Pompeo called out “actions that China has taken,” while Wang spoke against the “actions have affected the mutual trust between both sides and has cast a shadow over the prospect of China-US relations.”
Pompeo returned to Washington without meeting China’s Xi Jinping, which investors took to mean that it will be a while before we see softening on either side of the trade war fence.