Published: Thu, October 11, 2018
Markets | By Noel Gibbs

China Seeks to Stimulate Economy

China Seeks to Stimulate Economy

Beijing has stepped up liquidity support across the financial system in 2018 as policymakers have focused on calming fears of capital outflows and sought to soothe battered markets even as anxiety grows that a heated trade war with the United States could deal a damaging blow to the broader economy. When Chinese markets were closed last week, Hong Kong stocks fell for four consecutive days as investors grew increasingly concerned that the impact of the trade war is starting to show.

Shares of the nation's biggest oil producer contributed to the bulk of a rebound in the benchmark Shanghai Composite Index, with a 4.4 per cent jump.

Friday's USA non-farm payrolls showed job creation slowed in September, likely from Hurricane Florence's impact on restaurant and retail payrolls, but the Labor Department report also showed a rise in wages that could keep the Federal Reserve on track for more interest rate hikes. Recent forward looking data including the official and CAIXIN purchasing managers' indices (PMIs) of manufacturing confidence have softened, with the exports component of the PMIs dropping significantly. The Shanghai Composite Index falls some 2.5 per cent this morning (October 8, 2018).

On Monday, Hong Kong's Hang Seng index was down 0.5 percent and a sub-index tracking information technology firms was 0.9 percent lower.

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The central bank said Sunday it had released 750 billion yuan ($109 billion) for additional lending by reducing bank reserve requirements by 1 per cent.

China's foreign exchange reserves dropped to a 14-month low at the end of September amid prolonged trade tensions with the US and a weakening yuan. On Friday, Chinese technology stocks listed in Hong Kong, including Lenovo and ZTE, slumped on a media report that the systems of multiple U.S. companies had been compromised by malicious computer chips inserted by Chinese spies.

"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. "Liquidity is not the issue".

"Some of the difficulties encountered by enterprises are brought about by trade frictions and some due to China's economic transformation", Ning said. China is reluctant to ease policy via a policy rate cut to avoid fuelling any increase in leverage and therefore continues to embark on targeted easing in the form of RRR cuts. "The narrowing interest rate differentials between China and the U.S. will exert more downward pressure on the RMB", wrote Nathan Chow, strategist at DBS Group Research.

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Analysts had attributed Monday's losses to Chinese investors playing catch-up after a week-long holiday, during which a sharp sell off in global bond markets had dragged down equity markets.

Following the PBOC's move, the offshore yuan was 0.2 percent weaker against the dollar in early trade on Monday.

China also has to contend with a stock market that has fallen by around 15 percent this year and a currency that has lost 10 percent of its value against the dollar.

The yuan was also down, after the central bank set the reference rate at its weakest level against the U.S. dollar since May 11, 2017, and analysts expect the currency's weakening trend to continue. 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.

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