TheÂ Chinese yuan is rebounding against aÂ basket ofÂ currencies onÂ Tuesday after theÂ federal government injected tens ofÂ billions ofÂ dollars into theÂ national economy. Despite bearish forecasts andÂ tumbling Asian stocks, theÂ currency has strengthened, but it is still near aÂ multi-year low.
Beijing reduced theÂ amount ofÂ cash that financial institutions are required toÂ maintain inÂ reserves. TheÂ Peopleâs Bank ofÂ China (PBOC) slashed theÂ reserve requirement ratios (RRRs) byÂ 1% toÂ cut financing costs forÂ large andÂ small commercial lenders that will go into effect October 15. TheÂ injection ofÂ cash will be equal toÂ $109.2 billion, aÂ move that is meant toÂ stimulate theÂ worldâs second-largest economy andÂ offset theÂ negative effects ofÂ higher US tariffs onÂ Chinese goods.
Xu Hongcai, deputy chief economist atÂ theÂ China Center forÂ International Economic Exchanges think tank, called theÂ move âvery timely.â
TheÂ trade warâs impact onÂ theÂ economy is showing. There is room forÂ further reductions andÂ IÂ expect another one percentage point cut byÂ theÂ year-end.
TheÂ stimulus could not give Asian markets aÂ shot inÂ theÂ arm because stocks have fallen toÂ 17-month lows. There could be two things: Investors realize that theÂ economy is inÂ worse shape than what officials will concede, orÂ they fear that theÂ International Monetary Fund (IMF)âs forecast are correct.
According toÂ theÂ IMF, Chinese gross domestic product (GDP) will be lower atÂ 1.6% next year. It estimated that world growth will remain aÂ healthy 3.7%, but this was revised downwards byÂ 0.2%.
This comes after anÂ IMF official told reporters atÂ theÂ IMF andÂ World Bank meetings inÂ Bali that he is not concerned that theÂ government cannot defend theÂ yuan.
They do have toÂ balance those actions against theÂ need toÂ achieve aÂ more stable financial sector, toÂ achieve more deleveraging, andÂ they have toÂ exert better control over local government financing. It’s definitely going toÂ be aÂ balancing act forÂ them.
TheÂ Trump administration reiterated that it is keeping aÂ close eye onÂ theÂ yuanâs depreciation. Treasury Secretary Steven Mnuchin stated that theÂ US government is monitoring theÂ situation andÂ will examine theÂ subject atÂ this weekâs conference ofÂ finance ministers inÂ Bali. Washington has repeatedly accused Beijing inÂ recent years ofÂ weakening theÂ yuan toÂ boost exports andÂ undermine theÂ US economy.
Most experts agree that theÂ government has not artificially debased theÂ yuan. TheÂ trade war has produced aÂ series ofÂ consequences forÂ theÂ Chinese economy, leading toÂ aÂ slowdown inÂ manufacturing growth andÂ anÂ increase inÂ debt â both government andÂ household.
TheÂ USD/CNY currency pair slid 0.11% toÂ 6.9228, from anÂ opening ofÂ 6.9307, atÂ 16:00 GMT onÂ Tuesday. TheÂ EUR/CNY fell 0.18% toÂ 7.9505, from anÂ opening ofÂ 7.9651.
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