Market Outlook: China cuts reserve requirements

China Stocks Yuan Tumbled Yesterday After PBOC Unveiled RRR Cut

The shift in yields is also sucking funds out of emerging markets, putting particular pressure on the Chinese yuan as Beijing fights a protracted trade battle with the United States.

Chinese stocks took a hammering Monday as traders returned to work after a weeklong holiday in the world's second-largest economy.

The United States, Europe and other trading partners say initiatives such as "Made in China 2025", which calls for state-led creation of champions in robotics and other fields, violate Beijing's obligations to open up its market to foreign companies.

Depreciation pressure on the renminbi has grown since mid-April, when the strength of the USA dollar gathered pace.

It is the fourth time the country's central bank has cut its reserve requirement this year. Some analysts now expect a cut in the official policy interest rate to bring interbank lending rates down.

"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 USA", a team led by Pedro Martins said in a note.

For the Chinese currency, investors always anchor an important "psychological" exchange rate at 7 against the USA dollar, and they worry that market panic may emerge if the renminbi weakens past that rate.

Beijing imposed similar controls in October 2015 after a change in the exchange rate mechanism prompted markets to bet the yuan would fall.

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"Depending on the economic situation, it [China] should prepare more powerful monetary and fiscal policy tools, possibly including a large-scale stimulus package", the commentary in Global Times said.

"We've been expecting for some time now the USA market to start delivering volatility".

China's foreign exchange reserves dropped to a 14-month low at the end of September amid prolonged trade tensions with the USA and a weakening yuan.

Oil prices skidded in line with U.S. equity markets, even though energy traders anxious about shrinking Iranian supply from U.S. sanctions and kept an eye on Hurricane Michael, which closed some U.S. Gulf of Mexico oil output.

PBOC's latest move came at the end of a week-long national day holiday in China.

That left the dollar at 95.4397 against a basket of currencies. The global dollar index rose to 94.143 from the previous close of 94.133. The yuan fell about 0.56 percent against the dollar in September.

Despite the yuan's steady depreciation in recent months, there have been few signs so far of a spike in capital outflows like those seen a few years ago after a surprise devaluation by the PBOC. Retail sales this year have grown at the slowest rate in a decade.

The central bank claimed the move would have little impact on the yuan, saying it had solid fundamentals and would remain stable, but reduced the central parity rate against the dollar by 165 basis points yesterday, to 6.8957. Negative number indicates that spot yuan is trading stronger than the midpoint.

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