As the trade war with the United States escalates, the Central Bank of China moves to keep its economy afloat by infusing $109 billion. People’s Bank of China (PBOC) announced that they will decrease the reserve requirement ratio (RRR) by 1% from 15 October in order to reinforce confidence in its economy. This move will free up additional funds for infrastructure projects and businesses.
The PBOC stated that “The decision is intended to further encourage the stable development of the real economy, optimize the liquidity structure of commercial banks and financial markets, lower financing costs, and to continue increasing the financial systems’ efforts to support small businesses, private enterprise and innovation.”
The fourth reserve cut made by PBOC aims to cushion the blows of the ongoing trade war with the U.S, the latest of which is the imposition of tariffs on $250 billion worth of Chinese goods. Investment growth has slumped to a record low and net exports have declined as well in the first half of the year.
Xie Yaxuan, chief economist at China Merchants Securities said in a note that “The timing of announcement was a deliberate move by Beijing to offset the shock from declines in global stock and bond markets to the domestic economy”.
Xu Jianwei, senior China economist for French bank Natixis in Hong Kong, said the Chinese government had no other choice but to take a different path from the US on monetary policy.
“In a trade war, the Chinese economy will face more difficulties with weak investor confidence … China has to inject more liquidity [into the economy],” he said.
Investors are wary of the fate of the Yuan. The PBOC stated that the reserve ratio cut “would not translate into depreciation pressure on the yuan” and that there were “sufficient conditions” for China to maintain the stability yuan currency value. PBOC added that it would continue to maintain a “prudent and neutral” monetary policy.